June 5, 2003
Surface Transportation and Merchant Marine Subcommittee hearing scheduled for Thursday, June 5, at 10:00 a.m. in room 253 of the Russell Senate Office Building. Members will hear testimony on options for financing equipment and infrastructure investments for the provision of conventional and higher-speed passenger rail service. Senator Hutchison will preside. Witnesses will be announced at a later time.
Mr. Robert Serlin
Good morning Madame Chairman and distinguished members of this committee. My name is Robert Serlin. My background has been developing business solutions for revitalizing capital-intensive transportation and basic commodities businesses. I appreciate the opportunity to testify before the Subcommittee today. I am a President of Rail Infrastructure Management, LLC, an entity initially organized in 1997 to analyze opportunities for investment in the rail industry and to provide the public sector a partner to develop innovative rail passenger solutions. The need for such an effort was identified in a report produced by the so-called Blue Ribbon Panel – the “Working Group on Intercity Rail Passenger Service” – which was convened in 1997 by House Transportation and Infrastructure Chairman Bud Shuster to address Amtrak’s organization and financial structure. There has rarely been a time when the topic of passenger rail deserved as much focus from a public policy perspective as the one in which we live. Our highway capacity fails to meet demand and further highway build-out in urban areas is unlikely, population growth continues, and the airline industry struggles to identify an economically viable business model. Yet, the one truly scalable means of transportation – the passenger railroad – a transportation mode that can be fast, safe, environmentally desirable, and consumer friendly, has been ignored or minimized. As we look at the future of inter-city passenger rail service, I believe that there are three major, immediate challenges facing Amtrak. The first challenge is to end the recent experience of almost regular financial crises. In this regard, I think that Mr. David Gunn, working with the Department of Transportation and Congress, deserves much credit. The second challenge is to restore the infrastructure to a state of good repair. The third and most ambitious challenge is to find ways to revitalize rail passenger service in the Northeast. The basic station pattern in the Northeast was laid out in the 1920’s and 1930’s and ridership has been basically flat for much of Amtrak’s history. The Northeast Corridor is the most densely populated corridor in the world. It has the potential for dramtically increased ridership, which will have a strong positive effect on Amtrak’s financial results. Though most passenger railroads are owned by the public sector, the magnitude of capital required has, unfortunately, grown to a level well beyond that achievable through annual Federal or state appropriations. Future investment in passenger rail will require a blending of the public and private sectors and, as Secretary Jackson has said, “a new business model.” We have recently seen innovatively financed infrastructure projects such as the Alameda Corridor in Southern California. Several states are seeking ways to work in partnership with the nation’s freight railroads to develop other new corridors. These publicly owned rail infrastructure corridors will need to be maintained and operated in accordance with Federal laws and regulations. Amtrak has strived to be a catalyst for change, but being chronically short of funds, it can only offer moral support and limited equity. STAKEHOLDER NEEDS GUIDE SOLUTIONS I am going to focus my comments here on Amtrak, though they are equally applicable to the other eleven DOT-designated high speed rail corridors. A solution cannot be created without first identifying the stakeholders and understanding their needs. The interests of critical stakeholders such as labor and the states, as represented here today by Mr. Sonny Hall and Mr. Joseph Boardman, Chairman of the Transport Workers Union and Commissioner of NY State’s Department of Transportation respectively, must each fully be taken into account and incorporated into any such public-private partnership. The vested commuter carriers and the freight railroads with operating rights are also key stakeholder. Amtrak, another critical stakeholder, must be able to run its high speed trainsets at up to 150 mph, and connect New York and Washington in as few as two hours. The Federal government is, perhaps, the most important stakeholder. Secretary Mineta, Deputy Secretary Jackson and Administrator Rutter have developed a set of principals that are a solid basis for a legislative proposal and are consistent with my views. SOLUTION IS CONTAINED IN THE BLUE RIBBON PANEL’S REPORT Amtrak currently manages two very different and, in some ways, conflicting businesses: · The first, providing passenger rail service, operating trains for many constituencies and markets over 23,000 route-miles in 46 states. · The second, managing the 600 route-miles of owned infrastructure, primarily located in the Northeast, which represents an integral part of the Northeast states regional transportation system. This second business, the infrastructure, consumes significant Amtrak resources. It has been estimated that approximately sixty-five percent of Amtrak’s cash losses are infrastructure-related. Therefore, the Blue Ribbon Panel, the Amtrak Reform Council and others have proposed separating Amtrak’s operations into two separate, Federally owned corporations. Under such a proposal, each corporation would control its respective assets. Amtrak would retain the rolling stock, shops, reservation system, and operating rights over the nation’s freight network. Amtrak would continue to run its trains throughout the nation and the Northeast Corridor. Freed of the owned infrastructure, the cost of operating specific rail services could more easily be quantified since each service would be largely a variable cost enterprise and unburdened by infrastructure allocations. Amtrak could more easily attract new capital since it would be easier to match revenues to costs. The separation of passenger transportation from the infrastructure would free Amtrak to focus on its core competency and would liberate resources (both Federal and state) to be spent in a targeted manner to enhance the passenger rail system all across the country. FINANCIAL APPROACH Based upon figures published in oversight reviews and independently conducted surveys of potential private sector investors, I believe that an infrastructure financing plan can be created and funded using non-appropriated funds generated from a combination of existing financial instruments. It is clear that financing is the key to creating a successful rail infrastructure company. The financial markets have developed to a point where almost any financing requirement can be addressed through a variety of products. Many, if not most of these, do not require a Federal appropriation. The market for risk continues to grow rapidly. In this particular case, factors that will be critical for successful public-private partnership will include: (i) clear public policy; (ii) realistic timeframe; (iii) credible operational plans; and (iv) accountability. Let me talk about each of these briefly. · Public policy needs to address the parameters and requirements of what must be done. In this case, it would include separating passenger transportation services from infrastructure management. · A reasonable timeframe must be stipulated, such as between thirty and fifty years, given the investment required to reverse the deferred maintenance and turn an operating profit. Profitability can only be achieved by removing choke-points in the infrastructure that constrain train through-put, limit maximum speed and make journey times non-competitive. Our projections indicate that it will take between thirteen and fifteen years to reach cash breakeven. · A framework for supervising the infrastructure manager and the relationships between the multiple infrastructure-users must be found. The solution should use existing entities, such as the Federal Railroad Administration and the Surface Transportation Board. Guidelines for accountability should be explicitly laid out under current FRA safety regulations and applicable portions of the Railway Labor Act. · Accountability can be provided both through the mandates of the enabling legislation and the private financial markets. The enabling legislation can create a framework that, for example, establishes operational and safety requirements, preserves existing passenger rail relationships, recognizes labor’s role, and perhaps even provides additional funding for Amtrak and other regional organizations contemplating new rail passenger corridors. Private financial markets impose financial discipline and performance requirements. By using available financial instruments, I believe that the Federal government will succeed in attracting the private sector to address this challenge. It will succeed in making available appropriateable funds that can be spent on the national passenger rail system where need and public purpose demand. NOT THE BRITISH EXPERIENCE We have heard much about the separation pitfalls experienced in the United Kingdom. Our experiences in the United States, however, indicate that bifurcation works and is successful. Amtrak only owns a little more than two percent of the total route miles over which it operates. The other ninety-eight percent is owned and dispatched by others. To the best of my knowledge, nobody claims that Amtrak’s operations over its non-owned tracks is either unsafe or unsuccessful. Nonetheless, the U.K. does provide instructive lessons: some good and some bad. In 1995, the U.K. government privatized British Rail creating a publicly traded company called Railtrack to manage the infrastructure. A number of train service franchise holders were licensed to run trains. They brought focused, private sector marketing experience to the regional and long distance franchises and, by in large, thrived. Ridership grew approximately seventy percent in five years while over $4.3 billion was invested in new passenger rolling stock. Railtrack ultimately failed because it did not invest adequately in its core business – the rail infrastructure. Instead, it focused on developing center city London real estate. Factors attributable to Railtrack’s demise include: · initial planning that did not match reality: for example, the company encouraged increased track usage before completing the infrastructure improvements and maintenance necessary to support such an increase; · no government regulatory framework: Railtrack did not operate under any operating regulatory agencies such as our Federal Railroad Administration. This resulted in adversarial relationships between the track users and the track manager; and · a legal system unsuited to making infrastructure management decisions: under British law, Railtrack’s leadership was personally liable for the actions it took and, therefore, outsourced all essential operating functions. This resulted in a chaotic response to a string of major derailments in 2001. In the United States there currently exists a regulatory system with over one hundred years of history to prevent these pitfalls. In addition, it is understood that infrastructure improvements, including third tracks, new bridges, tunnels and stations, need to be made before ridership can be allowed to increase. CONCLUSION I am not here to judge whether Amtrak could or could not have done a better job. I am impressed with Mr. Gunn’s efforts to impose financial discipline on Amtrak and to focus Amtrak on its primary operating mission. But nonetheless, Amtrak’s structural problems remain. It is in everyone’s interest for the national rail passenger system to succeed. The approach I have outlined here will mean better service and greater passenger usage. The precedents exist for a solution utilizing the best of private and public resources. We have seen this approach in new freight projects. We have seen it in private toll roads. And in essence, we see it in the construction and landside operations of airport facilities. The challenge is to optimize that mix by letting the private sector address issues, such as infrastructure, that need in excess of ten years to be implemented. This will necessitate that the private and public sectors each acknowledge the importance of the other and that each permit the other to do their work. I agree with DOT’s Inspector General, Mr. Ken Mead, who said before you a little over a month ago: “Allowing an infrastructure company to operate “like a business” may mean relinquishing control over … which capital investments are made.” I would be the first to acknowledge that this is but a small part of fixing the larger puzzle of creating the best national passenger rail service possible. By funding and reinvesting in the Northeast Corridor, we can produce a living and working business model that will serve as an example for the other eleven designated high speed corridors. Thank you for providing me the opportunity to testify and I welcome questions you might have.
The Honorable Allan Rutter
Chairman Hutchison and Members of the Subcommittee, I appreciate this opportunity to appear before you today to discuss rail finance, focusing on equipment and infrastructure investments for intercity passenger rail service. I will be brief. In order to discuss rail finance, the Administration has focused on two questions that first must be answered: what intercity rail passenger service should America have and who decides this type of service? The answers to these questions strongly affect the answer to the question of how to finance intercity passenger rail service in this country. The present Amtrak route system has changed little over Amtrak’s thirty years of existence, seemingly locked in place by history and politics. That is starkly anomalous in America’s transportation system. What other transportation company or mode of travel has changed its routes and service so little in the last thirty years? Most transportation providers have changed their systems dramatically over that time span in response to changes in travel patterns driven by economics and demographics. If Amtrak’s system were not so ossified, perhaps Amtrak would serve more passengers today than it did thirty years ago. It appears that moving decision-making on routes and service closer to the customers would be a very good thing. This observation appears to be borne out wherever States have taken a strong role in determining what routes will be operated to serve their citizens, what kind of equipment should be used, what kind of service should be provided, and on what schedule. The states of California, North Carolina, and Washington are all excellent examples of states stepping up to the plate and meeting this challenge, paying for what they want above and beyond what Amtrak would otherwise provide, and getting noticeably better rail service for their citizens as a result. Citizens have responded to those investments: three California state-supported routes have attracted 2.35 million riders in the first seven months of this fiscal year, almost 44% of the total ridership for the same period on the Northeast Corridor Acela, Metroliner and Regional services. The Administration proposes to build on the examples set by these states to reform and strengthen the Federal role in passenger rail to mirror much more closely the current Federal program supporting mass transit. The Federal government would continue to define rail safety standards and enforce them. The Department of Transportation would provide capital grants directly to states and interstate consortia of states that want passenger rail. State government agencies would determine the level of passenger services needed and the price for such service, and contract with third-party operators to provide long-distance and corridor trains. The same program would apply to legacy long distance routes, current and new corridor services -- at higher speeds or not. To the extent that states’ service choices require operating subsidies, state governments would be required to provide that subsidy. It is possible that in the early part of the authorization cycle, the Federal Government would provide limited subsidies for corridor and long distance trains, and fund the capital backlog for certain passenger rail projects. By the end of the authorization cycle, however, state governments would be responsible for at least 50 percent of needed capital investment for all intercity passenger rail service– similar to Federal capital investments in the Federal Transit Administration’s “New Starts” program. Similarly, by the end of the authorization period all rail operational costs will be borne by riders or States or State rail consortiums. We believe this an appropriate division of State and Federal transportation responsibilities. It reflects the way the Federal government handles other transportation programs. After an appropriate transition period, only services States are willing to pay for would be continued. Like other Federal programs that invest in transportation, intercity passenger rail service would require careful thought and planning up front before either the states or the Federal government make significant investments. Intercity passenger rail service should be part of state transportation plans already required by Federal surface transportation legislation. Careful passenger rail planning should go a long way toward overcoming the long-term problem that our modes of intercity passenger transportation, which were conceived independently for the most part, do not interrelate well. States, however, have a powerful interest in enabling their citizens to navigate our transportation system seamlessly. The states that do so stand to reap considerable economic advantages, such as being more attractive as a location for businesses. A sound planning process should also help make sure that intercity passenger rail service goes where people want to travel, when they want to go, and at an appropriate price. This may result, for example, in a lot more attention being paid to some of the submarkets along long distance routes, instead of the points of origin and of final destination for these routes. As I understand it, on many long-distance routes few passengers travel the entire length of the route. Instead, most passengers start and stop at intermediate points along the way. It would make sense for a state or two neighboring states having a submarket that attracts a lot of passengers to want more service on that part of the longer route and to invest accordingly. North Carolina is doing that between Charlotte and Raleigh. Oregon and Washington are doing that between Eugene, Portland, Seattle and Vancouver, British Columbia. Those states are reaping significant benefits from doing that and we should help them. In many places, states may decide that it is more important to have fast, frequent, timely, and reliable service in relatively short corridors that have a lot of business travel. In such corridors, rail can compete effectively with air and highway for business travelers. The Northeast Corridor, where Amtrak is the dominant carrier, is the best illustration of that prospect. Especially where airports and highways are already overcrowded and land is so scarce that it will be hard to build more airports or highways, it is especially important to make full use of existing rail capacity. Since states will be making the key decisions about whether to build additional airports or highways, it makes sense to have them make key decisions about passenger rail service and if it should be expanded, reduced, or eliminated altogether. Then the states can comprehensively plan the best ways to get their citizens from one place to another without needless constraints on modal choice. Another part of effective planning for transportation systems is compliance with environmental laws. Before major Federal funding decisions can be made, without regard to the type of funding used, assessments of environmental impacts must be completed, environmental impact statements or findings of no significant impact prepared, and all necessary permits obtained. State governments are very familiar with these processes and have learned to negotiate them successfully. They can be expected to handle compliance with the environmental laws as quickly and efficiently as it can be done. California, North Carolina and Virginia, and Florida are doing that very effectively right now for the additional rail service they are seeking with higher speed rail projects. Thorough planning also involves thorough discussions and negotiations with the freight railroads which own the rights-of-way and tracks over which most of the Nation’s current and future passenger rail services operate outside the Northeast Corridor. Passenger rail services pose significant operational challenges for freight railroads, and expansions of current services or new service on intercity corridors should not impair the current capacity for carrying freight, lest such investments will lead to increased congestion of our highways by more trucks. Better yet, states considering passenger rail investments should make capacity improvements that benefit both passenger and freight users to maximize the congestion relief afforded by the projects. Policymakers may need to decide whether the current pricing mechanisms of passenger rail access at incremental costs will lead to the most efficient use of public and private infrastructure assets. Of course, it is also important to provide funding for intercity passenger rail service in a way that best assures that the taxpayers get their money’s worth. The standard grant agreement relationship used by the Federal government to provide most financial assistance affords reasonable controls on and accountability by recipients. Properly used, grant agreements make clear what the public will get, when the public will get it, and what it will cost. Reasonable and workable financial controls are used. All aspects of the program are “in the sunshine” and audited. This is a prudent means of seeing that Federal funds are well spent and produce the benefits intended by the Administration and Congress. This kind of thorough financial planning is also mirrored in proposals in the Administration’s surface transportation reauthorization (“SAFETEA,” mentioned below), in which states are required to develop financial plans for Title 23 projects over $100 million. This Administration has a strong record of support for innovative financing for surface transportation projects, as the recently introduced Safe, Accountable, Flexible, and Efficient Transportation Equity Act (“SAFETEA”) reauthorization proposal demonstrates. The Transportation Infrastructure Finance and Innovation Act (TIFIA) established a Federal credit assistance program that is already available for intercity rail projects. SAFETEA proposes to expand the use of TIFIA credit assistance by broadening eligibilities to include private freight rail facilities and reducing the project size threshold for TIFIA projects to $50 million from $100 million. States would be allowed to impose user charges on federal-aid highways, including the Interstate System, provided that such charges were part of a program to relieve congestion and/or improve air quality. Transportation projects (highway facilities and surface freight transfer facilities) will be eligible for tax-exempt private activity bonds, exempted from a state’s private activity ceilings, encouraging private operation of transportation projects. States will be given more freedom to use innovative project delivery methods such as design/build, which are often a key in setting fixed prices for projects to attract private investment. One of the common threads in most innovative financing mechanisms for surface modes—state revenue bonds, toll roads, TIFIA, Grant Anticipation Revenue Vehicles—is that most of these financial instruments require repayment. Debt instruments used for transit and road construction either pledge dedicated tax revenues, dependable funding streams from Federal or state programs, or reasonably expected revenues from transportation facility users. Various kinds of debt instruments are proposed from time to time to fund intercity passenger rail service. The Administration does not think dedicated debt instruments are suitable for this purpose. Unlike most other transportation debt financing mentioned above, intercity passenger rail does not generate adequate cash flows to service significant additional debt, nor is it supported by reasonably anticipated, long-term dedicated funding streams from the Federal government. We believe that there may be corridors in which passenger rail services can cover costs of operations and maintenance, but few corridors will generate revenues sufficient to provide adequate coverage beyond operating and maintenance expenses to repay interest and principal of debt raised for project capital costs. Let me also speak in general terms about tax credit bond financing, even though such matters are not our agency's primary responsibility (and such matters are considered by tax-writing committees in the Congress). As an example of the concept, you may wish to learn more about Qualified Zone Academy Bonds http://www.ed.gov/offices/OESE/SST/qzab.html), a program that offers limited amounts of tax credit bonds for equipment and rehabilitation of schools in empowerment zones and enterprise communities or schools serving a student population of which at least 35 percent are eligible for free or reduced-cost lunches. These are the only form of tax credit bond currently allowed. This program, by limiting the total term of the bonds, currently to fifteen years, roughly splits the cost of a qualifying project in half. The federal government pays the interest (through tax credits) and the local school district repays the principal. (As you can see, this equal sharing of financial exposure is similar to the kind of financial participation we contemplate in a federal/state capital partnership for intercity passenger rail). The total size of the Qualified Zone Academy Bond program is limited to $400 million per year in new issues, and only certain qualified buyers can purchase these bonds (lending institutions such as banks and insurance companies). These provisions limit the administrative complications and costs to the Treasury of these financial instruments. If larger amounts of tax credit bonds are issued, the permitted holders of these bonds would likely have to be expanded to include, for example, individuals and mutual funds, thus making them much more complex and increasing the administrative burdens placed on the Internal Revenue Service. If longer terms of maturity are considered for intercity passenger rail purposes, then the overall exposure of the Treasury is increased relative to any matching funds from passenger revenues or state participation. If the tax credit debt is issued in an amount that not only covers capital costs but is also used to create sinking funds from which principal is eventually repaid as interest accrues in the sinking fund then the Treasury is effectively footing the entire bill for the capital costs. Further, because there is very little liquidity in the market for these bonds the market would impose a significant premium, thereby reducing the amount of actual funding and raising the effective costs to the taxpayers of using this funding mechanism compared to more traditional means. For these reasons, the Administration would oppose such a financing mechanism for intercity passenger rail. Before Congress considers more debt for intercity passenger rail, Congress should consider the difficulty Amtrak is having with the enormous debt it has already incurred. Amtrak’s total debt grew from $1.7 billion in 1997 to $4.8 billion in 2002. Figure 1 illustrates the growth in Amtrak’s total debt. Figure 1 Amtrak Short-Term and Long-Term Debt (Source: U.S. DOT Inspector General) Because of this increased debt, naturally Amtrak’s annual debt service has grown substantially, adding a large up-front cost to its business plan. Annual debt service requirements (principal and interest) are forecasted to be $278 million in FY 2004 (up from $111 million in 1997). This means that debt service will consume over 15 percent of Amtrak’s requested FY 2004 appropriation of $1.8 billion. Amtrak’s accumulated debt is a significant burden weighing down future passenger rail development. The FRA is not surprised by this massive debt and calls for its accelerated retirement. In 1983, Amtrak was unable to pay the debt service on $880 million in loans guaranteed by the Government under section 602 of the Rail Passenger Service Act. FRA paid $1.119 billion to honor its guarantee of principal and interest on Amtrak’s debt, and in return the Federal government was given a lien on Amtrak’s assets and given $1.119 billion of preferred plus to one share of preferred stock for each dollar of future financial assistance given to Amtrak. That preferred stock has a par value of $10 billion. So you can see that our past experiences with passenger rail debt, necessarily colors our current view that future financing for passenger rail depends on shaky promises of project revenues or future funding dependability. That is not to say that we are opposed to the involvement of the private sector in passenger rail development, either in service delivery or financial participation. Indeed, earlier testimony before this committee demonstrated our confidence in the ability of the private sector to become involved in a number of ways in providing passenger rail services to state governments. We are convinced that the private sector may be interested in pursuing commercial applications along the Northeast Corridor, and such commercial uses may provide income streams for future corridor capital projects. Yet, we have listened to many commuter rail agencies and freight railroads that use the Northeast Corridor and the states that support such operations, and they have cautioned us against private ownership and control of the Corridor. We are taking these comments and concerns under consideration as we continue drafting reauthorization legislation for the national passenger rail system. Thank you again for the opportunity to appear before this committee. I will be happy to answer any questions you may have.
Mr. Sonny Hall
Chairman Hutchison, Ranking Member Inouye and members of the Subcommittee, my name is Sonny Hall and I am International President of the Transport Workers Union (TWU) as well as President of the Transportation Trades Department, AFL-CIO (TTD) and appear today in both capacities. TWU represents workers at Amtrak and in the freight rail industry and TTD consists of 35 affiliated unions across the entire transportation industry, including the 12 rail unions that make up our Rail Labor Division. Let me first thank you Chairman Hutchison for inviting me to testify today on this extremely important and timely subject. This Committee has a history of seeking the views of transportation workers and their unions and I applaud you for including us in your deliberations over the future of Amtrak. We might not always agree, but I think including us in this critically important debate will only enhance this Committee’s consideration of how to improve and support passenger rail service across America. The Committee has called this hearing to discuss ways to finance intercity passenger rail service. We applaud your leadership in tackling this difficult issue. Transportation labor has long argued that this country needs to make a real, long-term financial commitment to Amtrak and to recognize once and for all that passenger rail service is a public service -- not a “for-profit” endeavor. Unfortunately, Congress and this Administration have failed to provide Amtrak the level of support it needs to succeed as a viable national rail passenger service. In short, Amtrak suffers from too many years of chronic under-funding and any solution considered by Congress must reverse what has been throughout Amtrak’s existence wildly unrealistic transportation policy. As I will discuss in more detail, yesterday the Economic Policy Institute (EPI), a highly respected Washington, DC-based think tank, released a study that debunks the myth that the solution to Amtrak’s problems is to privatize the system. It is our understanding that EPI has submitted a copy of this report for the record and I urge members of the panel to review it and to use it as a guide as you consider various passenger rail legislative proposals. We have long understood that calls to privative Amtrak, or to insist that the carrier somehow turn a profit, are simply a way to expect the impossible from a national rail system and in the end use the operation’s financial distress to call for its elimination. From a transportation policy perceptive, as well as from a labor perspective, we find this result unacceptable and we are heartened by the fact that so many Members of this Committee agree with us. We sincerely hope that EPI’s in depth analysis of the perils of privatization will allow this Committee and other policy makers to close the book on this dangerous experiment and instead properly direct attention to more sensible solutions. I know there is a great deal of interest on this Committee, and from many members of this panel, in finding new and innovative ways to fund national passenger rail service. As we have in other sectors of transportation, we support finding new ways to attract badly needed capital for passenger rail infrastructure, and I will discuss this issue in more detail later in my testimony. But let me say now that we need to first and foremost support the national passenger rail system we have today. And as we look to the future, we must remember the history behind Amtrak’s creation and the financial hardship inspired by many years of neglect and inadequate federal investment. Moreover, we must learn from that experience as we venture to make Amtrak a successful national railroad operation. Amtrak was created three decades ago with a simple goal in mind: to establish a modern, efficient intercity passenger railroad that can provide a truly national network of passenger transportation. Amtrak was charged with operating and revitalizing intercity passenger rail service and integrating such service into our national transportation system because it was clear in the late 1960s that freight carriers were unable and unwilling to sustain the severe financial losses associated with operating passenger rail service. Simply stated, Amtrak was created in response to the financial bleeding associated with the rail passenger operations of the nation’s freight rail carriers. In plain English, Amtrak was nothing less than a bail-out of failing private passenger rail operations. Unfortunately, the history of Amtrak is filled with one financial crisis after another as the carrier has struggled to secure adequate funding simply to remain in operation. Amtrak workers have made repeated sacrifices to help the railroad survive through some of its darkest days, including efforts in the past to eliminate or slash Amtrak’s federal funding. Amtrak workers have taken the brunt of the railroad’s financial hardships year after year. But, regrettably, some have chosen to scapegoat Amtrak workers, saying they are part of the problem. This is not only untrue, but deeply offensive to those who have made years of sacrifice. Several weeks ago, rail labor released a study on Amtrak wage data prepared by noted economist Thomas Roth. The report, which I am submitting as part of my testimony, definitively demonstrates that labor costs at Amtrak, including wages and benefits, have remained constant over the past 21 years and have actually declined in real dollars. In fact, Amtrak wages have lagged far behind cost-of-living increases. Amtrak employees earn well below the prevailing rates of their counterparts in the freight and commuter rail industry. A typical Amtrak worker today earns on average 22 percent less than a worker performing the same job on a freight railroad. It is also significant that as a percentage of total operating expenses, Amtrak’s employment costs have not increased in almost 20 years. Just as the myth that Amtrak can exist without subsidy must end, so too must the myth – and the scorn it breeds – that Amtrak workers make too much and sacrifice too little. We were happy to hear Mr. Gunn testify recently that Amtrak’s workers’ wages are not the problem. Amtrak employees have been without a new contract for three and one-half years, and are grossly underpaid. In fact, Amtrak employees have not had a wage increase in this century, and since their contracts became amendable 1999, have received a COLA built in to the old contract of a total of 59 cents per hour. Over that four year period, that works out to a little over a penny per month. Ms. Chairwoman and members of this Committee, rail labor wants Amtrak to succeed. We want Amtrak to prosper. However, we also must respect and properly acknowledge the frontline men and women who do their best every day to move people safely and efficiently from one end of this country to the other over tens of thousands of miles of railroad track. As TTD’s 35-member Executive Committee resolved earlier this year, “As Congress and the President secure Amtrak’s future, transportation labor will insist that the jobs and livelihoods of Amtrak employees are not ignored or cast aside and that new collective bargaining agreements are completed without further delay.” As chronicled in the EPI study, privatization of Amtrak is hardly the answer. We need only look at Great Britain’s failed experiment to see what can happen when we allow a public service to be hijacked by private interests. Beginning in 1994 and ending in 1996, British Rail, motivated by the zeal for broad privatization of various public services, was transformed from a publically run service into a “competitive” railroad market. The story of British Rail underscores the threats of ideologically driven policy experiments such as rail privatization. British passengers were saddled with increased fares, shoddy maintenance practices, and dangerous cost cutting including excessive job reductions. This resulted in higher accident rates, deteriorated service and coordination problems within a maze of poorly managed providers. And the British people were left with an operational meltdown of unprecedented proportions. By 1999, with problems mounting, the government began to undo the privatization experiment and sought to disengage the so-called market model. In the end, as pointed out by EPI, Britain will have a system that looks a lot like Amtrak – but better funded. I should note, and this fact is cited in the EPI report, that the Conservative shadow Secretary of Transportation recently pledged to voters that if the Torries are returned to power, they will never attempt to re-privative the rail system. Let me also comment on proposals put fourth by the Amtrak Reform Council, the Administration and others that would solve Amtrak’s problems by breaking up the system and dividing various responsibilities. ARC’s proposal, for example, would slice Amtrak into component operations and then turn to some very complicated contracts to ensure basically the same service that Amtrak provides today. Besides raising transaction costs (a major problem with British Rail) and creating additional layers of bureaucracy, I am not sure what will be accomplished by this or other models following a similar course. Is Amtrak run perfectly today? No. There are of course areas for improvement and we want to work with the carrier and this Committee on that effort. But how is dividing the franchise into various parts inherently any better then the current framework? Amtrak is drowning under a deficit, struggling to turn around a significant deferred maintenance crisis, already paying substandard wages to employees and subject to unpredictable and highly volatile funding sources. These are the issues that deserve the immediate attention of this Committee. We understand that some members of this Committee and other interests are pursuing new ways to fund transportation projects, including inter-city passenger rail. In particular, focus has turned to bonding initiatives that are designed to raise billions of dollars for capitol and related improvements. Obviously, we welcome any attempt to increase the pot of money available and to create the operational, maintenance and construction jobs so badly needed in America. But these initiatives must be carried out responsibly and the interests of employees must be protected. First and foremost, any funding plan must adhere to existing and longstanding employee protections. Any of the funding initiatives would be federal in nature and the inclusion of labor standards is consistent with longstanding and successful transportation policy previously enacted on a bipartisan basis. We would be forced to oppose such legislation if the interests of employees are not protected. In addition, we urge against speculative funding proposals as a substitute for supporting our existing national rail system – Amtrak. TTD has specifically endorsed the $1.8 billion that Amtrak is seeking for FY 2004 and we would hope that all Senators who are looking at new funding plans would support this request as a baseline level. Let us mobilize to reject the principle that Amtrak must make a profit because it is that basic notion that has doomed Amtrak to failure for three decades. As EPI points out in explicit detail, highways receive 43 times the federal funding that rail receives; aviation receives 20 times as much; and transit – which EPI candidly refers to as “the other stepchild in the federal budget” – receives 8 times as much federal support. Since 1971, Amtrak has received about $21 billion in federal dollars – less than the $23.6 billion that highways received in 1999 alone. And overall, passenger rail receives just over 1% of all federal transportation dollars and about one-third of one percent of combined federal, state and local funding. What is clear is from these figures is that Amtrak must be given the same chance to succeed as our nation’s highway, air and water transportation systems have been given over many decades. Again Madam Chairman, thank you for allowing transportation labor the opportunity to present our views on the future of Amtrak and inter-city passenger rail service. This issue is critically important to us, not only for the jobs that such a service creates and supports, but because we agree with you and many of your colleagues that national passenger rail service is an integral part of our overall transportation system. I hope we can work together to fund and support an Amtrak system that serves the interests of passengers, communities and workers.
Mr. Jeff Morales
Good morning, Madame Chairwoman and members of the Subcommittee, my name is Jeff Morales. I am the Director of the State of California’s Department of Transportation. Thank you for giving me the opportunity to testify today. Introduction Today, I would like to give you some thoughts on intercity passenger rail finance as it relates to State-supported Amtrak service in California. But first, let me introduce you to the exciting intercity rail program we are running in California in partnership with Amtrak. California has, by far, the largest State-supported intercity passenger rail program today, both in terms of dollars and riders, and is considered by many to be the model in State-supported intercity passenger rail service. The bottom line is our performance. Particularly over the last few years, rail ridership in California has continued to grow, and is leading the nation. This is happening in spite of a sluggish economy, and the sense of many that Californians will never get out of their cars. This year, close to one of every five Amtrak riders nationally will be on one of California’s trains. As a side note, I would also like to point out that we are seeing tremendous growth on our commuter rail lines in California. Although this is not the subject of today’s hearing, these lines work in conjunction with our Amtrak-operated service, and are an increasingly important part of our overall transportation system. Amtrak operates three routes for the State: the Pacific Surfliner, San Joaquin, and Capitol Corridor Routes. In FFY 2002, the Pacific Surfliners and Capitol Corridor had the highest and second highest ridership, and the San Joaquins had the fourth highest ridership of all Amtrak routes outside of the Northeast Corridor. California’s three state-supported routes had almost 3.6 million combined riders in FFY 2002. This was 47% of the ridership on all corridor trains outside of the Northeast Corridor, and 16% of total Amtrak ridership in FFY 2002. In FFY 2003, we expect to carry over 4.0 million passengers or nearly 20% of total Amtrak ridership. In order to make our program successful, the State has committed major operating and capital funds to the program. On the operating side, California contributed $67.8 million in operating payments to Amtrak in FFY 2002. This was 53% of the total payments that all states made to Amtrak in FFY 2002. On the capital side, California has provided an unprecedented amount of funds to intercity passenger rail service. The State has provided $1.7 billion in capital funds since 1976. California is the only state that has designed and bought its own equipment that is now used on most of the State-supported trains. Governor Davis has shown particularly strong support for intercity rail, as he believes it is one of the keys to congestion relief. Under Governor Davis, close to $600 million has been dedicated to intercity rail capital. Description of California’s Three Routes Now, I would like to give you a little history and description of our Routes. In 1971, the year Amtrak was formed, Amtrak started by running three trains on the Pacific Surfliner Route (then called the San Diegans) in southern California, from San Diego to Los Angeles. California got involved when the State began supporting the route in 1976 with a State-supported addition of a fourth train. Over the years service has increased significantly. Service was added in 1988 on the north end of the route from Los Angeles to Santa Barbara. Currently, the State covers about 67% of the net cost of operations for this Route, while Amtrak covers the remaining 33%. This is the only corridor route in California where Amtrak entirely supports a portion of the service. Today, the route is the fastest growing corridor in the country with 11 round-trips between San Diego and Los Angeles, and a 12th round-trip operating on weekends. Four trains extend north to Santa Barbara weekdays and five on the weekends, with one daily train extending further north to San Luis Obispo. Ridership in FFY 2002 was 1.7 million. Ridership has been particularly strong in FFY 2003. From October 2002 through April 2003 ridership was almost 24% higher than the same prior year period. This impressive ridership increase is mostly due to “Rail 2 Rail,” an innovative joint ticketing and marketing program with Metrolink – the commuter rail service on the same corridor. California also has a north-south route called the San Joaquins. Amtrak service on this route started in 1974 with one round-trip between Oakland and Bakersfield. The State started supporting the route in 1979, and a second round-trip was added in 1980. In 1999, the first round-trip to terminate in Sacramento was added. There are currently four round-trips from Bakersfield to Oakland, and two round-trips from Bakersfield to Sacramento, for a total of six daily round-trips. The Route has an impressive dedicated feeder bus network that connects riders to Los Angeles and further south, as well as to more rural communities throughout the State. In SFY 2001-02, almost 65% of all San Joaquin passengers used at least one connecting bus. Ridership in FFY 2002 was over 730,000. Ridership in FFY 2003 from October 2002 through April 2003 was almost 9% above the same prior year period. Our newest route is the Capitol Corridor, serving the northern metropolitan area of the State. The State started service on this Route in December 1991 with three round-trips between Sacramento and San Jose, and one trip extending to Roseville. In July 1998, responsibility for administering the Capitols was transferred to the Capitol Corridor Joint Powers Authority (CCJPA). The State now provides funding and oversight to the CCJPA. Today, the Capitol Corridor has twelve weekday round-trips and nine weekend round-trips between Sacramento and Oakland. One daily train extends east to Auburn, and four weekday trains extend south to San Jose with six on the weekends. Ridership in FFY 2002 was almost 1.1 million. The Capitol Corridor added three weekday round-trips in SFY 2002-03. Ridership in FFY 2003 from October 2002 through April 2003 was almost 7% above the same prior year period. Ninety-eight percent of the State’s population lives in counties served by the three routes and their connecting bus networks. The State Department of Transportation estimates that as a result of State-supported intercity rail service, 265 million vehicle miles and 4.4 million gallons of gasoline were saved in 2002. These statistics illustrate that intercity rail travel in California provides a true alternative to auto travel, not just a token option. California’s Capital Support for its Intercity Passenger Rail System As I mentioned earlier, since 1976, California has provided $1.7 billion in capital funds for track, signal and station improvements. $749 million of these funds went to the Pacific Surfliners, $403 million to the San Joaquins, $196 million to the Capitol Corridor, $107 million for maintenance and layover facilities and other projects, and $274 million for rolling stock. Starting in the early 1990’s, with the passage of two general obligation bond measures, capital funding increased dramatically. Without these capital projects, the expansion of California’s intercity passenger rail ridership from 1.3 million in SFY 1979-1980 to 3.6 million in FFY 2002 would not have been possible. Capital projects are necessary to expand track capacity for additional frequencies, improve service reliability, and reduce train running time so that rail service is competitive with the auto. Governor Davis has strengthened the State’s commitment to intercity rail by proposing close to $600 million for intercity rail capital. $146 million was designated to construct 14 miles of triple track between Los Angeles and Fullerton on the Pacific Surfliners. An initial $28 million has been reserved for the design and environmental work on “run-through” tracks at Los Angeles Union Station. This project will also benefit the Metrolink commuter trains that use Union Station. Also, $92 million is proposed to construct double tracks on the San Joaquins over three significant portions of the route. Equipment Program The State also has an unusual and impressive equipment program. California is the only State that has designed and bought new intercity rail equipment. In the mid-1990’s, the State pioneered the California Car design that allows faster loading and unloading, shorter dwell times at stations, and greater accessibility for disabled passengers. This design was used as the basis for Amtrak’s new Pacific Surfliner fleet. California currently owns a fleet of 88 cars and 17 locomotives. The State supplies all of the 78 cars and 17 locomotives in the northern California fleet used on the Capitols and San Joaquins. Also, the State supplies ten of the 50 cars used on the Pacific Surfliners. As I mentioned earlier, the State has spent $266 million to date for rolling stock. As the initial California Cars are aging, California has started a heavy equipment overhaul program, with $10.8 million budgeted in SFY 2001-02 and 2002-03. California’s System is a Significant Part of the National System Now that I have been able to describe to you California’s intercity passenger rail system, I am sure that you realize how key it is to Amtrak’s larger system. As I mentioned earlier, California’s 3.6 million riders made up 16% of Amtrak’s total FFY 2002 ridership. California helps the national system by contributing riders to the long-haul trains. Almost 100,000 passengers transferred between California’s three routes and long-haul trains in FFY 2001, and contributed $12.1 million in passenger revenue to the long-haul trains. These trains are the Coast Starlight, California Zephyr, Southwest Chief, and Sunset Limited. California’s financial contribution to Amtrak is also significant. California’s operating payments of $63.1 million reduced Amtrak’s total full cost operating loss of $772.2 million by 8% in FFY 2001. Issues California Would Like the Subcommittee to Consider in its Discussions on Intercity Passenger Rail Finance I now have a few thoughts on issues California would like the Subcommittee to consider in its discussion on intercity passenger rail finance. Freight Railroads. A number of issues relate to the interrelationship between private freight railroads and intercity passenger rail service. As you know, under federal law only Amtrak has the right to access freight railroads for intercity passenger rail service at incremental cost. Thus, Amtrak still has a significant competitive advantage over other potential service providers. The importance of this fact cannot be overemphasized. Until all service providers have the same access rights to railroads as Amtrak, true competition will not be possible, as other providers have to negotiate with the railroads for access – with no guarantee of getting it at all, and almost certainly at a higher price. Because California has spent significant funds to improve private railroad infrastructure for use in passenger rail service, the State would not employ a service provider that does not have long-terms rights to operate on a railroad. We believe to address these significant issues of equal access to freight railroads and stability of service, changes to current federal law are necessary. As mentioned above, California has spent significant funds making capital improvements to freight railroads to provide additional intercity passenger rail capacity for new trains and to increase passenger speeds. Unfortunately, while passenger service has increased according to the State’s agreements with the freight railroads, freight service often has used much of the additional capacity, leading to dispatching delays and poor on-time performance for the intercity rail passenger service. This is an issue that needs to be addressed cooperatively by state and federal government, Amtrak and the railroads. We would like to point out that the State has a good partnership with the Burlington Northern Santa Fe (BNSF), although we are still resolving issues with on-time performance. The State’s relationship with the Union Pacific has improved in the recent past. In order to address some of the issues just mentioned, California has contracted with R.L. Banks and Associates to conduct a benefit/cost feasibility study on competitively bidding intercity rail, in order to determine if there are methods whereby competitive bidding could benefit California under current law. The study will also look at how to best position California to continue intercity passenger rail service in the event Amtrak is restructured or liquidated. The study will additionally identify any changes in federal law that would be needed. The study is planned to be completed by the end of 2003. Federal Role in Intercity Passenger Rail Service. Another set of issues California is concerned with relates to the federal role in intercity passenger rail. As I mentioned earlier, California’s extraordinary intercity passenger rail capital program has made California Amtrak service possible. However, while California has stepped up to the plate and delivered, I do not suggest or support the idea that the federal government should not have a role. If the federal government invests in any corridors, it should be willing to invest in our productive corridors. Improved mobility in California has national benefits, and relieving congestion in California corridors is just as worthy a goal as helping address problems in the Northeast and elsewhere. Consequently, an ongoing stable federal source of capital funding is necessary to allow California Amtrak service to just keep pace with population growth. Stable federal capital funding is also absolutely essential in order to allow the incremental development of high-speed rail service on key corridor routes throughout the nation. In a similar vein, California cannot continue to be required to increase its responsibilities to Amtrak for operating costs. It is essential that long haul trains continue to be exclusively the responsibility of the federal government. The states will not be able to pick up funding of the long haul services. Additionally, we recommend that the Subcommittee consider the issue of equity in States’ payments to Amtrak for intercity rail operating services. Amtrak has begun to address this issue with its new policy that all States will make operating payments on the same basis. We hope the Subcommittee monitors Amtrak’s timeliness in equalizing states’ payments. In this era of scarce funding at all levels – Federal, state and local – we believe the Federal government needs to continue to increase opportunities for flexible transportation funding. While ISTEA and subsequent legislation opened the transportation funding playing field considerably, intercity passenger rail funding was notably left out of this game. Unfortunately, intercity passenger rail is still not being given access to flexible transportation funding in the latest draft of SAFETEA. In California, intercity rail service augments commuter rail and provides congestion relief to parallel Interstate routes such as I-80 in the Sacramento to San Francisco Corridor and I-5 in San Diego. In essence, intercity service has become a corridor management tool. We believe that in multimodal corridors, intercity passenger rail capital projects should be given the same federal funding flexibility and opportunities as is now offered commuter and urban rail capital projects and that total funding should be increased to accommodate intercity passenger rail needs. Here is an example to point out the effect of the lack of funding flexibility. As Director of Transportation, I cannot use federal highway funds on the Capital Corridor that serves the I-80 corridor or the Pacific Surfliner route that serves the I-5 corridor to relieve congestion on those interstate routes. The State should have that option. Conclusion We appreciate the Subcommittee’s initiative in convening this hearing. I would like to leave you with three key points from California’s point of view. First, California has made a significant capital and operating investment in its intercity passenger rail system. We urge the Senate to ensure that this investment is protected as changes are considered to the relationship between passenger and freight rail and as Amtrak’s future is considered. Second, we believe that a continuing and stable source of federal funding for both capital and operating needs is necessary to successfully operate the national intercity rail passenger system. The sooner the issue of funding can be resolved, the better for the system. Finally, there has been much discussion about introducing competition to Amtrak. If Congress takes this route, we recommend that current law be changed to allow states, and by extension their franchisees, to access freight railroads at incremental cost. I want to thank you again for the opportunity to testify today before this Subcommittee, and would be happy to answer any questions.
Mr. Edward HambergerPresident and CEOAssociation of American Railroads
On behalf of the members of the Association of American Railroads (AAR), I am grateful for the opportunity to present freight railroads’ views concerning passenger railroading and ways to finance it. It is important to note at the outset that freight railroads agree that passenger rail has a role in alleviating highway and airport congestion, decreasing dependence on foreign oil, reducing pollution, and enhancing mobility and safety. Freight railroads will continue to work reasonably and cooperatively to help passenger rail succeed. We also know that passenger rail is extremely costly. Indeed, funding passenger rail has always been difficult — and continues to be so today, when budget constraints present enormous challenges to all levels of government. Freight railroads believe very strongly, though, that it is not the responsibility of our nation’s privately-owned freight railroads to subsidize passenger rail. Indeed, as you consider the future of passenger rail in this country, we urge you to keep in mind that, while passenger railroading is important to our country, it pales in comparison to the importance of freight railroading. Our freight rail system is a tremendous national asset that moves more freight, more efficiently, and at lower rates than any other system in the world. The safe and cost-effective transportation service that freight railroads provide is critical to the domestic and global competitiveness of our nation. Freight railroads are responsible for 42 percent of our nation’s intercity freight transportation service (measured by ton-miles). Therefore, policymakers must find the most effective way to provide the passenger rail service that America wants and needs, but without burdening the freight rail system — operationally, financially, or in any other way. Freight railroads are willing to work with the relevant government entities to determine if a public-private partnership is appropriate. It is important to recognize, of course, that in such circumstances any public-private partnership must provide a replacement of freight capacity and a fair return on the private freight railroad assets used for public purposes. Overview of Passenger Rail in the United States Any passenger rail system that operates on or crosses freight rail facilities is of interest to freight carriers. This applies especially to commuter rail and intercity rail. Commuter rail, which provides passenger rail service between a central city and its suburbs or an outlying region, is offered in 20 or so U.S. cities. In 2002, commuter rail accounted for approximately 1.5 million unlinked passenger trips per business day, or 411 million trips for the year. Millions of these trips were on tracks that are actually owned by freight railroads but over which a commuter railroad has operating rights. Most existing commuter railroads plan to increase the frequency of their service, and several plan to extend existing lines or add new ones. In addition, in approximately 30 metropolitan areas throughout the country, entirely new commuter rail operations have been proposed. The vast majority of existing commuter passenger operators that want to expand their service, as well as nearly all proposed new commuter operations, hope to use freight railroad facilities for their operations. Amtrak is the sole provider of intercity passenger rail service in the continental United States. Amtrak operates over more than 22,000 route miles, carries more than 23 million passengers annually, and serves more than 500 stations in 46 states and the District of Columbia. Amtrak is also the nation's largest contract provider of commuter rail service, serving an additional 54 million commuter passengers per year in California, Connecticut, Maryland, Massachusetts, and Virginia. Amtrak has 22,000 employees. Amtrak could not exist without the facilities and services of freight railroads. Amtrak owns approximately 730 route-miles, primarily in the Northeast Corridor bounded by Boston and Washington. Nearly all of the remaining 97 percent of Amtrak’s system consists of tracks owned and maintained by freight railroads. Freight carriers also furnish other essential services to Amtrak, including train dispatching, emergency repairs, station maintenance, and, in some cases, police protection and communications capabilities. So far, 11 corridors have been designated by the U.S. DOT as high-speed intercity rail corridors. Like Amtrak, these commuter and high speed proposals would involve service over existing freight lines, or acquisition of part of a freight railroad right-of-way to permit construction of passenger tracks. The map below illustrates the extent of existing and proposed passenger rail service in the United States and how it overlays the national freight rail network. Passenger Rail History As you deliberate the future of U.S. passenger rail service and ways to finance it, it might be helpful to reflect briefly on the history of passenger railroading and the conditions that led to the creation of Amtrak and other passenger rail carriers. Well into the 20th century, railroads were the primary means by which both people and freight were transported in this country. In 1930, for example, the rail share of both the intercity freight and passenger markets was around 75 percent. Over time, though, a number of factors, especially the enormous expansion of our nation’s highway system and the development of commercial aviation — both accomplished with the help of hundreds of billions of dollars in government subsidies — brought enormous competitive pressures to bear on passenger railroading. In fact, by the 1930s, passenger railroading had become clearly unprofitable. By the late 1950s, private railroads were losing $750 million per year (nearly $4 billion in today’s dollars) in fully distributed costs on passenger service, according to an Interstate Commerce Commission (ICC) study. In fact, a noted transportation scholar wrote “it is no exaggeration to say that by 1958 railroad passenger service had demonstrated itself to be the most uneconomic activity ever carried on by private firms for a prolonged period.” These massive losses continued largely because state and federal government regulators often refused railroad requests to eliminate passenger trains no matter how much money the railroads were losing. By the late 1960s, railroads had managed to obtain regulatory approval to discontinue many purely local trains and were pursuing the elimination of major trains that comprised the basic elements of the national passenger rail network. By 1970, passenger rail ridership had plummeted to just 11 billion passenger-miles (an 88 percent decline from its 1944 peak of 96 billion) and the cumulative “passenger deficit” — the losses that government regulators forced privately-owned railroads to bear through mandated passenger operations — had reached many billions of dollars. Unfortunately, the massive passenger losses, in combination with unrelenting competition for freight business from subsidized trucks and barges, led to railroad bankruptcies, line abandonments, deferred maintenance, service deterioration, and general financial decline. In 1970, the largest U.S. railroad, the Penn Central, went into bankruptcy. At the time, it was the largest bankruptcy of any company in U.S. history. Not coincidentally, the Penn Central was also the largest passenger railroad in the country. In response to the crisis in passenger rail, in 1970 Congress passed The Rail Passenger Service Act of 1970 (RPSA). RPSA was a reaction to the real possibility that the United States would soon have no intercity passenger rail service at all, and a recognition that passenger rail losses were a serious threat to the viability of freight railroading. Given the huge financial pressure they faced, it is no surprise that when the RPSA created Amtrak, railroads welcomed the opportunity to rid themselves of their hopelessly unprofitable passenger obligations. However, the RPSA exacted a hefty price from freight railroads for permission to exit the intercity passenger rail business. First, freight railroads were required to capitalize Amtrak in cash, equipment, or services. These payments to Amtrak totaled $200 million (approximately $750 million in today’s dollars). Second, the RPSA authorized Amtrak to operate wherever it wished over the privately-owned freight rail network. Amtrak was also granted the power to force freight carriers to convey property to it (subject to constitutionally-mandated “just and reasonable” compensation) if the property were necessary for intercity rail passenger transportation. Third, the RPSA explicitly ordered freight railroads to grant preference to Amtrak trains over their own freight trains and all other customers. Fourth, the RPSA gave the ICC the authority to intervene if Amtrak and the host freight railroad could not agree on the compensation due the owner for Amtrak’s access. A 1973 ICC decision that ordered Amtrak to pay a rate of compensation greater than incremental or avoidable cost was overridden by a 1973 amendment to the RPSA, which allowed Amtrak to pay just the incremental costs of the owning freight railroad caused by Amtrak’s use of the tracks. Railroads that refused to accept the statutory terms offered in the RPSA were required to continue their passenger operations — despite any losses they would incur —for at least four more years. Thereafter, they could seek relief before regulatory agencies, but received no guarantee that they would be permitted to discontinue unprofitable service at that point. All but a few of the railroads accepted the terms of the RPSA and immediately turned over passenger operations to Amtrak, rather than face continuing losses and the uncertainty of the regulatory process. Access to Freight Rail Facilities by Passenger Railroads As noted above, by law freight railroads must grant Amtrak access to their track upon request and give priority status to Amtrak trains. Amtrak pays fees to freight railroads to cover the incremental costs of Amtrak’s use of freight railroad tracks, but these fees do not come close to covering the full costs borne by the host freight railroads associated with the operation of Amtrak trains over their tracks. In fact, a recent analysis by the AAR found that in 2001 alone Amtrak payments to freight railroads were approximately $240 million less than the variable costs to the freight railroads associated with hosting Amtrak service. This figure substantially understates Amtrak’s full cost responsibility for a number of reasons. First, it does not consider delay and opportunity costs. Operation of Amtrak trains over freight lines creates major scheduling difficulties, since Amtrak trains must be given priority, the typically higher passenger train speeds necessitate passing slower freight trains, and disturbances in one part of the rail network ripple through the system and disrupt freight operations elsewhere. Second, railroads’ fixed costs (costs that do not vary with traffic levels) are excluded. Any company that wants to continue to operate must recover both its variable and fixed costs. Third, the additional costs to freight railroads associated with the higher level of liability inherent in passenger operations were not included. Fourth, a portion of Amtrak’s route system is operated over freight railroads that were not participants in the study, and therefore their costs were not included. Non-Amtrak passenger rail operators, including commuter operators, do not have the same statutory rights as Amtrak regarding access to freight-owned track. Instead, they must first reach agreement with the owning freight railroad on a wide variety of engineering, operational, and legal issues — such as hours of operations, the number of passenger trains, access fees, liability provisions, and many others — before they can begin passenger service. Often, where freight railroad system capacity is available, mutually beneficial arrangements are negotiated and agreement is reached. Just last week, the Burlington Northern and Santa Fe Railroad and Sound Transit agreed on a plan that will result in the start of commuter rail service between Everett, Washington and Seattle later this year. Capacity issues have become increasingly important in recent years. In contrast to, say, 30 years ago, when the U.S. rail network had significant surplus capacity (and, not coincidentally, most U.S. railroads were in serious financial difficulty), today U.S. freight railroads operate networks that are carefully designed to match capacity with existing traffic levels or traffic levels expected in the near future. The intensely competitive environment in which freight railroads operate does not allow them the luxury of operating redundant main lines or a network of lightly-operated branch lines. At the same time that rail mileage has been falling, rail traffic has been increasing. Rail ton-miles — the movement of a ton of freight one mile, a standard measure of freight volume — rose from 919 billion in 1980 to 1.51 trillion in 2002, a 64 percent increase. The concurrent rationalization of low-density rail mileage and increase in traffic volume mean that the rail network is used far more intensively and far more productively today than in the past. Capacity constraints mean that many freight corridors have no capacity available for new or expanded passenger operations; in other corridors, expected increases in freight traffic will consume available capacity, precluding passenger operations, unless capacity is expanded. Ton-miles per mile of road owned, a measure of freight traffic density, illustrates the capacity issue. This metric has risen from 3.9 million in 1970 (when Amtrak was established) to 15.1 million in 2002 — a 288 percent increase. Largely because of this enormous increase in the intensity of infrastructure utilization, train “slots” on major freight corridors have become increasingly valuable. Moreover, because rail customers often no longer carry large inventories at their plants, railroads must meet their customers’ requirements for “just-in-time” or more predictable freight arrival. Consequently, asset utilization has become a crucial management tool and rail infrastructure, crews, communications, and customer satisfaction have come to depend on precise and efficient operations. Thus, when passenger trains fill prized corridor “slots” at bargain prices, the result is a major cross-subsidy from freight to passenger service. It also limits the overall size of certain freight rail markets (because slots are not available to freight trains) and affects the reliability freight railroads can offer their customers. Indeed, priority status by passenger railroads results in detrimental impacts on the numerous freight trains on and approaching the corridors traveled by the passenger carrier that are typically much greater than simply the value of the “slot” occupied by that carrier. It is interesting to note that when freight railroads run freight trains over the Northeast Corridor, which is owned by Amtrak, Amtrak charges the freight railroads fully allocated costs, not just incremental costs. In fact, the fees that freight railroads pay Amtrak are many times greater (on a per car basis) than the fees which freight railroads must accept from Amtrak. Thus, railroads are prohibited by statute from treating Amtrak the same way that Amtrak treats freight railroads. Freight railroads should be fully compensated for Amtrak’s use of their property as Amtrak is compensated for use of Amtrak’s property. Funding Capacity Enhancements The addition or expansion of passenger operations on freight-owned facilities requires a thorough analysis of the effect that passenger service would have on existing and future freight operations, and the investments needed to ensure safe operations that do not impede the owning freight railroad. Funding is, of course, a critical — and sometimes controversial — issue. Each specific case must be evaluated based on its unique circumstances and merits, but in general freight railroads should be expected, and are willing, to pay for infrastructure investments that truly benefit them and that they actually want. Conversely, there is no reason to expect freight railroads to pay for investments that do not benefit them or that they do not want. This is a crucial point. As profit-driven entities, freight railroads cannot afford to make investments that yield primarily public benefits, and the benefits of passenger rail are primarily public benefits. Freight railroads have no shortage of potential infrastructure investment projects, but financial markets provide stern discipline to ensure that investments are made only where they will provide a reasonable promise of a direct economic benefit to the investing railroad. This discipline is necessary and appropriate in a market economy, but it discourages investments — including investments in capacity that would benefit passenger railroads — that would yield significant public benefits (e.g., congestion mitigation, emissions relief, enhanced mobility, improved highway safety), but only limited or no direct financial benefits to the railroad. A number of proposals have been put forth regarding how public funding can be made available for passenger rail-related projects. For example, funding for the Congestion Mitigation and Air Quality Improvement Program (CMAQ) could be increased, as could the amount of loans and loan guarantees available through the Railroad Rehabilitation and Improvement Financing (RRIF) program. Freight railroads support both of these approaches. The AAR also supports a thorough evaluation of the Transportation Finance Corporation concept recently presented by the American Association of State Highway and Transportation Officials (AASHTO), and similar proposals, some of which will be discussed today. Railroads do not yet have a position on these proposals, which are new and the details of which are still being ironed out. To repeat a critical point I made earlier, freight railroads should not be considered obligated to fund passenger rail service or suffer negative effects on their own operations because of passenger rail. That is a primary reason why freight railroads strongly oppose the creation of a “rail trust fund” to finance passenger rail if money for the trust fund is to be derived from freight railroads and/or their customers and suppliers. Future Public Policy Directions Freight railroads cannot afford, and should not be expected, to subsidize others at the expense of their own needs. To this end, freight railroads respectfully suggest that you adhere to a series of principles regarding the future of passenger rail service. These principles call for future rail passenger public policy to acknowledge the extreme capital intensity of railroading and to ensure that railroads’ investment needs can be met. Policies which add to freight railroads’ already enormous investment burden, such as further saddling them with support of passenger rail infrastructure needs, or which reduce their ability to provide the quality service needed by their freight customers, must be avoided. To do otherwise would undercut our nation’s freight rail capabilities and be counterproductive in addressing our country’s congestion, environmental, safety, and economic concerns. After all, the goal of reducing pollution and highway congestion by expanding rail passenger service will not be realized if passenger trains interfere with freight service and force freight onto the highways. The freight railroad principles are outlined below. 1. Passenger rail cannot exist without significant government subsidization. Our nation’s railroads learned the hard way how difficult it is to recover the full costs of passenger railroading. No comprehensive passenger system in the world operates today without significant government assistance. Once policymakers in the Administration, Congress, and the various states agree on the nature and scope of passenger railroading in this country, they must be willing to commit public funds on a long-term basis commensurate with that determination. 2. Freight railroads should receive full compensation for the use of their assets by passenger operators. The special statutory privileges regarding its relationship with freight railroads that Amtrak has enjoyed over the past 30 years — i.e., Amtrak’s statutory right of priority access to freight railroads’ tracks at incremental cost — have amounted to a significant, mandatory, and inequitable subsidization of intercity passenger operations by freight railroads. An incremental cost basis does not come close to reflecting the full market value of Amtrak’s access to the owning railroad’s tracks because it does not cover the full operating, capital, opportunity, and other costs freight railroads incur in hosting Amtrak trains. 3. Freight railroads should not be expected to further subsidize intercity passenger rail service, either through new taxes or the diversion of existing taxes (including the 4.3 cents per gallon deficit reduction fuel tax). If policymakers determine that passenger service provides essential public benefits, then the costs of the passenger service (including the costs of maintaining and, where necessary, building new rights-of-way to passenger-rail standards) should be borne by the public, not by freight railroads. For 30 years, freight railroads have subsidized Amtrak. Forcing them to continue to do so, or forcing freight railroads to subsidize other types of passenger rail, would seriously hinder freight railroads’ ongoing efforts to provide safe, efficient, and cost-effective freight transportation service. Indeed, to force freight railroads to subsidize passenger operations would be supremely inequitable. Freight railroads are suppliers to passenger rail. As such, they should be treated the same as those who supply locomotives, passenger cars, diesel fuel, electricity, and provisions for dining cars. Nor should freight railroads be held to a loftier “public interest” standard. Highway contractors are not required or expected to bid below cost because highways are in the public interest. The same rules should apply to railroads. The 4.3 cents per gallon deficit reduction fuel tax paid by railroads deserves special mention. This tax should be repealed — not diverted to any other purpose — so that freight railroads can channel these funds into needed infrastructure and equipment. Diverting this tax to fund passenger rail would perpetuate the inequities faced by freight railroads, because they would continue to derive no benefit from a tax they pay but their primary competitors do not. Forcing freight railroads to shoulder an inappropriate liability burden is another form of subsidization that should be avoided. It is almost inevitable that some accidents will occur on railroads, despite railroads’ best efforts to prevent them. An accident involving passenger trains — which are generally far lighter than freight trains, often travel at much higher speeds, and, most importantly, have passengers on board — is far more likely to involve significant casualties than a similar accident involving only freight trains. Passenger operations also bring more people onto railroad property, resulting in a corresponding increase in risk. These risks make freight railroads extremely reluctant to allow passenger trains on their tracks without adequate protection from liability. 4. Safety requirements and the integrated nature of railroading necessitate that intercity passenger rail be provided by one entity — Amtrak. Further, Amtrak’s right of access, preferential access rates, and operating priority should not be transferred or franchised. One of Amtrak’s fundamental purposes was to amalgamate several hundred disjointed passenger trains operated by more than 20 individual carriers into a coherent intercity passenger rail system. It was envisioned that a single carrier would yield greater efficiency and innovation. This approach remains just as sensible today. Moreover, the terms and conditions by which Amtrak uses freight-owned tracks were set by Congress more than 30 years ago under circumstances vastly different from today. As noted above, at that time freight railroads were given the proverbial offer they could not refuse: in order to be able to stop losing hundreds of millions of dollars per year on passenger trains they were forced by the government to operate, freight railroads accepted special, non-compensatory terms covering Amtrak’s use of their tracks that under other circumstances would have been unacceptable. No such quid pro quo exists for non-Amtrak passenger service, so other passenger operators are not entitled to the treatment legislated for Amtrak. Moreover, freight railroads did not agree to an “open door” policy and balkanized structure that would allow any number of state, regional, or local entities to claim access to their assets. Further, freight railroads knew that Amtrak's obligations were, in essence, the obligations of the United States and that Amtrak would be operated safely and professionally. Should Amtrak intercity services be transferred to other passenger operators, it is unclear under what circumstances the transfer would be made and what characteristics would apply to the operators. For example, private entities might have different degrees of financial backing; public authorities might or might not enjoy the full faith and credit of their sponsoring states; and some prospective passenger rail operators might be less committed to safety and sound operating standards than Amtrak. If others are asked to provide Amtrak-like services, freight railroads must retain the right to negotiate terms (at arms length, free of governmental intervention) under which those providers will gain access to the freight railroad’s right of way. Proposals to summarily grant passenger carriers other than Amtrak access to freight facilities ignore the fundamental fact that freight railroads’ rights-of-way are private, not public. In the absence of agreement through voluntary negotiations, freight railroads should not be forced to allow passenger operators to use their assets any more than any other private business should be forced to allow another company to use its assets without its consent or at non-compensatory rates. In fact, freight railroads view the granting of statutory access to other passenger operators to be a “taking” of private property, which requires just and reasonable compensation under the Constitution. 5. The obligations of passenger railroads, notably those under the Railroad Retirement Act and the Railroad Unemployment Insurance Act, must not be shifted to the freight rail industry and its employees. Railroad employees and retirees are not covered by Social Security. Instead, they are covered by Railroad Retirement, a government sponsored and managed pension plan funded by payroll taxes on railroad employers and employees. Railroad Retirement covers the full rail industry, including freight, Amtrak, and commuter railroads; rail labor and trade organizations; rail lessor companies; and miscellaneous railroad affiliates. Like Social Security, Railroad Retirement is a pay-as-you-go system: payroll taxes from current employees are used to provide current retiree benefits. Railroad Retirement is also a pooled system in which all rail participants contribute at the same statutory rates, all rail industry employees receive standardized retirement and survivor benefits based upon their years of service and earnings, and participating employees are assured of benefits regardless of the fate of their particular employers. The integrity of such a system depends upon all participating entities contributing based on the current number of active workers employed. It would be inequitable for passenger railroads (Amtrak alone accounts for approximately 10 percent of the total rail industry work force) to suddenly be granted special relief from a pooled, pay-as-you-go system. Simply removing Amtrak or other passenger railroads from the Railroad Retirement system, in whole or in part, would force the remaining participants — primarily freight railroads and their employees — to shoulder the burden of maintaining the viability of the system. 6. Future high-speed passenger rail corridors should be separate, dedicated, and “sealed.” Amtrak’s existing high-speed Northeast Corridor operations have proven popular over the years, and many envision high-speed rail service to be a primary component of future intercity passenger rail operation elsewhere in the nation. High-speed rail passenger service is an integral part of passenger rail operations in countries around the world, including France, Germany, and Japan. Where high-speed rail exists, however, governments have supplied the massive amounts of funding it requires. Given the huge expense involved, the expansion of high-speed passenger rail service throughout the United States presents formidable challenges. To operate safely, high-speed passenger rail operations require the construction of separate, dedicated tracks. Further, grade crossings must be eliminated (either through closure or through the construction of highway underpasses or overpasses). These are exceedingly expensive undertakings and will require firm, long-term commitments by the appropriate authorities, since they are necessary for successful implementation of high-speed projects. Summary This Committee and others in Congress have before them a difficult mission: to fashion a realistic, fair, and workable solution to the serious financing problems facing passenger rail in the United States. In reaching that solution, we strongly urge you to incorporate the principles detailed above. Doing so will help ensure that freight railroads continue to play a vital role in our nation’s economic prosperity and global competitiveness. Freight railroads look forward to working cooperatively with this Committee, with Amtrak, and with others to achieve this worthy goal.
Mr. James (Rocky) Query
My name is James (Rocky) Query. I am a Senior Vice President in the Public Finance Department of Lehman Brothers, an international investment banking firm. The Firm is one of the largest providers of investment banking services to governmental and corporate clients in the transportation industry. Over the last twenty years I have had the opportunity to develop financing programs on behalf of a number of the country's largest transportation agencies serving all transportation sectors including highways, transit, airports, marine ports and intercity passenger rail. Of particular relevance to the Subcommittee, I have previously executed transactions and provided financial advisory services for Amtrak. Presently, my colleagues and I at Lehman Brothers are also members of a private consortium led by Fluor Daniel and Bombardier which is one of two finalists that have been selected by the Florida High Speed Rail Authority to develop new high speed passenger rail service between Orlando and Tampa, Florida as the first phase of the development of a state-wide high speed intercity rail system. I appreciate the opportunity to comment on funding requirements and financing alternatives that you are considering to address the capital needs for conventional and higher speed passenger rail service. The Subcommittee's efforts recognize the growing demand for reliable intercity passenger rail service across the country. Travelers in the Northeast Corridor continue to be highly dependent on such service. As service levels grow on the West Coast, the essentiality of intercity rail service in that corridor has grown as well. The high priority placed on funding for passenger rail service by groups such as the National Governor's Association, the States for Passenger Rail Coalition, the National League of Cities and other municipal organizations is the best evidence that a broad-based group of transportation planners and policymakers in the Midwest, the Southeast, Florida and Texas are all looking as well to new passenger rail service to address growing congestion concerns faced by their transportation networks. Beyond the demonstrated demand for improved rail service in select corridors, the events of September 11th also emphasized for many, the importance of maintaining a national passenger rail transportation system as part of a diversified and well-balanced transportation system. As this Subcommittee considers the funding framework and financing tools that can best address these needs, I would emphasize several elements that would be most beneficial: First, establishing a reliable source of long-term Federal funding and funding formulas for intercity passenger rail projects is the single most important measure this Subcommittee could take to support capital funding for such projects. In 1997, Congressional passage of the Taxpayer Relief Act provided a multi-year funding package for Amtrak. Ideally, capital intensive infrastructure programs such as rail are best supported by a dedicated source of ongoing revenues. Multi-year funding is the next best thing. The multi-year funding provided to Amtrak in the 1997 legislation was an essential ingredient in Amtrak's ability to establish an investment grade credit rating that enabled it to achieve highly cost-effective financing for the improvements in high speed rail service in the Northeast Corridor that were launched over the past few years. Second, eliminating the disparity in available funding for intercity rail projects compared to other surface transportation modes such as highway and transit is essential. Highway and transit projects established as priorities in a state's transportation improvement program receive similar levels of Federal matching support under existing trust fund formula programs. The same should be true for intercity passenger rail priorities as well. The challenge, of course, is that trust fund resources are viewed by many as inadequate already to meet the needs of highways and transit alone. Simply adding a new category of eligible spending will only increase the level of competition between modes for available funds. Third, the framework provided by current state transportation improvement plans provides an effective mechanism for establishing priorities among highway and transit projects. Allowing states to take the lead through their transportation improvement plans in identifying and developing specific projects can be an effective way to establish intercity rail priorities as well. Fourth, intercity rail projects often cross state lines. Funding programs should encourage state efforts to act collectively by allowing them to combine resources to meet matching fund requirements. Fifth, intercity rail projects should enjoy the same access to tax-exempt financing as is currently enjoyed by other transportation modes such as airports and seaports. Most capital spending for intercity rail is done by Amtrak or the freight railroads, none of whom have the ability to issue tax exempt debt. Congress could provide for the issuance of exempt facility tax exempt debt free from volume cap restrictions for qualifying passenger rail projects as is presently allowed for airport and certain seaport projects. Sixth, tax credit bonds can be a highly effective way for the Federal government to provide long-term capital funding support for intercity rail needs. The experience with tax credit bonds to date in the context of the QZAB program for school construction projects should be encouraging. Use of QZAB Bonds continues to grow as does the private investor support for such projects. Recent proposals for using the tax credit bond mechanism for transportation projects have shared a number of key provisions that will increase the level of investor interest and market receptivity for such a program such as the ability to separate the tax benefits from the repayment of principal (strippability). Other key factors that will determine effectiveness include the interest rate formula that will be adopted to establish the level of tax benefit and provisions regarding the potential risk of recapture of tax benefits from investors should project sponsors fail to comply with program requirements. Seventh, outside of the Northeast Corridor, passenger rail service is dependent on the conditions of rail and right-of-way owned and maintained by private freight rail companies. Finding adequate capital to meet the service levels required for passenger traffic is difficult for these companies as well. Access to tax-exempt financing for projects on private rail right-of-way which have been included in a state transportation improvement plan and measures to address liability concerns could be helpful incentives to encourage greater freight rail investment in necessary upgrades for passenger rail service. Eighth, public private partnerships can be an effective mechanism for development of new passenger rail projects. As I mentioned, Lehman Brothers is currently a member of a consortium led by Fluor Daniel and Bombardier that is one of two finalists who have proposed a plan to the Florida High Speed Rail Authority to provide high speed passenger rail service between Orlando and Tampa, Florida as the first phase of a state-wide system. Our proposal utilizes a unique combination of public and private sector funding for the system rolling stock and rail infrastructure. Importantly, our proposal depends upon the availability of tax credit bond support totaling nearly $2 billion dollars over the next six years. In conjunction with the issuance of tax credit bonds, Fluor Daniel and Bombardier will be placing private capital at risk to help fund system capital and operating costs. As you evaluate other public private initiatives that may be proposed, such as the one described by Rail Infrastructure Management, we would encourage you to recognize that intercity rail projects, like all other public transportation modes, will require some level of ongoing public support. Operating and capital subsidies are not evidence of management failure. Long-term reliable governmental support is a necessary ingredient for any dependable and efficient public transportation system. The task is one of providing the necessary support in the most cost-effective fashion. A number of specific measures have been proposed for the Subcommittee's consideration. I have not tried to comment on all of the financing measures that have been proposed, but I welcome any specific questions you may have . Thank you again for your efforts to address this important issue. Testimony Provided by James (Rocky) Query Senior Vice President Lehman Brothers Two Penn Center, Suite 200 Philadelphia, Pa. 19102 Tel: 215.865.6400 Fax: 215.564.4375 email: firstname.lastname@example.org James (Rocky) Query is a Senior Vice President with Lehman Brothers, an investment banking firm. He is a member of the Firm’s Public Finance Department responsible for its work with many public transportation agencies in several sectors including highways, transit, intercity rail and airports. He has more than twenty years of industry experience and has worked with many of the country’s largest rail programs. He has previously served as financial advisor and underwriter for transactions on behalf of Amtrak. Lehman Brothers is currently a member of a consortium led by Fluor Daniel and Bombardier which has proposed to develop high speed rail service between Orlando and Tampa Florida as the first phase of the development of a state-wide high speed rail system.