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U.S. House of Representatives,

Subcommittee on Railroads,

Committee on Transportation and Infrastructure,

Washington, DC.

  The subcommittee met, pursuant to notice, at 2 p.m., in room 2167, Rayburn House Office Building, Honorable Susan Molinari (chairman of the subcommittee) presiding.

  Ms. MOLINARI. Thank you and good afternoon.

  I would like to welcome all of you to this hearing, one on an issue of considerable importance to the subcommittee and this Nation, Amtrak's financial condition.

  I should say at the outset that we have a limited time for this hearing as there is a full committee markup scheduled in this room at 4:30. We must clear out of this room by 4:00 so they can set up for the full committee meeting. I ask that members and witnesses be as concise as possible and wherever they can to submit written material for the record and just hit the high points of their oral arguments.
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  As I said, this hearing is intended largely as a briefing or an update on Amtrak's financial situation. A subsequent hearing will be held to discuss the broader policy issues related to reforming or restructuring intercity passenger rail.

  We have some new members on the subcommittee—which hopefully will be joining us during the course of this hearing—who will be hearing about Amtrak for the first time today, another veteran from the legislative efforts of the last Congress. But I think it is appropriate for all of us to stop and look upon Amtrak issues with a fresh perspective since solutions that were proposed in the last Congress may no longer be the right approach.

  During the time I have been Chair of the Subcommittee on Railroads, I have become increasingly concerned about Amtrak's financial crisis. At a similar hearing we held in February 1995, it was clear from Amtrak's and GAO's testimony that the status quo simply couldn't hold. The lack of capital investment over a period of several years had begun to manifest itself in the form of more frequent equipment breakdowns, deteriorating maintenance facilities, and poor quality of service. At that time, the GAO estimated that about $4 billion was needed simply to bring Amtrak equipment and physical plant up to a good state of repair. Of this amount, $2.5 billion was needed just on the south end of the Northeast Corridor between Washington, D.C. and New York City.

  At that time, there were also problems on the operating side. In 1994, Amtrak had to borrow just to meet payroll. However, the thinking then was that the much larger problem was the under-investment in capital.

  This committee worked very hard on reform legislation in 1995 that I believe would have provided Amtrak with the tools it needed to operate more like a business, to reduce its costs, and remove itself from its dependence on Federal operating subsidies. I also worked hard in the Budget Committee to ensure stable funding for Amtrak in the budget resolution so that reforms would have time to take hold before appropriations were reduced.
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  Most of us know that despite our determined efforts and a very strong vote on the House Floor of 406 to 4 for Amtrak reform legislation, no law was ever enacted because the Senate never considered the counterpart legislation. Yet appropriations have been reduced dramatically over the last 3 years.

  I think we may be at the point now where the operating crisis is a more eminent threat to Amtrak's survival than the lack of capital funding. In 1996, for the first time, the Amtrak Board of Directors approved a budget that would have allowed for a $66 million cash shortfall in fiscal year 1997, meaning that Amtrak would have to borrow money simply to meet payroll. That $66 million shortfall has already been revised upward to $70 million or $80 million. Amtrak will have to begin borrowing as early as this month.

  I am also concerned about the fiscal year 1998 presidential budget proposal for Amtrak funding at $776 million. Typically, the President's budget is the annual high water mark for Amtrak funding. If Amtrak receives that funding level, I think there is a distinct possibility of an Amtrak bankruptcy in the near future.

  I also have to say that Amtrak's proposals to address these problems do not provide me with a great degree of comfort at this point in time. It would be great if Amtrak could obtain .5 cent from the Federal gasoline tax without taking it from existing highway or mass transit account funds and have all the money available to it and fully spendable beginning in October of this year. But so many pieces of this puzzle will have to fall exactly into place in Amtrak's favor for this to happen. I am not convinced that it is a real possibility that Congress should be banking on as a way to solve Amtrak's financial problems.
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  At this point, I think it would be premature to begin advocating a particular solution to Amtrak's problems. Our purpose today is to gain a better understanding of Amtrak's financial situation so that we can analyze quickly the various policy choices that will need to be made this year in order to ensure the continued existence of intercity passenger rail.

  I want to thank all three of our witnesses for appearing here today and look forward to your testimony.

  I now recognize the ranking member of the committee, Mr. Wise, for his opening statement.

  Mr. WISE. I thank the Chair for calling this very, very timely hearing at a very timely time.

  There are some realities, and I want to underscore what the Chair has said. I think most of us would support the .5 cent proposal. Usually it is couched in terms of when we get the 4.3 cents back. The problem is that I don't think there is any deadlocked cinch that that 4.3 cents comes back, much as I would like it and I suspect every member of this committee would like to see. This is a classic battle between budgeteers and authorizers. It is another classic battle between Ways and Means and this committee, but also between OMB, seemingly a stumbling block to so much—on a non-partisan basis, I might add—through many Administrations in terms of financing growth.

  Let me just say that I think the Chair points out the problems well and that on this committee we need to continue looking at what we can do to preserve Amtrak. My concern with Amtrak is that you get just enough to keep it rolling but not enough to let you do what needs to be done. At some point, the Congress is going to have to face up to that and give Amtrak the enabling tools it needs.
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  Madame Chair, at this time, I would reserve my right to submit later statements.

  Thank you.

  [The prepared statement of Mr. Wise follows:]

  [Insert here.]

  Ms. MOLINARI. The gentleman from New York, Mr. Quinn?

  Mr. QUINN. I have no opening statement at this time.

  Ms. MOLINARI. Any other opening statements?

  [No response.]
  [The prepared statement of Ms. Granger follows:]

  [Insert here.]

  Ms. MOLINARI. Mr. Downs, thank you very much for appearing before us this afternoon. We look forward to working with you.

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  Mr. DOWNS. At your suggestion, I would ask that my prepared testimony be entered into the record and I will try to summarize it so that I can respond to questions from the committee.

  Madame Chair, let me also personally recognize the effort that you took in the last session of Congress to get the authorizing legislation for Amtrak passed. We both know how painful some of those battles were, how difficult some of those choices were. I want to recognize that leadership publicly and say that for an issue as contentious as Amtrak's reauthorization bill in the last session of Congress, it was an extraordinary vote, as you point out, of 406 to 4. It is extraordinary to get that kind of vote. I take it in part that that was due to your leadership in forging that consensus, that bipartisan alliance, about what was necessary for Amtrak to survive.

  So I don't mean in my criticism of Congress to point a finger at either this committee or at this House.

  Ms. MOLINARI. We would like to thank you for not submitting that part of your statement for the record.


  Mr. DOWNS. Also, it reminds me that 2 years ago this week I was in this room with you. We outlined what the tough choices were about reauthorization and capital funding. We warned about the outcome that would happen shortly without that reauthorization and without that funding for capital. Lo and behold, we are now here and it looks like something that Amtrak has done to itself rather than in partnership with a Federal Government that made conscious choices, over the last 2 years, about our funding and our capital that have now resulted in the position we are in.
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  It should not come as a surprise to anyone about the report that GAO is making to the Congress about our financial status. The $150 million gap we face is the result of direct congressional and Administration inaction or inattention to our business plan, our glide path, our intentions about reducing our operating subsidy. It reminds me once again that no matter what you do in this process, no good deed here ever goes unpunished.

  We started out in 1995, as it shows on chart one, with an actual operating subsidy of $392 million. We said that we would reduce that by $130 million in 1996. Instead, the outcome was $185 million. We said in 1997 we would be at $250 million. Instead this year we are at $200 million. In 1998, we said we would be at $245 million. Instead, we are at $200 million.

  Part of this I have to lay as well on the Administration in terms of fully understanding the implications of our funding needs. Part of those actions we attempted to take in terms of a pretty hefty downsizing of the corporation by eliminating five routes from the national system.

  We were told in the big FY 1997 continuing resolution that we needed to continue those routes until at least the middle of this fiscal year to give the States enough time to accommodate those changes. We told everyone involved in that process that it would cost the corporation approximately $40 million. We were given $22.5 million, resulting in an additional cost drain to the corporation of about $13 million. I think that was pretty clearly understood at the time.

  When you and I last talked in this committee, we spoke about three things: Amtrak reforming its business practices to the extent it could; a reauthorization bill that would restructure the corporation; and a capital funding source. To date, one of those approaches has been accomplished: ours. As you have mentioned, the reauthorization bill did not make it and our capital funding source has not obviously been put in place.
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  I want, though, to put the GAO findings in context. On page four of the report it says, ''Although operating deficits have declined, they have not gone down at the same rate as Federal operating subsidies.'' That is the problem in a nutshell. As you point out, that leaves us potentially at the end of this year $70 million in the red for cash. We do not go to Treasury for our cash, we go to banks such as BankAmerica, Chemical Bank, City Bank. Traditionally they have provided lines of cash for us for short-term borrowing.

  Last year, for instance, we borrowed $8 million to close the year. This year, we anticipate another $70 million is of borrowing. This borrowing has major implications for fiscal year 1998. It means we start out fiscal year 1998 $70 million to $80 million in the hol.

  In 1994, we initiated a plan at the request of Congress and the Administration not only to make Amtrak solvent but to free us of operating assistance and support by 2002. Our job is to manage ourselves like a business. In return, Congress would pass a reauthorization bill that would restructure us enact a dedicated capital funding source for 5 years to recapitalize the company, and then we would be on our own.

  We are still looking for the legislative reform. We are still looking for the capital. We think we have taken the necessary positive and painful steps that have resulted in hundreds and hundreds of jobs being eliminated at Amtrak. We have seen a number of cities lose all Amtrak rail service and hundreds of others lose service from 7 days a week to 3 or 4 days a week.

  We have identified a future that includes mail and express service, as you have probably seen in this morning's Washington Post article about business expansion. We have identified high-speed rail in the northeast as generating $150 million a year net profit in 2000 and 2001. And we have a business plan that we think, with the right restructuring and the right capital investment, clearly demonstrates that success is achievable about the goal that has been set for us both by the Administration and by the Congress, to be operating subsidy-free.
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  The dilemma is that the 5-year business plan, while it is achievable, can die in the short-term. As I said, it is unclear that we can make it through fiscal year 1998 at the levels the President's budget has requested, $200 million. It is unclear from a cash basis whether we can make it past late spring or early summer. I don't say that in jest, and I hate this environment where it looks like chicken little with the sky falling or that the lights will go out on the Washington national monument. It is not the case.

  We have a number of equipment leases and borrowing in the private sector. All of our Superliner IIs, all our new locomotives, all our high-speed train sets are funded by borrowing from the private marketplace. We have legal obligations to pay those obligations. That takes cash. If we do not have the cash and we cannot obtain bank financing for temporary cash, we are not just technically in default, we are in real default.

  That equipment, ironically, is now not owned by Amtrak. If you think of us as being privatized, our locomotives are owned by a German export bank, a Dutch leasing bank, and our passenger cars are owned by the Canadian export bank. They all believe in being paid. If they believe in being paid and they are not, they come after the assets that are pledged behind that, the rolling stock of the corporation.

  It is possible to see the equipment of the corporation disappear for non-payment. The option here is to come back for an emergency supplemental, which everybody would hate, and we would be criticized severely for having to come back to the Congress through the Administration for an emergency supplemental for cash to keep the business alive.

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  I am not saying this to say that if you don't do something we will go under. It is simply the truth that we are very close for the first time in our corporate history—in 26 years—to being at a place where our fate is no longer controlled in the public sector. It is controlled by the private sector.

  I have looked again and again at the one chart in the packet before yoy as to how we got here long-term. If you look very quickly at chart two, Federal capital appropriations between 1976 and 1997, you will see the drastic decline during the late 1980s in capital funding for Amtrak, including a $3 million appropriation for capital in 1986, $30 million in 1987. During that period of time, we were told that if you needed it, go to the private marketplace and borrow it. We did. You will see in 1987 the start of a ramp-up in debt obligations to replace capital equipment and rolling stock.

  It continues unabated into the year 2002. Those are the debt incurred for the delivery of the high-speed train sets.

  One thing about debt on chart four, it comes with principal and interest payments just like you pay on your house. An increasing amount of our operating subsidy goes for principal and interest payment. The principal is paid by capital and the interest by our operating grant. If this looks familiar, it probably is the mirror image of what is happening at the national level about debt, principal, and interest. Increasing amounts of our costs are fixed by the strategy about debt, principal, and interest.

  As I said, there are several choices here. They range in painfulness. One of them is a restatement of the cost of letting Amtrak go in 1998. We made an estimate for CBO and for this committee and others of the unwind cost for Amtrak. In other words, if we are let go what it would cost. Between labor protection agreements, contract obligations, lenders, debt, and other unwind costs, we estimated $5 billion to have the company go under. That is somebody's obligation, or maybe just liquidated in a bankruptcy court.
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  At your request, we asked CBO to review those numbers and they concurred in those unwind costs.

  Ironically, that is about 20 percent more than funding Amtrak's capital plan over the next 5 years. So you can pay or you can pay. Somebody obviously winds up paying.

  We have said that we have a business plan that makes sense. We said that we need an authorization bill that has fundamental restructuring for the corporation, including addressing issues like liability and the ability to wield power, the ability to collectively bargain in an open environment. Now it is a choice. We need a clear, concise decision by the Administration and the Congress about the future of this company.

  It is not an answer that suits the public, the Congress, or the Administration that it is to quietly bleed to death in a corner, struggling, declining service, missed opportunities for business development. If it is a choice of the Nation that we need to not exist as a mode of transportation or service anymore, that needs to be a clear public policy choice entered into between the Executive and the Congress on behalf of this corporation. We are getting close to needing that decision.

  The alternate to that is to let it drift into the point where private creditors make that decision. I don't believe that is in anyone's interest.

  The third solution I have heard is to return a number of the responsibilities for intercity passenger rail to the States and to regions. I believe that would in effect be a decision to end rail passenger services, because it does not allow States the right to access freight railway property for passenger service. If the policy is to return service to State and regional choice, then it ought to return by law to the States the right of incremental access and priority for passenger rail service on freight railroad property.
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  On that happy note, I conclude my remarks for the committee and am open for any questions you might have.

  Ms. MOLINARI. Thank you very much, Mr. Downs.

  Before we get to the questions—and I appreciate your testimony and the honesty with which you have put forth Amtrak's situation—I would like to recognize the chairman of the full committee, Mr. Shuster.

  Thank you for being here.

  The CHAIRMAN. Thank you very much, Madame Chairman.

  I certainly want to welcome you, Mr. Downs, and your management team. I have a high regard for your management and what you have been attempting to accomplish. I couldn't agree with you more that unless we give you the tools, the best manager in the world can't make Amtrak work in the long run.

  My view—and it is really my view with a question mark at the end of it to see if you would care to comment on it—is that the way we can save Amtrak, which I am dedicated to doing if we can, is to take three fundamental steps. The first is to put 4.3 cents of the gas tax back into the Highway Trust Fund, make it available to be spent—and I underline that because simply putting the money back in the Trust Fund doesn't do anything if it isn't available to be spent—and then dedicate .5 cent of that, roughly $600 million a year, to Amtrak.
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  Second and simultaneously, we need to pass the kind of Amtrak reform we passed here in the House to give you the tools you need to manage Amtrak, or something similar to the bill passed last Congress. And having done those two things, recognizing the impact is still a year away in the budget cycle, then we need to make the case for some bridge money for you to survive until the effects of those first two steps take place.

  If we are able to accomplish all of that, is this a solution?

  Mr. DOWNS. Mr. Chairman, I appreciate that outline of what we think is the only viable outcome for Amtrak. First, on the .5 cent, I support the transfer. We have always supported that. We support the concept of the .5 cent off the top so that we are not forced into a disagreement with any of the other modes about funding for this. We have always said that we have to have the capital to survive long-term both in the corridor and on long-distance trains.

  We have also said that we need significant legislative reform as part of that process and that we are willing to go a long way in trying to help make that work in any arena or any forum that we can. I believe that with those two changes and an adequate cash position for 1998, on behalf of all my management in Amtrak, we believe we can be subsidy-free by 2002. We believe we can do that. If we didn't believe it, we wouldn't be saying it. We want to be accountable for that. We need the tools to do that.

  I think that we have been disadvantaged in this process by a lack of clarity about the Administration's position on Amtrak reauthorization and ISTEA. We have been a bit disadvantaged by the appearance of the President's budget request for Amtrak being in the highway trust fund without any additional resources placed in the trust fund to offset those obligations. It unfairly puts us at odds with the entire highway constituency in the United States, which makes me very uncomfortable.
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  The CHAIRMAN. There is an old saying that when you are up to your elbows in alligators, it is hard to remember that the objective is to drain the swamp. I sort of look at this point of getting you subsidy-free as draining the swamp. We have a long way to go to get there and I am really focused on trying to figure out how to keep you alive and give you the opportunity to achieve it.

  In fairness, I must say that just as I vigorously support the .5 cent from the 4.3 cents, I would just as vigorously oppose simply giving Amtrak .5 cent out of the highway trust fund without doing any of these other things, I think my position has been clear on that, but I want to make sure that it is. I am certainly dedicated to trying to find a way to save Amtrak.

  Thank you.

  Mr. DOWNS. Mr. Chairman, you have always made that position crystal clear.

  Ms. MOLINARI. Thank you very much, Mr. Chairman.

  Let me just ask you one question before we make the rounds.

  First of all, I would like to state that we have a lot of technical questions regarding the numbers that are before us and detailed financial and operating questions. So I would like to ask that the record remain open for 30 days after today's hearing so that we can get those questions to you and get your responses back for the record, without objection.

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  In your testimony—and I don't mean to belabor the point—so many of your fall-back positions here have to do with your being able to survive if you get the gas tax money that the chairman just referred to, if electrification in the northeast stays on track, if all those things happen and Congress is more generous than the Administration in its budget—all three of those things we agree with and want to see happen do not seem something that we can all bank on.

  What is your fall-back position and what happens to Amtrak if we don't have reform in this Congress, if electrification is delayed, and if we are working with the President's budget numbers?

  Mr. DOWNS. There is an old saying about no-pay, no-go. This railroad depends on cash to make a lot of trains work every day. A huge portion of that is provided by ticket income from our customers. Without adequate cash, we have to make another round of decisions about services, lines, and the passenger service that will go away. It is unclear whether or not, in the limited network left after this next round of route and service cuts, how much of the rest of the network we can pull apart before there is no network left. It is like having individual lines out there. Some of our economic studies show that if you pull too much of the national system apart, it collapses. There won't be enough network for people to travel over from endpoint to endpoint.

  We don't know how far because we are in uncharted territory here. We tried to look at some economics to better understand that, but clearly our only place to go is a further reduction in service.

  Ms. MOLINARI. When do you have to make that decision?
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  Mr. DOWNS. After Congress make the decision on our appropriation and our——

  Ms. MOLINARI. Let's make the assumption that it is the President's budget.

  Mr. DOWNS. We have tried to look at a number of assumptions about when we would run out of cash, and depending on our end-of-year cash balance, we would probably run into trouble with our banks in late spring or early summer. At that time our future, would be clearly on the table.

  Some of the leases on our equipment have requirements for renegotiation or termination of leases in terms of change in material, financial conditions for the corporation. Running out of cash without any source for new cash is a material change in the financial condition of the company. It would raise issues as to whether or not the company was a growing concern. That would all happen in the spring or summer of 1998.

  Ms. MOLINARI. When would you start to cut more lines? This spring?

  Mr. DOWNS. It depends on what we get back in the appropriations process in terms of both capital and operating for this coming year. As soon as we know that, in September or October, we would then be able to make those decisions about the amount of service that is left in the United States.

  Ms. MOLINARI. Thank you.

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  Mr. Wise?

  Mr. WISE. Continuing on that line of thought, how is your acquisitions necessary for high-speed rail affected by your current situation?

  Mr. DOWNS. All of the money for high-speed rail was funded in the private sector, the 18 train sets, the facilities to maintain and operate them, with the exception of an $80 million capital grant from the United States Department of Transportation that came through our appropriation. So far, the production of those train sets is on-line and on time. The manufacturer is still on-line for delivery in mid to late 1999 of the first train set and completion of the delivery in 2000.

  If we had a material change in the financing of the company, could the Canadian export bank, who is financing this high-speed rail, make a decision to withdraw from financing? Yes, they are legally capable of doing that. If our financial condition didn't meet their test of financial sufficiency, they could decide to withdraw their financing.

  Mr. WISE. What about the electrification process? Does that not come from Federal money?

  Mr. DOWNS. The electrification process on the north end from New Haven to South Station in Boston was funded by a $345 million capital appropriation. We are underway to have that completed in July 1998. Poles are going in the ground as we speak, substations are being constructed for that. We have only one location issue left for a substation on the line.

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  It is fully funded. It is on-budget and on time. That portion of the high-speed will be completed.

  Mr. WISE. When will it be complete?

  Mr. DOWNS. I believe July 1998.

  Mr. WISE. What is the section?

  Mr. DOWNS. New Haven, Connecticut to South Station, Boston.

  Mr. WISE. You touched somewhat on the impact of bankruptcy of Amtrak. Please continue on that. I am trying to get a handle on how States would be likely to pick this responsibility up. It seems to me that what we would then have is a disparate system in which there is no guarantee. For instance, if the State of West Virginia were willing to invest money into trying to keep lines open and running for passenger service, there is no guarantee that its bordering States would match that commitment.

  Is that a fair statement?

  Mr. DOWNS. It is more than a fair statement. We have had three experiences about States wanting to buy service back. Vermont wanted to restore the service from Vermont to New York and asked for participation from Connecticut and New Hampshire, where the train ran through. They were told by both States no. Vermont picked up the entire cost of that train by itself.

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  On the Texas Eagle, which runs through Missouri, Arkansas, and Texas, the States of Missouri and Arkansas have pretty much said that they will not participate in the funding of that train leaving the burden solely on the State of Texas.

  On the Pioneer, which covers Colorado, Utah, Wyoming, Idaho, and Oregon, all the States have pretty much said no with the burden falling on Oregon, if they want the service retained.

  That has become a pretty consistent pattern and it shows that for a national network to exist it is pretty hard to have all the States join a multi-State alliance, agree on funding, and do it out of their State general funds. You will remember that Amtrak is not an eligible use for any Federal transportation funding. It is prohibited by law, in effect. We are not eligible for highway or transit or any Federal fund because of the old jurisdiction issues between this committee and the former committee which formerly had jurisdiction over Amtrak.

  Those days are over. I hope we can get back to funding flexibility for States. But I have had governor after governor tell me that first their State constitution prohibits the use of State gasoline tax for anything other than highway purposes or Federal-aid match. The governor would then say that they must use State general funds, which takes a special act of the legislature and they don't have time and it's too complex. So as much as they would like to do something, they can't.

  Without the ability of States to choose to fund Amtrak out of Federal transportation funds, and given the difficulty of multi-State compacts to fund this, the odds of this being successful at the regional and multi-State level are small unless there is one State willing to step forward and take the entire load.
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  Mr. WISE. Thank you.

  Thank you, Madame Chairman.

  Ms. MOLINARI. Mr. Downs, I don't want to concentrate too much of my questions on dealing with the financial collapse and shut-down of Amtrak, but I do have some questions that I would like to establish for the record.

  First of all, with regard to the labor protection liability benefits, which provide the 6-year salary protection for both labor and management, the General Accounting Office has estimated these to be between $2.2 billion and $5.5 billion in its 1995 report. An opinion of the Comptroller General issued in 1985, however, says that these liabilities are only collectible against the Amtrak Corporation and not the U.S. Treasury.

  I would like to ask unanimous support that that opinion be submitted for the record.

  [The information supplied follows:]

  [Insert here.]

  Ms. MOLINARI. I would like to know what your opinion is of that.

  Mr. DOWNS. When it comes to a $5 billion liability, there are a lot of opinions and a lot of opions by lawyers. It is an interesting dilemma. The principal shareholder of this corporation is the Secretary of Transportation. We are a business incorporated by Federal statute within the District of Columbia. We issue stock. The stock is held in trust by the United States Department of Transportation. I am sure in a bankruptcy proceeding there would be interesting arguments made about the shareholder responsibility here and the fiduciary responsibilities.
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  I am not well enough versed in bankruptcy law to give you a reasoned argument about it. I just know that it is fraught with a lot of danger to assume that the Federal Government has no liability for payments under the bankruptcy of the corporation.

  Ms. MOLINARI. Thank you.

  And just as a follow-up, what happens to the Northeast Corridor?

  Mr. DOWNS. The Northeast Corridor has a $1.6 billion lien on it. The lien is held by the Federal Government. If Amtrak was in Chapter 7 or 11, the first claim on all the assets would be the Federal Government. How that would play out and how the Federal Treasury or Department of Transportation would exercise its lien in a bankruptcy is unclear, but I do know it is encumbered by a lien, which is in effect the protection the Federal Government put on the corporation to ensure that the several billion dollars worth of upgrade on the Northeast Corridor for high-speed service and electrification were preserved as a right for the national government.

  Ms. MOLINARI. Thank you, Mr. Downs.

  Mr. Mica?

  Mr. MICA. Thank you, Madame Chairman.

  I have a couple of questions relating to your testimony. First of all, I think any of the solutions that have been discussed require additional revenue from the Federal Government. Is that correct?
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  Mr. DOWNS. It requires capital investment.

  Mr. MICA. Additional funds from the Federal Government? But operationally you are not going to be making money in the short term, are you?

  Mr. DOWNS. No. Our target is to be operating subsidy-free by 2002.

  Mr. MICA. With additional revenue as capital expenditures. But then we still get down to these two basic problems, which are labor and liability questions that will still plague you. We weren't able to resolve last time, given the mix of Congress and all the interests—they will still be there, right?

  Mr. DOWNS. I can't answer that question. That is a congressional response.

  Mr. MICA. But so far we haven't been able to resolve that, right?

  Mr. DOWNS. Right.

  Mr. MICA. I read also, interestingly enough, your comment on the British on privatization. You used the British model. I don't think the British model would work here. But has any thought been given to turning this operation over to the employees and dividing the stock up in an employee stock ownership plan and let them become the owner-operators of this?

  We did Conrail. The freight situation was a disaster and then it was taken over. This is almost an Eastern Airline. We have management and labor not being able to come to a decision or a solution. They didn't have an unprecedented stream of revenue to keep the operation afloat.
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  I am about ready to propose that we turn this whole thing over to the employees. I did an ESOP with the Federal investigators. Of course, they didn't have the capital investment to deal with. We still are obligated, no matter what the subsidy.

  But I think you haven't looked at the avenues for potentially resolving this in the long term. I think you have narrowed it, at least in your testimony, to looking at the British experience, which is not the only experience. If we turned over the Federal investigators and created an ESOP, gave them operation, management, we even gave them the contract and now they have contracts with State, locals, and others.

  But I think there are some creative ways to turn this over to other private operations. We are still going to have to subsidize capital. But I think with owner-operators in charge, you get a resolution of the fundamental problems that we have with this operation.

  What do you think?

  Mr. DOWNS. I have never disagreed that long term success of this corporation rests in the hands of the employees and the labor unions, and that if we get to a successful outcome in 2002, the primary beneficiaries ought to be the people who have worked very hard to make it a success and that may include——

  Mr. MICA. Why not do it now?

  Mr. DOWNS. I would first suggest that if we have $6 billion worth of stock held by the Federal Government, our first obligation in law after clearing a profit of any kind is to begin the repurchase of that. The Congress should then take the stop of quashing that stock and the legal responsibilities to repay that.
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  Second, I would assume that if you were giving employees stock in a corporation that is losing the amount of money that we are and on the verge of bankruptcy, you seriously ask yourself what it is we are asking them to assume in a bankruptcy proceeding. If we go under as a result of drastic under-funding, intentional under-funding on capital and operating by the Federal Government, to give those problems lock, stock, and barrel to the employees, risking bankruptcy as an ESOP—I think that is the ultimate in disservice to our employees, unless there is a protection.

  Mr. MICA. We are going to be obligated in bankruptcy. That is a red herring. That is not a valid argument. The Federal Government is going to have some obligation. They are going to lose their job because we didn't do something about it and resolve the situation. That obligation is there regardless. That obligation is there. Then find some creative solutions.

  I am telling you that this Congress and the next Congress, given the political makeup and the mix and what has happened here, we are not going to solve this problem ourselves. We are just going to be pouring more taxpayer money into it.

  I challenge you to come back to us with a proposal to turn this operation over to the employees, let them become the stock owners. We will still have the obligations. We are not going to do that. But we have some hope of the thing working in the future and the employees owning at least the management part of it, and we can separate their liability from that. Get the thing operating and getting those folks to do something with it.

  This is not acceptable, the British solution. You need to be challenged to come back to us—and not in 2002. I have heard 2002 until I am blue in the face. I am talking about doing something now to make this railroad get back on track.
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  Thank you, Madame Chairman.

  Mr. DOWNS. Mr. Mica, you may be tired of hearing it until you are blue in the face. So am I. I have heard it every year from this Congress and from the Administration. I have heard it in every corridor from every part of the Federal Government. We have taken it as a serious charge.

  I will of course respond about an ESOP. I have said that it makes sense over the long term for employees. Without understanding a context for them to make a decision like this about the funding for the future of the corporation, is an unwarranted risk. Of course, I will be glad to give back to you a legislative proposal that would show the responsibilities the Congress would have to clarify for that type of corporate structure. I am not threatened at all by an employee ownership of this corporation. I believe it is the long term outcome that needs to happen for Amtrak.

  Ms. MOLINARI. Thank you, Mr. Mica.

  Mr. Downs, could you tell me the current out-of-service rate is for your locomotive fleet and for your passenger car fleet?

  Mr. DOWNS. Current locomotive out-of-service rate—on our long distance trains it was 18 percent. On the corridor it was less than 10 percent. But I would have to return those to you for the record. On passenger car out-of-service, we normally have 10 to 15 percent for periodic overhaul, maintenance, and repair.
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  [The information follows:]

  Mr. DOWN. During the FY 96, the average daily locomotive out of service rate was 12 percent. The average daily percentage for out of service cars was 110 percent.
  Source: 1996 Amtrak Annual Report.

  Ms. MOLINARI. Thank you very much.

  Mr. Clement?

  Mr. CLEMENT. Thank you, Madame Chairman.

  Mr. Downs, I think you know I have the utmost confidence in you and your ability and your management team. I do feel and know and have been critical of Amtrak at times for running political routes rather than economic routes. I feel like you inherited that situation.

  I do feel, as I have stated to you and your management team, that we are overlooking some parts of the country, including mine, that do not have railroad passenger service at all. If we want to build congressional support, I want Amtrak to look at the whole country, not just some parts of the country. I want the northeast to have the high-speed rail and for trains to go 150 miles an hour. I realize this will put you in a position where you will have surplus equipment that you might not have now where we can look at other parts of the country.

  I don't want us to run trains for political reasons. I want us to run them for economic reasons to improve the economic picture of Amtrak. I think that is critically important.
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  I have been a railroad buff for a long, long time as a little kid. As you know, I am former Chairman of the Tennessee Public Service Commission. I understand that the State of Vermont recently opened a rail route that had been closed for several years, partially because of public-private partnerships to finance the reopening.

  Is this type of venture unusual for States wishing to establish new routes and reopen old ones?

  Mr. DOWNS. Vermont did two routes. For the size of Vermont and its population, it is extraordinary the effort they have put in. One is on the east side of the State, the Vermonter, and the partnerships there were with the skiing industry and tourism over marketing and advertising and promotion and assumption of some of the local station costs to help make that line more economical.

  On the other side, there was a partnership that took a piece of an old railroad on the New York side and upgraded it into Rutland, Vermont so that Rutland on the west side of the State would have direct access into New York City. That came in a partnership with a freight railroad, the State government, and Amtrak to restore that service. The ridership has been above projections every month since it opened, I believe.

  Both of those indicate that a State that looks seriously at its economic interests about tourism, visitors, commerce, and trade can work out a partnership with us that makes sense. In your part of the Nation, I believe that part of the solution is a business solution for us. We know that our future as a rail passenger service depends particularly on our long distance lines, on the aggressive growth of mail and express business. That is the old REA type business that was on the end of passenger trains for 100 years.
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  We think we can do that in partnership with freight railroads. We think we can convince them that there are lines of business that make sense and that can carry both mail and express and passenger service. Your part of the country is one of those where we think there is the possibility of growing service that will meet both a business test about mail and express and a test about passenger service.

  The irony is that we have never been in a position to fully explore all our business potentials while we have been struggling with an uncertain future either in an authorization standpoint or in a capital funding standpoint. Now that we have a clearer picture of how that business might develop, the irony is that we are now in risk because of cash.

  Mr. CLEMENT. Is Amtrak committed to opening new routes where a commitment to such ventures exists?

  Mr. DOWNS. Absolutely. We have to make a living. We have to be a business. We know that there are demands for this service on mail and express in parts of the country that we do not currently operate over, your city being one of those through the southeast.

  We have started some analyses about where those corridors might be, but it is hard to do that seriously when we are looking at—particularly from our financiers and our lenders standpoint—even the cars that are necessary to run this kind of business, about whether or not we are going to be here next year.

  Mr. CLEMENT. As you know, I have been one of those Members of Congress to support Amtrak, knowing I had no service, but yet betting on the future. I am still betting on the future. But I sure need some creative thinking and planning on behalf of Amtrak to help put a package together in order to maybe pull off a public-private venture.
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  Madame Chairman, I do have some more questions to ask. I don't know whether you want me to do it now or later.

  Ms. MOLINARI. Could I ask you to submit them for the record, or if time permits we will come back around.

  Mr. CLEMENT. I will submit them for the record.

  Ms. MOLINARI. Thank you very much, Mr. Clement. I appreciate that.

  Mr. Bachus?

  Mr. BACHUS. Thank you, Madame Chairman.

  Mr. Downs, it looks like the Conrail merger of the CSX Norfolk Southern consolidation—whatever you call it—is going through. How do you see this affecting Amtrak? Particularly, how do you see the arrangement between Amtrak and Conrail?

  Mr. DOWNS. We have not worked through all those. We hope to get an agreement in principle between the three parties about issues of flow-back and who inherits those. We have some preliminary agreements about the Conrail freight exclusivity on the Northeast Corridor and on the Harrisburg line. But those need to be codified into a formal agreement.

  I think ultimately this could be a good thing for Amtrak. We have assurances from the railroads that they don't intend to have a negative outcome for us on the Amtrak portion of the railroad affected by the merger.
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  Our first point was always to have some partnership around freight on the Northeast Corridor. I think we have that assurance now. That was our major threshold. The rest of them are easier to deal with, including flow-back.

  Mr. BACHUS. Where do you think we are going with the seniority arrangements between Amtrak and Conrail?

  Mr. DOWNS. The seniority?

  Mr. BACHUS. What is your approach to it on the seniority arrangements?

  Mr. DOWNS. On flow-back?

  Mr. BACHUS. Yes.

  Mr. DOWNS. That current arrangements stand—unless they are modified in some way by law—and the only thing that is unclear is who inherits those rights in this new merger. But those rights exist in both the law that created us and that created Conrail. They are not modified by the merger. It is simply a matter of who inherits those rights.

  Mr. BACHUS. How about the labor negotiations between unions and Amtrak? There hasn't been an agreement. The freight railroads have made some agreements back last year.

  Mr. DOWNS. Yes, they did. Almost every craft has an agreement with the freight railroad industry. We have 13 unions and 25 collective bargaining agreements. They have all expired. Currently, we do not have a single agreement between labor and management at Amtrak. We have been negotiating in some cases for 2.5 years with the labor unions involved in the process and have asked for mediation in the majority of those cases to expedite the process. We are anxious to conclude this.
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  The difference, though, between us and a freight railroad in this industry right now is that I believe their collective profit margin last year was about $3.5 billion. They had money they could agree to share with their employees. Absent some agreement about our cash for next year, it is hard to agree to a freight settlement that over the next 5 years that would, on our equivalent terms, minimum cost—if we adopted the freight settlement for Amtrak over the next 5 years, the total cost would be about $220 million.

  We don't have it. We have said that. We have said that we will share gains in productivity or performance or economics that are agreed to as part of this contract with the labor unions on some agreeable split—50/50 was our suggestion. Things like changing health care, crew consist, overtime trigger levels—we have clearly stated, though, that we cannot buy a contract here. We just do not have the resources to buy a contract.

  Mr. BACHUS. Is there any recognition by the unions as to the financial condition of Amtrak?

  Mr. DOWNS. Yes. I think they clearly have in mind—as do all our employees—the fact that we are looking at a $70 million negative cash position at the end of this fiscal year. They know what that means. That means that we borrow to make payroll the last couple of months of the company's fiscal year.

  It is a dilemma. It is hard to explain to members that Amtrak can't get a freight agreement. It is difficult for them to be first in line for a settlement, for an agreement with us. It is a difficult arena until they better understand what happens in this authorization and appropriation process.
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  We negotiate almost daily. We meet constantly. There is good faith on both sides to try to settle this amiably. Neither of us have an answer that is acceptable to the other.

  Mr. BACHUS. In connection with these labor negotiations, has the C–2 benefits—the 6 years of seniority protection—I noticed GAO said that if there was a financial collapse and bankruptcy of Amtrak that that would be a liability of $2 billion to $5 billion.

  Are you familiar that the Comptroller has said that if Amtrak bankrupts that that is not payable out of the U.S. Treasury?

  Mr. DOWNS. I am. As I said to the Chair earlier, I believe that you will find lawyers arguing on either side when the stakes are $5 billion. I am concerned that an interpretation like that looks past the fact that the Secretary of Transportation is the principal shareholder of this corporation. We are a corporation incorporated in the District of Columbia. We issue stock. The stock is held by the United States Treasury and the Secretary of Transportation. It is an unclear outcome that would probably be argued for years.

  Mr. BACHUS. You mean as to whether that would——

  Mr. DOWNS. Whether it was a liability solely of the corporation, or there was any Federal choice about whether or not Amtrak went under and it was within their control.

  Again, I am not a lawyer and probably not prepared to give you any good answer. But we can give you back an answer that is on paper that better characterizes this.
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  Ms. MOLINARI. It was just pointed out to me that the United States Government is bound by the Comptroller's opinion. Therefore, it is the opinion of the Federal Government that they are not liable, which could be argued. All of which means is that anybody who is living now waiting for those benefits probably won't be alive by the time that has been settled because it will be tied up in very serious litigation for a significant number of years.

  Mr. BACHUS. And if you are talking about the assets of the corporation, you have the train sets. But most of those would go back to the lenders because they are security.

  Mr. DOWNS. As I have said a number of times, this railroad doesn't own much anymore by itself. We do not belong to the United States Government. We belong to a series of international banks, a Dutch leasing bank, a German export bank, and the Canadian export bank own our Viewliners, our Superliners, our locomotives, and are providing the financing for our high-speed train sets.

  Mr. BACHUS. That is what I meant to say. The lenders own the equipment.

  Mr. DOWNS. Yes, sir.

  Mr. BACHUS. Basically that is the bottom line. Then you have the 999-year lease on the Northeast Corridor.

  Mr. DOWNS. With a $1.6 billion lien of the Federal Government on the corridor.

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  Ms. MOLINARI. Thank you, Mr. Bachus.

  A new member of our committee, the gentleman from Texas, Mr. Sandlin?

  Mr. SANDLIN. Thank you.

  I know our time is short and I understand we will have an opportunity to ask you policy questions later, but I would like to ask you about the Texas Eagle.

  Could you give us a status report on the proposed loan from the State of Texas to Amtrak?

  Mr. DOWNS. We told the State of Texas—I made the offer myself—that we would agree to a price of about $5.4 million for continuing the Eagle until the October 1st of this year to see how this legislative and appropriation process worked and to allow us time to develop a mail and express business.

  The State of Texas countered that they didn't want to give us that kind of cash. They would give us a loan of that money for 2 years with a balloon payment in 1999 and an interest rate of about 4.5 percent.

  After we said yes to that, they said that they wanted us to collateralize the loan. They suggested that we put cash up. I told them that if we had cash, I wouldn't need the loan.

  Mr. SANDLIN. I have heard that at banks before.
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  Mr. DOWNS. We have offered some unencumbered equipment, some of our older bi-level sleeping cars that we use on long-distance routes, and pledged them as collateral. We have been negotiating with them yesterday and today. I understand that even this afternoon the legislature is debating this issue about whether or not to agree to authorize the loan of the funds for this. I am hopeful that they will, but I have said to everyone, including the governor, that if they don't the service has to go away on the 10th of May.

  Mr. SANDLIN. Did the Comptroller seem to indicate that the proposed collateral you were mentioning that that would be enough for a zero fiscal note for the State?

  Mr. DOWNS. He wanted to better understand what the hell a sleeping car was?

  Mr. SANDLIN. After you explained that to him, was that enough for a zero fiscal note?

  Mr. DOWNS. Well, he may have understood it, and he wanted to know what our longer term financial status was, and that is again back to the question about being a viable business. If it wasn't enough, we were comfortable increasing the number of cars that were pledged as collateral. I simply, though, cannot pledge our entire fleet as collateral for this loan. But while I do have some limits, I am trying to accommodate the Comptroller as quickly and as positively as I can.

  Mr. SANDLIN. If that loan is made and the line is saved through October, does Amtrak during that period of time have intentions of trying to save this line? Or do you see it as just a temporary measure and that is the end?

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  Mr. DOWNS. The future of this line—like several of the long distance lines—is on the mail and express business that we talked about. We think there is a high potential on this line, and not just at 3 or 4 days a week, but at 7 days a week on mail and express.

  We need some time to see if we can develop that business. We need some time to show the economics of it. But we believe there is a viable business there that will provide service over the longer term.

  Mr. SANDLIN. How do you compare the ridership figures on this line with, say, other lines you propose to close? Are you prepared on that now?

  Mr. DOWNS. We had reduced the service from 7 days to 3 days a week. It has never seriously recovered. We have been engaged in intensive marketing with some local partnerships in cities like Marshall and Fort Worth and Austin about developing ridership. We have been doing a lot of local marketing. Part of it is coming back, but it is not there yet. It probably will never get to a point where the Texas Eagle will be in the top 15 trains in the United States without an aggressive mail and express business attached to the front end of that train.

  Mr. SANDLIN. Do you think the ridership failed just because you limited service? Wouldn't that have an adverse effect immediately when you go from daily service to three times a week?

  Mr. DOWNS. Yes, in part. But frankly, until we started to say we were going away, a number of cities in Texas didn't even know we had service there. I have called several folks along the way to tell them that we were thinking about reducing service, and more than one mayor said that they didn't know we had the service.
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  Mr. SANDLIN. I wonder whose fault that is, though.

  Mr. DOWNS. Now that we are talking about leaving, they are getting much more aggressive about local partnerships, about having us in local economic development, local marketing, local business development, helping us with some station costs. Those all have fundamentally changed the economics of the route, as we proved in Vermont. In that case, we have shown that we can be successful in partnership with the State.

  I think we could ultimately be there with Texas. I have been overwhelmed by the support of mayors Dallas, Fort Worth, Austin, San Antonio, Marshall, Longview—all of those communities have exerted political leadership to try to save this train. I think that means we have a future there. At least everybody is saying that we have a future there at the city level.

  Mr. SANDLIN. I know time is short. I will ask just one other thing.

  What should Texas do to try to save this line?

  Mr. DOWNS. Finish the loan.

  Mr. SANDLIN. The loan, number one. Then what?

  Mr. DOWNS. Then we have to develop some local marketing, economic development strategies that showcase the train as the way to get there.

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  Mr. SANDLIN. And who does that?

  Mr. DOWNS. Local chambers of commerce, local economic development funds, local businesses who do joint marketing with us when they have ads on the radio and television and in the newspapers that say, ''By the way, did you know you could get to our next conference on Amtrak? Call 1-800-USA-RAIL.'' It is small stuff, but it is effective. That marketing initiative will help us grow ridership.

  The last is to help us get there with mail and express.

  Mr. SANDLIN. What can they do to do that?

  Mr. DOWNS. Keep us alive through 1998.

  Mr. SANDLIN. No further questions.

  Ms. MOLINARI. That's easy.

  The gentleman from Oregon, Mr. Blumenauer?

  Mr. BLUMENAUER. Thank you, Madame Chair.

  I was curious if I understood your comments earlier about the limitations that are currently in place on transportation funding. The Administration this morning unveiled its NEXTEA proposal. Is that addressed in that recommendation from the Administration?
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  Mr. DOWNS. I have not seen the Amtrak chapter. I believe that they are very close on a final bill. I understand that it contains funding flexibility for States to choose among highway and transit categories, that States can choose those funds to be applied to Amtrak.

  I am very pleased about that because I think it gives States flexibility about choices in communities like yours and in Oregon about rail passenger service. And it will help States a lot fill that hole.

  Mr. BLUMENAUER. That is my understand is as well. I hope that is something this committee can embrace quickly and effectively so that at least there are more choices for States like Texas and Oregon.

  I was intrigued with the earlier conversation about creative approaches to providing financial resources. ESOPs were mentioned. It seems to me that in many of your routes, the cheapest way to get extra airport and highway capacity is actually to be found on the rails.

  Have you give some thought to that? Are you prepared to make some recommendations to the committee that might involve some of our friends in the aviation industry and in highways in terms of rationally, logically, and thoughtfully providing some other resources to make the rail system work and benefit the overall transportation system?

  Mr. DOWNS. Absolutely. And when we made the arguments here about funding flexibility and capital funding for Amtrak, it was to treat us as an equal mode.

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  In the Pacific Northwest, along the Cascadia corridor, for instance, there are clear choices about the differences between funding additional I-5 lane capacity, funding airport expansion in Portland or SeaTac, versus rail expansion—the cost effectiveness four or five to one in some cases—goes to enhanced rail passenger services in the Cascadia corridor.

  We know that. You know that. Forcing that analysis means that first we have to exist to be able to be part of the decision. There needs to be some capital funding there that provides an incentive and a target for States to pursue passenger rail as a rational choice about mode in their investment categories. But we are willing—and have been willing—to advocate our choice in terms of mode as a solution for that kind of congestion.

  Mr. BLUMENAUER. Yes, I appreciate your willingness to be flexible and be an advocate. And I agree with your analysis and have made it in halting fashion myself in a couple of different forums. I was curious if you had translated that into a specific set of proposals that we might see, for example, in New England, in the Midwest, and in the Pacific Northwest that would capture what we know to be the economics in some fashion. It could be a proposal that this committee or others could embrace and move forward on your behalf.

  Mr. DOWNS. We don't have it in planning language for the bill because, frankly, I know the entire planning language provision in the ISTEA reauthorization is going to be controversial again. We are surrounded with enough controversy as it is. But I have had this conversation with a number of governors who realize it immediately.

  Governor Engler, concerning the decision about building a second Detroit airport versus high-speed rail between Detroit and Chicago; Governor Weld, concerning high-speed rail between Boston and New York versus Son of Logan for $5 billion—those are all choices that are completely apparent.
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  We have been in the bully pulpit mode about our mode of transportation. I think there could be language in the planning requirements within ISTEA that force a better look at our mode of transportation as a solution for congestion against highways and airports. I am reluctant to pose it when we are this close to insolvency and knowing what is at risk both about our authorization and our funding, to get embroiled in that issue too quickly.

  Ms. MOLINARI. Mr. Downs, I have a question I would like to ask you on Amtrak railroad retirement excess payments. We need some clarification.

  I know Mr. Clement has two questions.

  We are running way behind.

  Mr. Wise would like to ask a question for the record for Mr. Oberstar.

  At that point, can you adjourn to our room right here and deal with Mr. Clement's questions and the question that we have on excess payments so that we can get GAO up here? Is that okay with everybody?

  Is that okay with you, Mr. Clement? Your question won't be on the record, but it will allow you to get it answered.

  We will submit those questions and answers for the record.

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  Ms. MOLINARI. Mr. Wise?

  Mr. WISE. Mr. Oberstar has a question on bicycle riders.

  Last summer, Amtrak was going to install bicycle racks on the Superliner cars. Apparently, this has not been done. The question is, What happened to this and your plans for accommodating bicycle riders in the future?

  Mr. DOWNS. That is our fault for starting an initiative and then letting it be overcome by another initiative. It is true on long distance trains that we were—and we even made some commitments about the ability to convert the lower level baggage area on some of our Superliner cars for bicycles. It would allow easy access without having to disassemble and box the bicycle, which I recognize to be an onerous requirement for a lot of folks who have to retune their bikes after they box them and put them back together.

  Mr. Oberstar was also one of the people who were pushing—along with a number of other Members of Congress—us to solve the smoking problem on Amtrak trains. On our long distance trains, about 20 percent of our riders are smokers. Usually, older riders and retirees, and they smoke in the upstairs lounge car. We try to separate them from non-smoking passengers. We get lots of complaints from families and lots of complaints from non-smokers about that being an unacceptable practice.

  We needed to find a way to completely separate the smoking environment out of our train. The only place we can do this is the lower level of those cars. Trying to meet the smoking test first about being smoke free on our long-distance train, we chose to convert those to a self-contained smoking car with its own ventilation system.
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  The long and short of it is that we know that we have a problem. I have heard from hundreds of bicyclists about this issue. We are looking at some of our experiences on the Vermonter where we did convert a baggage car to be able to carry, in racks, the bicycles. We are looking at what experience we have had there operationally and seeing about the applicability of those going into baggage cars on our long distance trains. It is not the same as having it inside a passenger car, but it solves the problem of disassembly.

  I am fully focused on it. I have received a lot of letters about it. I am sorry for the misunderstanding that we left with the bicyclists about this. They have a legitimate concern.

  Mr. WISE. Thank you very much.

  Ms. MOLINARI. Thank you very much, Mr. Downs. Again, I appreciate your testimony. We look forward to working with you on some very positive solutions that will allow us all to say that we were part of history when Amtrak was saved, hopefully.

  Now if I could ask you to step into our lounge with Mr. Clement and my staff. We will probably resubmit these questions for the record and ask for an official response so that they can be on the record. But we would like to get these answered now.

  Mr. CLEMENT. Madame Chairman, you want me to step in the Republican lounge?


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  Ms. MOLINARI. Go ahead.

  Mr. CLEMENT. I will.

  Ms. MOLINARI. We have all been to Hershey together, Mr. Clement. Come on over.

  Ms. MOLINARI. I would like to thank the General Accounting Office, Ms. Phyllis Scheinberg, associate director for transportation issues. I believe you are accompanied by Mr. Richard Jorgenson, senior evaluator.

  Thank you both for being here.


  Ms. SCHEINBERG. Thank you, Madame Chairwoman and members of the subcommittee. We appreciate this opportunity to appear before you today to discuss Amtrak's financial condition. Specifically, we will focus on Amtrak's current financial condition and progress toward achieving operating self-sufficiency by 2002, Amtrak's need for and use of capital funds, and factors that will affect Amtrak's future viability.

  As Mr. Downs just stated, Amtrak is in severe financial straits. My goal today is to describe the severity of this condition. The information I will be presenting underscores the need for policymakers to decide on Amtrak's future, and once that decision is made to provide the tools to make that future happen.
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  As you know, Amtrak's passenger rail service has never been profitable, and to date the Federal Government has provided Amtrak over $19 billion for operating and capital expenses. In 1995, in response to continually growing losses, Amtrak developed a strategic plan to increase revenues and control cost growth with the goal of eliminating its need for Federal operating subsidies by 2002.

  Despite some gains, Amtrak remains in a very precarious financial position. It remains heavily dependent on Federal support to meet its operating and capital needs.

  As you can see from the graphic projected on the screen, which is included in your packet, Amtrak's expenses have exceeded its revenues by at least $760 million in every year since 1988. Amtrak had hoped that increases in passenger revenues would help close the gap, but as shown in the next graphic, for the most part passenger revenues have actually decreased when adjusted for inflation. This graphic shows that Amtrak's passenger revenues have decreased by about 11 percent since 1993.

  Furthermore, Amtrak's operating deficits exceed the Federal operating subsidy. The next graphic on the screen shows the gap between Amtrak's operating deficit, the solid line, and the Federal operating subsidy, the dotted line. Amtrak was able to narrow this gap in 1995, but the gap grew again in 1996 when it reached $82 million, the highest level of any of the last 9 years.

  To pay for the gap between operating deficits and Federal operating subsidies, Amtrak has had to draw upon its financial resources. This is vividly portrayed in the next graphic, which shows Amtrak's working capital position. Working capital is the difference between current assets and current liabilities. Amtrak's working capital position indicates its ability to pay short-term bills out of current assets such as cash and short-term receivables. Here we see that working capital has decreased from a surplus position in the late 1980s to a deficit of $195 million in 1996. This condition affects Amtrak's ability to pay its bills over the short term.
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  A related concern is with Amtrak's debt level, which has doubled since 1993, as shown in the next graphic. Between 1993 and 1996, Amtrak's debt and capital lease obligations increased from about $500 million to almost $1 billion. Amtrak expects to borrow an additional $1 billion beginning in 1999 to finance 18 high-speed train sets and related maintenance facilities for the Northeast Corridor.

  As Amtrak's debt levels have increased, interest expenses on this debt have also increased. In fact, over the last 4 years, interest expenses have tripled from about $20 million in 1993 to about $60 million in 1996. Since Amtrak pays its interest from its Federal operating assistance, the increase has absorbed more of the Federal operating subsidy each year.

  Interest expenses now consume about 21 percent of the Federal operating subsidy. As Amtrak assumes more debt, it is likely that interest expenses will consume an even higher portion of its Federal operating subsidy.

  On the positive side, Amtrak's actions to reduce some routes and services, cut management positions, and raise fares have helped improve its financial performance. For example, Amtrak's net losses—total revenues less total expenses—declined from over $1 billion to about $764 million in 1996. However, despite these efforts, Amtrak is projecting that its 1997 net losses may be even greater than those of last year. In addition, Amtrak forecasts a year-end cash flow deficit of almost $100 million, which may require Amtrak to begin borrowing as early as this month to pay its bills.

  Amtrak's goal of eliminating Federal operating subsidies by 2002 is heavily dependent on the billions of dollars they will need in capital investment. For the Northeast Corridor alone, Amtrak estimates that an additional $1.4 billion to bring the high-speed rail service between New York and Boston and about $2 billion to preserve existing service levels on the south end of the corridor will be needed over the next 3 to 5 years.
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  Our work has also shown that an increasing portion of Amtrak's Federal capital is being devoted to debt service, capital overhauls, and legally mandated uses such as equipment modification and environmental cleanup. As a result, the portion of the capital grant available to meet general capital investment needs continues to shrink. In fiscal year 1997 only about 5 percent of Amtrak's Federal capital grant of $223 million is expected to be available for general capital needs.

  Regarding the future, Amtrak anticipates significantly increased levels of Federal capital assistance, about $750 million per year, compared to the $478 million in capital funding Amtrak received this year. Given today's budget environment, it may be difficult to obtain this degree of increased capital funding.

  In addition, Amtrak competes with airlines, intercity buses, and passenger cars for ridership, which limits its ability to raise fares without losing riders. For example, between 1994 and 1996, Amtrak raised fares and increased yield—that is, revenue per passenger mile—by 24 percent. Yet this action and competitive pressures from other modes of transportation caused Amtrak's ridership to fall by 7 percent.

  Finally, Amtrak will likely continue to find it difficult to take those actions necessary to further reduce its costs. While Amtrak was somewhat successful in making route and service adjustments in fiscal year 1995, it was less successful in 1997. Amtrak has also been unsuccessful in negotiating productivity improvements with labor.

  To conclude, although Amtrak's business plans have helped reduce net losses, we see little hope for Amtrak to reach the goal of operating self-sufficiently by 2002. We believe that as currently constituted, Amtrak will continue to require significant Federal financial support, both operating and capital, well into the future.
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  Madame Chairwoman, this concludes our statement and we will be pleased to answer any questions.

  Ms. MOLINARI. Thank you very much, Ms. Scheinberg, for all that good news.

  Given the outlook you have just prepared for us based on the numbers, the projections, the declining ridership, what is your assessment of Amtrak's prospect if it were to receive the fiscal year 1998 Presidential budget?

  I only use the President's funding as a mark because some of my colleagues have correctly pointed out that the political situation is such that that will be our high water mark.

  Ms. SCHEINBERG. Clearly the gap that we showed on our graph between revenues and expenses would grow if the President's budget were enacted this year.

  Ms. MOLINARI. Do you have any projections as to how long GAO thinks it would take under the President's budget for Amtrak to have to declare bankruptcy?

  Ms. SCHEINBERG. No, I don't have an answer.

  Ms. MOLINARI. Mr. Wise?

  Mr. WISE. Are you buying stock in Amtrak?

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  Ms. SCHEINBERG. No, sir.

  Mr. WISE. I would ask you if my calculations are incorrect. Stop me if I wander off the track, in your opinion.

  First of all, you point out that Amtrak needs $2 billion in capital for the south end of the Northeast Corridor over the next 3 to 5 years, which would be approximately somewhere between $400 and $600 million per year. Am I correct?


  Mr. WISE. And that doesn't count the $210 million per year that they need for previous commitments such as legal mandates and capital overhauls of existing rolling stock. Is that correct?

  Ms. SCHEINBERG. Yes, sir.

  Mr. WISE. And that doesn't count the $193 million in continuing work on electrification of the northern end of the Northeast Corridor as well as a substantial portion of $100 million in environmental mitigation costs. Am I correct there?

  Ms. SCHEINBERG. Yes, sir.

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  Mr. WISE. Am I correct, then, that Amtrak is facing somewhere between $950 million and $1.2 billion in capital costs each year for the next several years?

  Ms. SCHEINBERG. To accomplish all that you have listed in the time frame you are talking about, yes, that is correct.

  Mr. WISE. I just want to make sure that I understand. You do not dispute any of my assumptions to get to that total?

  Ms. SCHEINBERG. That's right.

  Mr. WISE. I just might point out to the members of the committee that that is a significant capital expenditure that is required.

  Has GAO done any kind of analysis of the impact of Amtrak becoming insolvent? You heard the testimony from the previous witness, Mr. Downs, about his thoughts and perhaps calculations. Has GAO done any analysis of this?

  Ms. SCHEINBERG. No, we have not, sir.

  Mr. WISE. Would you be prepared to offer any thoughts on that subject?

  Ms. SCHEINBERG. We will be prepared to assist you in any way we can, but it depends on what the situation is. A lot of it has to do with what the Congress decides to do with Amtrak and how it plays out.
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  Mr. WISE. There may be 18 new train sets available. I realize this one may be a bit more hypothetical. Amtrak asked for $545 million in operating subsidy in 1996, but received $405 million. Do you agree with that?

  Ms. SCHEINBERG. I believe that is correct.

  Mr. WISE. For 1997, they asked for $392 million but received $364 million.

  I think you have studied documents, but I just wanted to see if you would state again the effects of giving Amtrak a smaller operating subsidy than what they have already requested.

  Ms. SCHEINBERG. The impact we have noted is the gap that exists between the revenues and the expenses. That is the result of what you are describing.

  Mr. WISE. Were you able to factor in the impact of such things like last winter and the fact that there was such an adverse winter and the impact that would have on Amtrak?

  Ms. SCHEINBERG. Certainly that is included in the numbers. There was an additional $29 million, I believe, that added to the expenses because of the winter last year.

  Mr. WISE. So if Amtrak received the requested operating subsidy, and if last winter had been a normal winter, what would have been their budget result last year?

  Ms. SCHEINBERG. Certainly the gap between the revenues and expenses would have been less and Amtrak would have had to borrow less against its line of credit. So the situation would be better.
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  Mr. WISE. Does GAO have any thoughts on managerial actions Amtrak could have taken over the past 2 years that could have significantly improved their financial results this year?

  Ms. SCHEINBERG. Mr. Wise, I think it is worth saying that Amtrak is working very hard to reduce its costs. But it is very difficult for Amtrak to reduce its service and to reduce its routes. It is also very difficult and they have not been able to make progress in improving the productivity through the labor negotiations. So this is a very difficult task that is before Amtrak. It is not easy to say how else they could have done it. I think they are making a very strong, honest effort.

  Mr. WISE. Thank you very much.

  Ms. MOLINARI. Ms. Scheinberg, this is an amazing walk-through on numbers that I would like you to confirm for me based on your testimony.

  On page seven of your testimony, you state that based on current projections Amtrak is going to have to borrow about $148 million to meet its payroll next year.


  Ms. MOLINARI. To be clear, as Glen points out, the Amtrak projections for 1998 is based on an assumption that it receives an operating subsidy of $225 million, which is $25 million more than it received this year, and $25 million more than proposed by the Administration.

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  In addition, it assumes that Amtrak gets a dedicated trust fund that provides $751 million in capital northeast corridor funding, compared to $478 million for the same category of spending in 1997, and compared to $423 million proposed by the Administration for 1998.

  So in other words, Glen has pointed out to me based on those numbers that even under a best case scenario—which we are pretty much guaranteed not to get—where Amtrak obtains a 35 percent increase in funding compared to last year, it is still going to have to borrow $148 million just to make payroll.

  Ms. SCHEINBERG. That's true.

  Ms. MOLINARI. Isn't it also true, then, that Amtrak has a short-term line of credit of $150 million with its bank?


  Ms. MOLINARI. So that is, if the estimating for 1998 is even slightly off—which we all believe it probably is—Amtrak may not even be able to borrow the money it needs to make debt service payments and meet its payroll obligations?

  Ms. SCHEINBERG. I agree with everything you have said, yes.

  Ms. MOLINARI. Thank you, Ms. Scheinberg.

  Mr. Mica?
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  Mr. MICA. Thank you, Madame Chairman.

  Let's go back over the math again, if we can repeat it. We have been doing about $1 billion subsidy, this proposal is $1.2 billion operating and capital request. I don't have the 5-year plan, but staff tells me that it requires—and you have confirmed it and it is mentioned in your report—about $1 billion a year for each of the next 5 years, for a total of $5 billion. Is that right?

  Ms. SCHEINBERG. That is the rate that Amtrak is being funded, yes.

  Mr. MICA. And it looks like about 25 percent of that is an operational subsidy, in round figures.

  At 2002, did you come up with any differences that will still require that operational subsidy?

  Ms. SCHEINBERG. Yes, sir.

  Mr. MICA. So we are still in the same situation.

  My point earlier with Mr. Downs was that in 2002—we have obligations of $5 billion if we close it down now, right?

  Ms. SCHEINBERG. Up to $5 billion.
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  Mr. MICA. That is still going to be there. But we spend in the meantime another $5 billion to get it to 2002. We are still running on an operational subsidy. I maintain that part of the problem is that you haven't solved the operational ability of this thing to function. It is run under the same labor and liability. And then you come before Congress and you heard the questions to Mr. Downs were whether they were providing service to Eagle Pass or Podunk Junction or wherever.

  I don't think this is going to be solved unless we look for some different solutions. You mentioned that part of the key to it was productivity. There has to be something to give there.

  I guess we don't really have a problem as long as the taxpayer is willing to subsidize this and still be in the same situation in 2002. Is that right?

  Ms. SCHEINBERG. I don't see any change in the situation.

  Mr. MICA. You are confirming my worst suspicion.

  There are about 20,000 Amtrak employees now?

  Ms. SCHEINBERG. About 23,000.

  Mr. MICA. I don't want to get into how many people it takes to run a railroad or how many stops.
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  I don't see any viable solution that has been proposed to deal with the productivity and some of these fundamental questions about labor and liability for operations. Have you seen anything proposed? I guess you didn't look at it from that aspect, did you?

  Ms. SCHEINBERG. No, we didn't look at it. But I know that Amtrak has some ideas about reducing the size of the crews and reducing the number of cars. But it is very difficult to——

  Mr. MICA. Labor?


  Mr. MICA. You did mention in your report that high-speed rail in the Northeast Corridor has some potential for profitability. You didn't look at anything else like the auto train or other service in other corridors, did you?

  Ms. SCHEINBERG. No, sir. The only route that currently covers its cost and fully allocated cost is in the Northeast Corridor, the metroliner. The auto train does not cover its cost.

  Mr. MICA. Don't tell me that. Give me 6 months and I will make that sucker turn a profit.

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  Mr. MICA. You were charged with certain things to look at it and you have confirmed our worst suspicions that in 2002 we are going to be in the same situation, have $5 billion in debt, but will have spent another $5 billion and we will be here and still have potentially operational subsidies.

  I don't have any problem with funding the capital. That is an investment that you have to make. You can't run a railroad without the good equipment or whatever you need and the Northeast Corridor and the high-speed rail—all those things have good potential. But until you take it apart and solve some of the problems and then you operate those that can turn a profit—and I can darn well turn a profit on auto train, the Northeast Corridor, on other corridors—if you solve the productivity and some of the labor and liability questions.

  But your report doesn't really get into that detail, does it?

  Ms. SCHEINBERG. We didn't address how to do that, if that is what you're asking.

  I think all the assumption about where we would be in 2002 assume there would be no changes in the way the current system is operated, the current extent of the system, and the current funding of the system. The way to get at the change is for Congress to make a major decision about the system and to decide what we want to do.

  Mr. MICA. And what impediments are there? What is Congress to decide?

  Ms. SCHEINBERG. The decision is whether or not to continue to have a national system of the current routes, which would require a substantial Federal——
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  Mr. MICA. And cut out service to Eagle Pass and Podunk Junction?

  Ms. SCHEINBERG. Basically the same system we have now. If we want to have the system we have now, it is going to require substantial funding. Or if the investment is not available, then the decision has to be made as to what level of a system we want to have and what kind of service we want to provide. It is a question of what we want to have in this country for rail passenger service.

  Mr. MICA. And you don't have the productivity and other operational problems?

  Ms. SCHEINBERG. Those improvements have to happen in any case.

  Mr. MICA. Competing with airlines?

  Ms. SCHEINBERG. I think those should be—productivity, improved quality of the service—done in any case.

  Mr. MICA. I appreciate your answer. You have done your job and what we asked you to do.

  Madame Chairman, what we really need to get from them is to take this thing about and look at it some more and come back with some other viable alternatives. We are headed down the big tube. Running a railroad by committee is not going to work. It is obvious that we don't have the solution here today.
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  Thank you.

  Ms. MOLINARI. Thank you very much, Mr. Mica.

  In the spirit of honesty that has developed up here, when I gave Glen credit for the question, he corrected me and said that it was Alice that should get credit for the question.

  Mr. BACHUS. What the Madame Chairman said about all these projections of $148 million being borrowed next year rely on a $225 million operating subsidy, but only $200 million was proposed. Is that right?

  Mr. JORGENSON. It is based on at least a $200 million level of operating support from the Federal Government.

  Mr. BACHUS. So it is based on $200 million?

  Mr. JORGENSON. I am not sure if it is $245 million or $200 million, but it would be a minimum of $225 million.

  Mr. BACHUS. But I don't see that that is what was proposed. I think $200 million has been proposed in the President's budget. Is that right?

  But you have assumed at least $225 million. I am just saying that you have $25 million right away that looked to me like you have to make up.
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  Mr. JORGENSON. The $148 million borrowing next year is really predicated on Amtrak's successfully implementing its business plan both this year as well as next year.

  Mr. BACHUS. I understand all that.

  I am saying that these projects of $148 million say that if they are successful, if they cut costs—but it also is predicated on funding levels. One of them assumes a dedicated trust fund of $751 million. I think that is right. It is not in the President's budget. So you are assuming something that is not in the budget.

  Are you all assuming that—do you know something I don't know? Is it going to be put in?

  Ms. SCHEINBERG. All of these assumptions are Amtrak's assumptions. We are reflecting what is in Amtrak's business plan for this year and for next year.

  Mr. BACHUS. But their business plan can't put a dedicated trust fund of $751 million in place. They are assuming that we are going to do that this year in this Congress?

  Ms. SCHEINBERG. Exactly.

  Mr. BACHUS. We haven't done that. It is not in the President's proposals. But assume that we do that. That is a big assumption, but let's say that we put $751 million a year in a dedicated trust fund. Then suppose that we get the $225 million. Then you are also assuming that you are going to cut electrical costs by $20 million?
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  Mr. JORGENSON. I think that was correct. Yes, sir.

  Mr. BACHUS. Can you count on that?

  Mr. JORGENSON. That is predicated on Amtrak being able to negotiate wholesale rates for the purchase of electric power.

  Mr. BACHUS. What are the chances of that? Is it good? How would you rate it? Give me your best guess. Is that going to happen?

  Mr. JORGENSON. That is difficult to know. It really depends on their ability to negotiate.

  Mr. BACHUS. It is not a sure thing?

  Mr. JORGENSON. No, it is not a sure thing.

  Mr. BACHUS. This is a possibility, is it not?

  Mr. JORGENSON. Yes, it is.

  Mr. BACHUS. But these figures—$148 million that will have to be borrowed—are based on a possibility that they will save $21 million on lower electrical costs?

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  Mr. JORGENSON. That is part of the assumption. Yes, sir.

  Mr. BACHUS. Another part is that they are going to sell $16 million worth of property, right?

  Mr. JORGENSON. Yes, sir.

  Mr. BACHUS. That is what they are hoping to sell it for, right?

  Mr. JORGENSON. Yes, sir.

  Mr. BACHUS. So anything less than that is an additional shortfall?

  Mr. JORGENSON. That's correct.

  Also the borrowing is going to depend a lot on their ability to generate the revenue that they are expecting to generate in fiscal year 1997 as well as fiscal year 1998.

  Mr. BACHUS. Even if all this is done, they are going to have to start borrowing it earlier in the year than what your figures say.

  Mr. JORGENSON. They expect to borrow this month based on the projected cash flow.

  Mr. BACHUS. I think your figures said May. Am I wrong?

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  Mr. JORGENSON. No, sir, I believe it was March.

  Mr. BACHUS. Last year it was May?

  Mr. JORGENSON. I believe that is correct.

  Mr. BACHUS. You are figuring about the same cost this year as last year, but they are having to start borrowing it 2 months ahead of time. So I guess that means that somewhere later they are going to make it up?

  Mr. JORGENSON. The total borrowing is based a lot on their expected budget results or expected losses this year as well as next year. Part of the problem with continuing to run the deficit that they have is that those deficits carry over into the following year. That impacts their cash flow.

  Mr. BACHUS. Also you got the package service. They have been talking about the mail service, the package service. Is that in their strategic plan?

  Mr. JORGENSON. Some level of mail and express is. Yes, sir.

  Mr. BACHUS. So some level of growth there is anticipated, right?

  Mr. JORGENSON. Not the levels that they are anticipating.

  Mr. BACHUS. Are any of these projections based on a growth on their package service?
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  Mr. JORGENSON. It is based on mail and express business, but not the increased growth that they are expecting now, which is something that has come up in terms of these routes.

  Mr. BACHUS. We might want to know what those projections are in figuring this out. Did you all look at that? We are told that they are going to grow revenues through this, but we don't have any projections.

  Ms. SCHEINBERG. We don't have any information.

  Mr. BACHUS. But that is one thing they have been talking about the last few months, that that is one way they are going to pull up revenues.

  In fairness to them, could GAO go back and look at that and tell us what kind of promise is there?

  Ms. SCHEINBERG. My understanding is that those are still being developed. The projections for the mail and package service are still being developed. I don't know if there is anything firm on that right now.

  Mr. BACHUS. I would say to you all and Amtrak, if there is, I would like to get some information on it just so that I have everything to look at.

  I have one final question. Mr. Downs gave percentages of the locomotives were out of service. For a freight railroad, that would be way high, right? It would be maybe double what you would expect?
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  Mr. JORGENSON. Yes, that would be about twice what the freight railroads run.

  Mr. BACHUS. Is that because we have starved Amtrak of the capital?

  Mr. JORGENSON. There is no question that out-of-service rates are highly a function of the age of the cars and the condition of the fleet they are running. Yet because they have not been able to replace some of the equipment and the cars and locomotives that they have expected to, that affects their out-of-service rate.

  Mr. BACHUS. Let's just say that they had more modern equipment. It assumes that they would have more for capital funding. If that happens, I think you can assume that they are going to have more cars available and more locomotives in service. There is nothing that hits your bottom line more than a locomotive that you are paying for that is not in service.

  Mr. JORGENSON. That is correct. The new equipment would presumably provide for a better out-of-service rate. In other words, they would have more units in active service.

  Mr. BACHUS. Do you know how that would affect their bottom line? Did you take a look at that?

  Mr. JORGENSON. No, sir, we did not.

  Mr. MICA [assuming Chair]. I thank the gentleman.

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  Our time is running out. I will yield to Mr. Wise for a moment.

  Mr. WISE. Mr. Chairman, I want to thank Ms. Scheinberg and the other witness. You have always provided excellent service to the subcommittee and we greatly appreciate the help you have given us as we try to understand some of these complex matters.

  Mr. MICA. We thank you both for your testimonies and will excuse you at this time.

  Mr. MICA. I note that we have about 15 minutes before we have to vacate this room. I am going to call our next witness, Hon. Don Itzkoff, the Federal Railroad Deputy Administrator. I would ask you to try to be as brief as possible in your presentation and then we will limit each side to 5 minutes of questions.

  Welcome, Mr. Itzkoff.


  Mr. ITZKOFF. Thank you, Mr. Chairman.

  Members of the subcommittee, I am pleased to appear today to discuss Amtrak's progress and the challenges that remain.

  Administrator Molitoris, originally scheduled to testify, looks forward to a future opportunity to discuss the Administration's reauthorization proposals with you.
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  In 1994, the Department of Transportation and Amtrak's Board of Directors committed to the goal of eliminating Amtrak's dependence on Federal operating subsidies while improving service and preserving a national system. This joint strategy is designed to achieve several core objectives: first, to restructure Amtrak into a bottom-line, customer-focused corporation; to provide adequate capital to modernize its equipment and facilities; and to foster sufficient operating assistance to carry Amtrak to 2002 when operating assistance would end. This strategy is working.

  My written statement details how Amtrak has created three strategic business units targeting different parts of Amtrak's customer base and implementing other innovations. Amtrak's emphasis on customer service and bottom line is already paying dividends.

  Amtrak increased its revenues over the past 2 years despite reducing annual train miles by 16 percent and employment by 8 percent. The number of passenger miles travelled per dollar of Federal operating subsidy increased nearly 25 percent from fiscal year 1995 to fiscal year 1996.

  In large part, these trends have resulted from the enhanced capital investment recently provided to Amtrak. The Administration has led with substantial capital requests for Amtrak and altogether the Federal capital investment for the last 4 years has exceeded that for the previous decade combined.

  New equipment matters. As late as 1995, the heritage cars accounted for nearly one-third of their equipment. But starting in 1993, Amtrak's Board has moved aggressively to renew Amtrak fleet. By the end of this year, Amtrak will have taken delivery on all 236 of the new Superliner II and Viewliners, and by next year on 176 new locomotives.
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  The most exciting development, as you heard, is the order for the new high-speed train sets for the Northeast Corridor service announced last year by Vice President Gore. The 150 mile an hour American Flyer equipment, which is 75 percent financed by the private markets, will be the safest high-speed trains ever built. Construction began last July in the New Haven to Boston electrification project. With the new trains and completion of electrification by 1999, Amtrak anticipates that high-speed service will develop an expected Northeast Corridor profit of $150 million per year.

  These investments will pay dividends well into the next century. But much attention today, however, has focused on Amtrak's current financial condition. I would like to offer a few brief additional remarks on that.

  For fiscal year 1996, the President's budget requested $300 million for operating assistance, a decrease itself of nearly 25 percent from the $392 million appropriated in fiscal year 1995.

  Unfortunately, Congress only appropriated $185 million for operating assistance that year, which was $115 million less than the Administration's request and $107 million less than included in the May 1995 congressional budget resolution. Faced with $40 million in additional costs due to weather in fiscal year 1996, Amtrak faced over $150 million in unexpected, adverse, bottom-line impacts. Yet Amtrak achieved the original target and almost half of the unexpected additional requirements and cut the shortfall to $82 million. Amtrak would have posted a surplus had the $300 million requested by the Administration been appropriated in that year.

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  For fiscal year 1997, Amtrak management projected a budget shortfall of $243 million. The Board adopted the business plan to cut the shortfall to just $30 million. However, when Amtrak's plan was effectively postponed, including the postponement of the discontinuance of a number of Amtrak's poorest performing routes, the anticipated budget gap grew even larger, despite the supplemental appropriation.

  In short, Amtrak faces formidable hurdles. With no cash reserves and a projected budget deficit now of $70 million, Amtrak is vulnerable. Yet as I have highlighted, Amtrak has overcome the challenges it has faced in the past.

  In 2 years, Amtrak has cut operating assistance in half. They are aggressively seeking State and private sector partnerships to promote service. It has modernized its fleet and improved quality. The Board of Directors has shown that it can and will make the hard decisions necessary to improve the economic viability of Amtrak's intercity rail passenger service.

  Our reauthorization legislation, which we look forward to discussing in detail when the subcommittee further considers Amtrak's future, will reinforce our commitment to a national system of high-quality passenger service, reemphasize our strategy of gradual reduction of the operating subsidy to zero by 2002, provide the capital resources Amtrak needs to reach this goal, and create an environment in which all Amtrak stakeholders can work to achieve improved rail passenger service.

  Administrator Molitoris and I look forward to working with this committee and the Congress in the coming months on this important legislation.

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  Mr. MICA. Thank you for your testimony, Mr. Itzkoff. I am glad you testified when you did. I was becoming suicidal after hearing the previous two witnesses. It looked so gloomy that I didn't think there was any hope.

  I want to ask you one question and then I am going to yield to Mr. Bachus the balance of my time, and then the last 5 minutes to the ranking member. My question deals with the Administration's fiscal year 1998 budget proposal.

  You stated that the Administration is committed to saving Amtrak and that in order to make it solvent for the future, we need to undertake a three-prong strategy: internally generated cost-savings, creation by Congress of a dedicated trust fund for capital expenses, and legislative reform. The Administration's budget, however, appeared to at least reject one of the three-pronged strategy because there was no creation of a dedicated trust fund.

  Without a dedicated trust fund for Amtrak, exactly what is the Administration's plan to save Amtrak?

  Mr. ITZKOFF. We have put forward a consistent strategy of significant support for Amtrak. As I indicated, the capital appropriations to Amtrak have been significant over the past few years. We believe that with the Amtrak funding out of the highway trust fund indicates the commitment for Amtrak as part of the intermodal surface transportation network.

  We have indicated, however, that the goal of moving to a zero operating subsidy is difficult, but we believe it is achievable and it is the right path because it has forced the kind of business innovations and new seeking of revenue that Amtrak has undertaken that they will need to survive. Tom Downs has talked about some of the new kinds of business opportunities they are exploring. We think those are positive and I look forward to the opportunity to submit our reauthorization proposal, hopefully in the very near future, that will further amplify our vision as part of the overall strategy.
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  Mr. MICA. So you just left the trust fund out temporarily?

  Mr. ITZKOFF. The Administration has not supported a dedicated source of identified revenue from the trust fund because we believe that further segregating the trust fund in that fashion is not necessarily productive. But we have proposed that Amtrak would be funded out of the highway trust fund generally, not just creating a separate specific account.

  Mr. MICA. I yield the balance of my time to Mr. Bachus.

  Mr. BACHUS. Thank you.

  Mr. Itzkoff, you have estimated that the high-speed rail operation starting at about 1999 will contribute $150 million a year to revenues. Is that right?

  Mr. ITZKOFF. That's correct high speed service is scheduled to begin in the fall of 1999—which is the beginning of fiscal year 2000.

  Mr. BACHUS. This year, did you say the shortfall—if you all proposed an operating subsidy of $200 million—it is going to be $243 million?

  Mr. ITZKOFF. We had proposed an operating request of $200 million. That is the number we are targeting to move to zero by 2002. That is correct.

  Mr. BACHUS. But that $200 million leaves you $43 million short, right?
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  Mr. ITZKOFF. One of the issues is that we don't see the Federal operating assistance being the only mechanism by which Amtrak can derive funds. I have outlined the revenue that is expected from the Northeast Corridor, Mr. Downs has talked about the new revenues they are anticipating from the mail and express business.

  Mr. BACHUS. I understand all that, but those are projections. And I think when he is talking about the Northeast Corridor, we are talking about 1999. I am just trying to get us from here to there, which is 2 years. I don't know that you can do that without some labor contracts.

  But I understand that if you get to 1999, if $150 million a year increase comes in we are well on the way.

  Mr. ITZKOFF. As Mr. Downs indicated, Amtrak does face a projected cash shortfall of $70 million for fiscal year 1997. The amount of the shortfall and the financial picture in fiscal year 1998 depends on not only the appropriations in these coming months, but also the rate at which some of their other business opportunities develop, and also the degree to which States contribute to Amtrak's bottom line. Already 12 States now contribute to operating of intercity rail passenger service. That amount of assistance that States have contributed to operating trains has doubled in just the past 2 years.

  Mr. BACHUS. Is part of that in the figure? The projections?

  Mr. ITZKOFF. All of those go into Amtrak's overall bottom line. Their revenue——
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  Mr. BACHUS. For future subsidy?

  Mr. ITZKOFF. I don't know the degree to which the growth projections have taken into account a continuing increase and these other kinds of revenue sources. But it is important to note that passenger revenues only account for approximately 62 percent of Amtrak's overall revenues, exclusive of its Federal operating payment.

  Mr. MICA. I thank the gentleman. I wonder if you have additional questions if you could submit them for the record.

  Mr. BACHUS. Yes, I will.

  Mr. MICA. I would like to recognize the ranking member.

  Mr. WISE. I thank the Chair.

  I am glad we were able to get FRA on today.

  You heard me ask Ms. Scheinberg about the capital costs. GAO has indicated that Amtrak's capital needs are almost $1 billion a year for the next few years.

  Do you agree with that?

  Mr. ITZKOFF. We have assessed their capital needs for the system overall and the amount we are proposing we believe represents a balance, given all the other priorities in transportation and the budget overall. The overall number—clearly the new equipment they have already received has provided some benefit.
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  I would like to provide for the record our assessment on whether that number or a different number would really be the optimal solution.

  [The information follows:]

  [Insert here.]

  Mr. WISE. Thank you for that answer. That was amazing.


  Mr. WISE. I am going to go back to the $1 billion figure because I haven't heard anybody dispute that. Let's assume that it is about $1 billion—and I talked to Ms. Scheinberg about what those items were. If you care to dispute that, then I look forward to seeing that documentation.

  If it is about $1 billion—and I think Amtrak thinks it is about $1 billion—how does the Administration propose to cover these capital needs? How much does the Administration recommend for that?

  Mr. ITZKOFF. For fiscal year 1998, our capital proposal is a total of $225 million, I believe, as part of our overall budget.

  Mr. WISE. That is general capital. But what about NECIP as well.
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  Mr. ITZKOFF. That would be $423 million with NECIP included.

  Mr. WISE. So somewhere there is a shortfall of $500 million to $600 million?

  Mr. ITZKOFF. Depending on how you look at it.

  I would point out that the short-term operating requirements Mr. Downs has outlined and Congressman Bachus has alluded to in the near term are different issues than Amtrak's long-term future, which does of course require a sustained and continuing capital investment.

  Again, we believe that we have led the way in terms of capital investment for Amtrak, which was of course greater than in the previous decade. The question is, Can we do more? That would obviously need to be discussed with the Congress.

  Mr. WISE. Isn't it the reality, though, that despite that fact—and I acknowledge that you have led the way and that it has been more than the previous decade—Amtrak is at a point in its evolution where it is going to need significant amounts of capital investment if it is indeed going to be successful?

  Mr. ITZKOFF. We think that they have made substantial progress under the strategy we have talked about of moving their operating subsidy closer to zero. Part of that has been the enhanced capital that we have given them to this point.

  How quickly they can continue to move, how quickly the other business opportunities can continue to develop—all this is part of what might be the answer to the necessary capital needs for Amtrak. Of course, that has to be fit in with the overall budgetary priorities that we have.
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  Mr. WISE. The House Budget Committee last year proposed maintaining Amtrak's budget at $972 million for the fiscal years 1996 through 1998, whereas the Administration proposed $938 million for fiscal year 1996 and $777 million for fiscal year 1998. That would seem to be a discrepancy in perception of need.

  Do you feel the Administration's proposal is reasonable, or was the House Budget Committee the better one to go with in that case?

  I know that is a difficult question for you, in representing the Administration, to answer. But in light of what we have heard today?

  Mr. ITZKOFF. Again, as I mentioned, in fiscal year 1996, the ultimate level of appropriations that was passed was $115 million less than the President's request for operating. So that did have a significant impact on their performance that year and had a spill-over effect into fiscal year 1997. Our fiscal year 1998 budget proposal we believe represents the best balance between Amtrak's needs, our ability to promote investment in transportation, and of course the President's desire to balance the budget, which I know is shared by nearly everyone here.

  Mr. WISE. Thank you very much.

  Mr. MICA. I would like to yield for last questions from Ms. Molinari.

  Ms. MOLINARI. Thank you.

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  I frankly don't know where to start because I feel that we have been at two different hearings here. You make a statement that Amtrak appears to be moving toward ending their operating subsidies and I can only conclude you think it's because they are going to be in bankruptcy and therefore we won't have to provide these subsidies. Sir, I respectfully request that you ask the Administrator—we have been given figures today by GAO, confirmed by Amtrak, that if one of Amtrak's projections—which are all very precarious and based on the uncertain nature of politics that exist today relative to funding Amtrak—if one of those things is off, Amtrak will have exceeded its borrowing credit.

  And you are here today to say that the Administration's proposal is—well, we have some business plans that are somehow going to help us to not go into bankruptcy this fiscal year. Why is your testimony so much rosier than the two people that came before? What are you basing this on?

  Mr. ITZKOFF. Again, the Secretary and the Administrator sit on Amtrak's Board of Directors and participate in all of their financial deliberations. Again, as I mentioned, Amtrak has come a long way with the pressure of moving to a zero subsidy environment farther and faster than anyone expected they could or even that we in the Administration expected they could. They have cut the amount of subsidy from $400 million to approximately $200 million in just 2 years.

  That kind of pressure we think has driven innovations that Tom has talked about—the mail and express enhancement, the fact that the States are now stepping to the plate to provide additional revenue, which has doubled in terms of State contributions—so I think the direction is the correct one.

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  Ms. MOLINARI. The direction? This is where we are dealing with apples and oranges. Yes, they have cut service throughout the United States in order to meet those projections. But their ridership is down, their service is down—everything that should be going up to allow the rosy scenario. If they continue to do what they are doing in order to meet projections, there will be no service routes left in the United States. It is not because more people are riding Amtrak, is it?

  Mr. ITZKOFF. Actually, the revenues for Amtrak have increased over the last 2 years, despite the fact that their train miles operated have decreased by 16 percent. I think that shows they have been driving some of the costs out of the system, which is a positive sign for the future.

  In terms of the short term—which I know, Madame Chairwoman, you have alluded to as being of great concern—we are concerned about that as well. Amtrak does project a budget deficit shortfall of approximately $70 million for this fiscal year. Mr. Downs has rightly alluded to the situation they face in fiscal year 1998. But again, that outcome is not clear.

  It won't be clear until we see the level of appropriations that ultimately results from the appropriations process, until we see the level of State participation that unfolds, and the degree to which their revenues increase from these new types of business ventures Mr. Downs has described and how quickly that can unfold.

  Ms. MOLINARI. There doesn't appear to be much point in belaboring this. I will just conclude by making a statement.

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  The difference you have here is how soon Amtrak dies. I think the Administration is advocating today that we are just going to let it go slowly so that there is no political responsibility, slowly being within the next 2 years. The fact is that passenger revenues are going down. Until that trend is reversed, in addition to all these business incentives which we wholeheartedly endorse—none of which are going to be in place to get Amtrak to where it needs to be in a timely fashion.

  I urge you to please go back to the Administrator and to the Secretary of DOT. We would like to see some leadership from this Administration to tell us how we are supposed to get to their numbers. I am just as frustrated by the numbers Congress produces. Nonetheless, I think we have a responsibility to come up with some cost savings, some productivity savings, and some innovations from this Administration that get us there in a timely fashion by the numbers that you suggest.
  Amtrak is very important to this Nation and we can all put on rosy sunglasses and say that we didn't have the political courage to say we're not investing anymore and we are going to let it go. Right now, it just seems like we are all going to pretend to look the other way. I really hope that we get some different perspective in the future as we grapple with this issue as Congress and try to come up with some short-term plugs.
  Mr. ITZKOFF. We do agree with you about the importance of Amtrak to this country. I would look forward to having the opportunity to come back with you when we submit our authorization proposal to discuss how we can move forward together.
  Mr. MICA. I thank the permanent Chair of the subcommittee.
  I also recognize the presence of the ranking member of the full committee, who has joined us. Unfortunately, we will not have time for further questions because we have a full committee meeting here in just a few minutes. We thank you for participating with us and working with us.
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  We will have additional questions that we will be submitting for you.
  [The information follows:]

  [Insert here.]

  Mr. MICA. I understand the record will be left open for 30 days.
  Mr. OBERSTAR. Mr. Chairman, I don't have a question. I would just like to follow-up on Chairwoman Molinari's observation about the funding.
  I think if the Administration is serious about passenger rail service, it needs to put together a realistic capital investment budget that moves Amtrak into the future and continues the northeast corridor electrification process. I think if you put together a bold vision for the future you will find strong support in the House.
  Mr. ITZKOFF. Thank you, sir.
  Mr. MICA. I thank you again for your testimony and for being with us.
  There being no further business before the Railroads Subcommittee, it is adjourned. Thank you.
  [Whereupon, at 4:20 p.m., the subcommittee was adjourned, to reconvene subject to the call of the Chair.]

  [Insert here.]



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MARCH 12, 1997
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Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
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SUE W. KELLY, New York
RAY LaHOOD, Illinois
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
J.C. WATTS, Jr., Oklahoma
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NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ROBERT E. (BUD) CRAMER, Jr., Alabama
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi
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BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania

Subcommittee on Railroads

SUSAN MOLINARI, New York7E, Chairwoman
7EKAY GRANGER, Texas, Vice Chairwoman
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
JOSEPH R. PITTS, Pennsylvania
JON D. FOX, Pennsylvania
BUD SHUSTER, Pennsylvania
(Ex Officio)

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ROBERT E. WISE, Jr., West Virginia
7EROBERT A. BORSKI, Pennsylvania
BOB CLEMENT, Tennessee
BOB FILNER, California
(Ex Officio)


  Downs, Thomas M., Chairman, President and CEO, National Railroad Passenger Corporation, Amtrak

  Itzkoff, Hon. Donald M., Deputy Administrator, Federal Railroad Administration

  Scheinberg, Phyllis, Associate Director for Transportation Issues, U.S. General Accounting Office, accompanied by Richard Jorgenson, Senior Evaluator


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  Granger, Hon. Kay, of Texas
  Wise, Hon. Robert E., of West Virginia


  Downs, Thomas M

  Itzkoff, Hon. Donald M

  Scheinberg, Phyllis

Downs, Thomas M., Chairman, President and CEO, National Railroad Passenger Corporation, Amtrak, charts:

''The Gap''—Operating Grants vs. Budget Assumptions
Federal Capital Appropriations: FY1976–1997
Outstanding Debt/Capital Lease Obligations: FY87–2002
Principal and Interest Expense: FY97–2002
Amtrak's Glidepath to Self Reliance
The 1/2\ Cent Solution
Responses to questions from Rep. Oberstar

  Itzkoff, Hon. Donald M., Deputy Administrator, Federal Railroad Administration:
Response to question from Rep. Wise
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Responses to post hearing questions

Molinari, Hon. Susan, Chairwoman, Subcommittee on Railroads, Committee on Transportation and Infrastructure, U.S. House of Representatives:

Letter from the Railroad Retirement Board on the Impact of Amtrak Workforce Reductions on the Railroad Retirement Board Trust Funds, February 20, 1997

Letter from the Comptroller General of the United States responding to questions relating to the payment of Labor Protection Costs in the event that the services of the National Rail Passenger Corporation (Amtrak) are terminated

Letter to Franklin D. Raines, Director, Office of Management and Budget, March 19, 1997 and response, March 23, 1997

Scheinberg, Phyllis, Associate Director for Transportation Issues, U.S. General Accounting Office, charts:

Revenues and Expenses Fiscal Years 1988–096
Amtrak's Passenger Revenues, Fiscal Years 1989–96
Amtrak's Federal Operating Subsidy and Operating Deficit, Fiscal Years 1988–96
Amtrak's Working Capital Surplus/Deficit, Fiscal Years 1987–96
Amtrak's Outstanding Debt/Capital Lease Obligations, Fiscal Years 1987–96

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  Alexander, Doug, Member of Council, District 17, City of Atlanta, GA, letter to subcommittee, February 12, 1997

  Ezerski, Beatrice, Secretary to the Board, Railroad Retirement Board, letter to Chairwoman Molinari, April 18, 1997