Current federal policy toward Amtrak is not sustainable. The $1.04 billion federal subsidy that Amtrak received for 2003 will enable the company to do little more than limp along, rationing its resources to cover operating losses on nearly every route. Amtrak estimates that it will require about $2 billion in federal assistance annually for the next five years to cover its operating needs and to address a large backlog of capital investments.⁽¹⁾ Without increases in subsidies, the condition of both the Northeast Corridor infrastructure and Amtrak's passenger cars and engines is likely to decline further. That decline will make travel by rail less safe, less reliable, and less attractive to passengers. Amtrak has requested $1.8 billion in federal aid for 2004; the Bush Administration has asked for half that amount.

The tortuous history of public policy toward Amtrak indicates the difficulty of reaching agreement about the appropriate federal role in passenger rail. Laws enacted over the past 30 years have included attempts to gain greater federal control (some would say "micromanagement") of Amtrak as well as attempts to give the company greater latitude to run its enterprise as a business. At times, the Congress has directed Amtrak to take specific actions to rationalize the rail system, and at other times, it has provided only broad guidance about objectives. The results of those efforts--however well intentioned--have pleased few people.

Passenger rail policy is a classic case in which most of the benefits are concentrated among a few identifiable groups but the costs are borne widely by taxpayers. Eliminating a train or route--or even all of Amtrak--would not save enough money for an individual taxpayer to notice, but it would have a marked effect on current passengers, railroad workers, and (to a lesser extent and depending on the circumstances) freight and commuter railroads, suppliers, and Amtrak management.⁽²⁾ Finding a compromise policy for passenger rail that offered improvements for all parties would probably be impossible. But compromises might exist that would use resources more efficiently and allow compensation for parties that were made worse off.

The federal government has several policy approaches available--ranging from ending subsidies (which would most likely lead to a shutdown of all or most intercity passenger rail service) to making massive new investments that would not only upgrade the existing system but also provide new high-speed service in corridors throughout the country. This chapter evaluates four options that cover a broad range of policy choices with regard to the future level of federal support for passenger rail service.

Those options do not address all of the rail-related issues that are currently under debate, however--many of which are difficult to resolve. If policymakers can agree on a vision for passenger rail over the next 10 or 20 years, they can more productively tackle such issues as governance (including budgetary treatment, accountability, and transparency), financing (from federal, state, and local governments and private-sector investors), and the desirability of separating infrastructure from operations. For example, if federal spending on rail increased, policymakers might want to record Amtrak's transactions in the federal budget to make the company more accountable for its use of federal funds.⁽³⁾ (For a discussion of Amtrak's budgetary treatment, see Box 3.) The 2003 appropriation law took a small step in that direction by requiring that the Department of Transportation disburse subsidies for Amtrak only after the railroad has provided enough information to satisfy DOT that the funds will be used according to a business plan approved by the department.
 

Box 3. Should Amtrak Be On-Budget? Because Amtrak is considered a private corporation, its transactions are not included in the federal budget. However, the Report of the President's Commission on Budget Concepts, which provided the conceptual basis for the government's overall budget, concluded that the budget should include all programs of the federal government and its agencies.1 According to guidelines in the report, entities like Amtrak would be treated as federal. The criteria in the report for determining whether an entity is federal include the entity's ownership, the source of its capital, who selects its managers, and the degree of control that the President and the Congress exercise over it. Applying those criteria to Amtrak suggests that the decision to exclude the railroad from the federal budget should be revisited. Ownership. The first claim to any profit that Amtrak might earn is held by the Secretary of Transportation, who owns all preferred stock in Amtrak. Some of today's freight railroads hold common stock certificates, which could be interpreted as giving them nominal ownership of Amtrak. (Those certificates were issued to the railroads as compensation for some of the rolling stock and lines that were used to form Amtrak in 1970.) However, those common shares convey virtually no benefits to the holders. Amtrak does not produce any earnings or dividends and does not convene an annual meeting of shareholders. Source of capital. The federal government is the primary source of capital for Amtrak. When the company was created, lawmakers hoped that such assistance would be temporary until Amtrak became self-supporting, profitable, and creditworthy. That hope has not been realized. Selection of managers. The President appoints Amtrak's entire board of directors with the advice and consent of the Senate. Degree of control. The federal government has extensive control over Amtrak's policies through the board of directors that it appoints and through the leverage that it gains by providing essential financial support. 1.  See President's Commission on Budget Concepts, Report of the President's Commission on Budget Concepts (October 1967).

The options examined in this chapter are only broad outlines, so the Congressional Budget Office has not estimated their federal costs. (Doing so would require greater specificity for each option.) However, the broad options can be analyzed qualitatively in terms of their expected implications for economic efficiency and their distributional effects. The efficiency effects are discussed with respect to several factors: rail service in particular and transportation service in general, externalities, and dynamic effects (that is, how investment decisions today might affect future costs both to the private sector and to society as a whole). The distributional effects include impacts on passengers, railroad workers, commuter and freight railroads, and taxpayers.
 

Option I: Eliminate Federal Subsidies and Provide for an Orderly Shutdown of Service

Ending federal subsidies would essentially implement the outcome that the Amtrak Reform and Accountability Act of 1997 envisioned if Amtrak did not achieve operating self-sufficiency by 2003: restructuring or liquidation. The federal government could cease providing subsidies immediately, thus driving Amtrak into bankruptcy and liquidation. Alternatively, it could provide subsidies for another year or two, with the understanding that they would be used for transitional assistance to railroad workers and to the state and local governments most acutely affected by the shutdown.

Amtrak might be able to reorganize itself around a few routes, but bankruptcy law does not give railroads as much latitude as companies in other industries have to free themselves of obligations.⁽⁴⁾ In particular, the law does not permit the bankruptcy trustee or the court to impose changes in labor contracts as part of restructuring.⁽⁵⁾ Burdened with the costs of those contracts, Amtrak might be unviable and thus forced to liquidate. A limited set of corridor services might be bought by investors or states, but most corridor and all long-distance service would probably be shut down.

Effects on Economic Efficiency

In the absence of externalities, this approach would lead to an efficient outcome in terms of transportation economics. Only service that was sustainable without federal support would continue, and the cost of that service would be borne by consumers who were willing to pay for it or by state and local governments that deemed the benefits of having rail service worth the cost of subsidizing it. (Currently, 13 states provide Amtrak with a total of $136 million a year to support service to their communities.)⁽⁶⁾ Eliminating federal subsidies for passenger rail would cause a shift to more efficient modes of transportation--bus, airplane, and automobile.

In places where airport or highway congestion is a problem, this option could result in some inefficiency because its market-based approach does not take account of such externalities. However, as noted earlier, available information suggests that passenger rail does not contribute significantly to alleviating congestion on other modes of transportation. This option also neglects possible benefits of having alternative modes available.

Ending federal support for intercity passenger rail service would complicate--though not prevent--the introduction of new service in the future. Some of the domestic technical know-how of producing and operating modern equipment and service might be lost in the absence of current demand for it. If passenger rail service was revived in the future, however, new technologies would most likely be available from foreign sources. Moreover, most proposals for high-speed rail have been made independently of Amtrak and have assumed the construction of new tracks that could safely accommodate fast trains.

Distributional Effects

This option would affect taxpayers, passengers, commuter and freight railroads, and railroad employees. It would save federal taxpayers about $1 billion a year, based on the current rate of subsidy. Passengers would have to turn to buses, airplanes, or cars for the 25 million trips they take on Amtrak each year. Even if all of those passengers crowded onto buses or airplanes, they would increase the demand for those modes only marginally, because those modes already provide 99 percent of the passenger-miles taken on commercial carriers annually.

In the Northeast Corridor, state and local transportation agencies operate commuter rail service along Amtrak's tracks and use Amtrak's stations and other facilities. Currently, the commuter railroads are required to pay Amtrak only for the marginal costs they impose. If Amtrak stopped operating, those agencies would probably find a way to continue running commuter service, but they would most likely have to cover the full costs of infrastructure and operations themselves through increases in fares or subsidies. The federal government could provide transitional assistance to those state and local agencies, or it could allow them to divert existing federal aid for other programs (such as highway and transit programs) to corridor rail service.

Elsewhere in the country, Amtrak provides commuter rail service under contracts with state and local agencies. In the aftermath of Amtrak's threatened shutdown in July 2002, some of those agencies have taken steps to ensure that service can continue in the event that Amtrak no longer meets its contractual obligations. (See the appendix for more details.)

Under existing labor agreements, Amtrak is obligated to give workers who lose their jobs when service is discontinued up to five years' pay and benefits. If Amtrak shut down, it would be liable for about $3.2 billion in such claims, according to a recent estimate by the General Accounting Office.⁽⁷⁾ Whether Amtrak would have enough assets to pay those claims is doubtful. The federal government might choose to pay some or all of them--or to offer other assistance to Amtrak's workers--although, according to the Comptroller General, the government is not liable for any of Amtrak's debt.⁽⁸⁾

A shutdown of Amtrak would also have consequences for the Railroad Retirement System--the counterpart to Social Security for railroad workers. Amtrak's employees contribute about $400 million to the system annually, about 9 percent of its total receipts. The Railroad Retirement Board has estimated that the system would need additional funding by 2024 (or increases in payroll taxes for freight railroad workers or reductions in benefits) if contributions from Amtrak employees ceased.⁽⁹⁾
 

Option II: Reorganize to Build on Passenger Rail's Comparative Strengths

This option would focus federal resources on the Northeast Corridor and other corridors that have the requisite characteristics to take advantage of rail's comparative strengths. The national network of passenger rail service would be eliminated, and the resources saved by discontinuing long-distance trains would be deployed where the payoff is likely to be the greatest: rebuilding and maintaining infrastructure, cars, and engines on high-density corridors that already serve a large number of rail passengers. That shift in focus could make train travel safer and more reliable and could stimulate increased ridership and support for passenger rail. The Northeast and West Coast corridors could serve as demonstration projects for other corridors where the necessary conditions for efficient rail service are emerging.

As noted earlier, trip time is an important determinant of a traveler's choice of mode. For rail, that means not just line-haul time but also access and waiting times. Reducing rail travel time by choosing convenient locations for stations and by providing greater frequency of service could be as effective in wooing passengers as building costly new infrastructure to accommodate high-speed trains would be. In addition, the reliability of schedules (to minimize unscheduled delays) could be enhanced by devoting more resources to maintaining equipment and infrastructure. Greater reliability could increase the demand for train travel--attracting more passengers and inducing them to pay more for their tickets.

This option would build on the comparative strengths of passenger rail service. As discussed in Chapter 4, passenger rail works best where population densities are high and where trip times between cities are no more than about four hours. High densities work to rail's advantage because they produce a large number of potential travelers and because they generate congestion delays that make other modes of transportation relatively less attractive.⁽¹⁰⁾ Rail also has an advantage for travelers whose origin and destination are easily accessible to train stations--which often means accessible to local public transit. (If people taking short intercity trips have to drive any appreciable distance to get to the train station, they are likely to save time by making the entire trip by car.) By focusing on areas where passenger rail is most competitive, this option would ensure that federal subsidies were used more cost-effectively than they are now.

Effects on Economic Efficiency

This approach would promote greater efficiency in long-distance transportation because it would prompt a shift to more cost-effective modes for such travel. For congested corridors, it could lead to greater efficiency than Option I if the size of the subsidies reflected the cost of the congestion externalities (although, as discussed earlier, the size of such externalities is unknown, and there are more-direct ways to address the externalities of one mode than to subsidize another).

This option would also provide a demand for improving short-distance intercity service--which could include upgrading tracks, signaling systems, and equipment. If ways could be found to provide corridor service more efficiently, that could stimulate interest in investing in corridors with emerging demand for rail transport.

Distributional Effects

Eliminating nationwide service would inconvenience some passengers, although relatively few travel long distances by train even on long-distance routes. (Most passengers board those trains and disembark at intermediate points.) Gaps caused by the loss of service could be filled by airlines and intercity bus companies, which serve many more communities than Amtrak does now.

Because passenger trains use the tracks of freight railroads, this policy would not preclude the possibility of resuming passenger service in the future. As long as freight railroads continue to use the tracks, the infrastructure will be maintained to accommodate freight trains. A future decision to bring back passenger service might require investment to upgrade tracks, but rights of way and basic services would already be in place.⁽¹¹⁾

Like Option I, this policy would cause disruptions for Amtrak's workforce. Some workers could be redeployed to corridor services, but others would lose their jobs. Even those who continued to be employed might have to move to new locations and learn new job skills. Depending on the amount of money that lawmakers were willing to provide, those workers could receive some compensation or retraining to mitigate the policy's negative effects.

In terms of the impact on taxpayers, this option could be designed to use the same size federal subsidy as currently; the only difference is that the money would be used more cost-effectively, so taxpayers would get more benefit for the dollar.
 

Option III: Upgrade the Corridors and Keep the Existing National Network

This option would maintain the existing level of service on long-distance routes while providing additional resources for the high-density corridors where rail has an economic advantage. With regard to the corridor investments, the efficiency and distributional effects would be similar to those described in Option II.

Although Amtrak has to pay freight railroads only the incremental cost of using their tracks--and thus avoids the large costs of owning and maintaining railroad infrastructure outside the Northeast Corridor--it has been unable to earn enough revenues to cover costs. Continuing to subsidize long-distance rail service draws resources that could be spent on highways and aviation. This option would measure up favorably in terms of economic efficiency only if the demand for long-distance rail transport increased substantially in the future--something for which there is little empirical support. If that happened, this option would have the benefit of stimulating further investment to improve rail speed, safety, and reliability.

Keeping the national system at current levels of service would mean that none of the beneficiaries of current policy would lose. The additional costs associated with upgrading corridors while maintaining long-distance service would be paid through increases in taxes or cuts in other government programs. If state and local governments were willing to provide subsidies, the impact on the federal budget would be lessened, but that would require those governments to make similar difficult resource-allocation decisions.

A variant of this approach--which could moderate the costs somewhat--would involve reducing some of the on-board services offered on long-distance trains. The expensive-to-operate sleeping and dining cars could be eliminated on the grounds that they are a costly luxury for which there is little justification for taxpayer subsidies. Instead, long-distance trains could provide only the coach and cafe service offered on corridor trains. Alternatively, travelers desiring luxury services could be charged prices high enough to cover the cost. Such measures would not have much effect on people traveling shorter distances on long-distance trains. Long-distance travelers who wanted hotel accommodations could disembark and stay in hotels along the way, catching the next convenient train to their destination.
 

Option IV: Substantially Upgrade Both the Corridors and Long-Distance Service

This option envisions a future in which passenger rail would play a much more prominent role in intercity transportation, compared with other modes, than it does today. The option would substantially upgrade track and equipment for both corridor service and long-distance service across the country. Those upgrades would entail large increases in federal assistance--at least several billion more dollars per year.

This approach could include a program of massive new investment in rail service in the "high-speed rail corridors" designated by DOT in response to legislation. Although most of those corridors do not have the size or density of population necessary for passenger rail to have an economic advantage, those conditions might materialize in the future--particularly if the resources devoted to rail investments were diverted from investments in highways and airports. If policymakers sought to make rail the dominant mode for travel up to several hundred miles, they could focus federal resources to help make that happen.

Effects on Economic Efficiency

Analysis of the available data suggests that this option would not be economically efficient under any of the criteria used to evaluate the various policy choices in this study. The shift in emphasis envisioned in this approach is so large that past or present experience provides little guidance. The many billions of dollars per year needed to implement this option could probably come only from raising taxes, cutting spending, or increasing the federal budget deficit. Within the framework of the Congressional authorization and appropriation processes, such an increase in funding would most likely entail trade-offs among transportation programs--highways, transit, and aviation--and thus would lead to a significant shift of transportation resources from more-efficient modes (highways and aviation) to less-efficient rail.

More than any of the alternatives, this option rests on the idea that rail provides large and unique external benefits in mitigating congestion and pollution and in influencing patterns of regional economic development. For example, rail might stimulate development--or redevelopment--around train stations in central cities and help stem the tide of suburban sprawl. (The evidence on whether sprawl is harmful or beneficial to the economy is mixed, however.)⁽¹²⁾ In addition, this approach would yield the benefit of providing alternative transportation in case a national emergency caused highways, airports, and airways to shut down. By its nature, this option rests on a claim of long-term dynamic gains.

Distributional Effects

The big winners from substantially upgrading passenger rail service nationwide would be railroad workers. Passengers would also gain by having more transportation alternatives. The possible effects on commuter and freight railroads are less clear. If intercity passenger rail operators tried to increase service on existing freight rail tracks, congestion would most likely become a serious problem--as it already is on a few freight lines. Conversely, if track capacity was increased, commuter and freight railroads could benefit.

The big losers would be current and future taxpayers--whose taxes would go up to pay for the increased subsidies--and other modes of transportation, from which federal funds would probably be diverted. If the advocates of large investments in rail are correct, however, future taxpayers would receive compensating benefits from the substantial investment in passenger rail.
 

Conclusions

Seeking a consensus about long-term federal policy toward passenger rail may be unrealistic. If policymakers cannot reach agreement about passenger-rail issues, then Amtrak is likely to limp along as it has for the past 33 years: not quite satisfying anyone, not providing the most valued rail service per dollar of subsidy, but not costing very much relative to the size of the economy and the federal budget.

Legislation governing Amtrak has often had unintended consequences. One example is the requirement in the 1997 Reform Act that the company achieve operating self-sufficiency by December 2002. Although lawmakers were by no means unanimous in desiring that goal or in considering it realistic, Amtrak set out to show that it was on a "glide path" to self-sufficiency by narrowing the gap each year between operating expenses and operating revenues. But it did so in ways that, at least in retrospect, were counterproductive. The focus on that accounting objective led to ill-considered short-term measures that plunged Amtrak into more serious financial trouble.⁽¹³⁾

Among the lessons to draw from that experience is the importance of setting realistic goals for passenger rail, finding measures to assess progress along the way, making midcourse corrections if necessary, and requiring much greater transparency and accountability in return for federal subsidies.