Volume 3 Number 19
- This is the fourth in a series of special editions of This Week at Amtrak concerning a report by a bi-partisan forum of congressmen known as the Amtrak Working Group, led by Congressman Richard Baker of Louisiana. In March, this group has issued the most important government document regarding Amtrak since the final report of the Amtrak Reform Council was issued in December of 2002 by Chairman Gil Carmichael and his blue ribbon panel. The title of the AWG report is “Amtrak in the 21st Century.”There are a number of important topics which will be covered in a series of This Week at Amtrak special editions. The topics will not necessarily be in the order as presented in the group’s report.
For the expediency of electronic mail reading, all footnotes and other notations have been removed from text excerpted from the report presented here. The full text, with all information and notations is available on the URPA web site at http://www.unitedrail.org. Every reader is urged to review the full contents of the report in its original context for complete clarity.
- As Amtrak moves to solve these problems, it is important to know and appreciate the history, and what the next generation of Amtrak managers face on a daily basis, trying to save a crippled passenger railroad. This report provides a vast insight into what Amtrak senior officials are facing as they work to correct the mistakes of the past.
- Here is an excerpt from the Amtrak Working Group report.
SECTION III - Review of Reports
Amtrak Working Group Review of GAO’S October 2005 Report: “AMTRAK MANAGEMENT - Systemic Problems require Actions to Improve Efficiency, Effectiveness, and Accountability”
As a preliminary item, the Amtrak Working Group notes that the GAO reported to the Working Group Members and staff that substantial delays in the delivery of documents and information were encountered from Amtrak. This impeded the delivery of the GAO report to Chairman Young by several months. As a result, the GAO report was issued nearly two years after Chairman Young’s letter of request to GAO in December 2003.
At the request of the AWG, GAO compiled a chronology of its year long quest to obtain the documents necessary to conduct its review (see Appendix II). GAO and Committee staff reported one such example of a key data request, Amtrak’s “Spend Analysis.” Despite repeated attempts to obtain this information over several months GAO never obtained the data because Amtrak later determined that they did not in fact maintain such data. In essence, it took several months just for Amtrak managers to determine they did not have these key data reports.
The Amtrak Working Group recognizes that the breadth and depth of the GAO’s work on Amtrak was significant with a large team of GAO personnel devoting hundreds if not thousands of man hours to bring about their final product. While the AWG recognizes that GAO was often frustrated by delays in receiving requested materials from Amtrak, the AWG wants to also acknowledge as well the commendable efforts by many Amtrak individuals in giving their best efforts to comply with GAO’s unprecedented document requests. Given the broad scope of GAO’s report (150 pages) the AWG desires to have the full Committee Membership apprised of the GAO’s executive summary of that work. Accordingly, the GAO executive summary follows as Appendix III.
GAO Report Summary, Analysis, and Questions for Committee Consideration
In the course of doing its report, GAO interviewed Amtrak management officials, including board members, Amtrak’s independent public accountant, KPMG, other freight and commuter railroads as well as VIA Rail Canada. GAO observed Amtrak’s internal control practices, reviewed a sampling of service contracts such as food and beverage; and reviewed a sample of invoices for outside legal services.
The overall results of GAO’s work indicated “systemic” problems in all five areas. It found that:
- Amtrak lacks a comprehensive strategic plan to ensure cost-effective results;
- Amtrak’s financial reporting and financial management is weak, limited, and often unreliable;
- Amtrak’s annual losses are projected to increase 40% from $1 billion to $1.4 billion over the next few years;
- Amtrak’s procurement and acquisition practices lack efficiency, cost effectiveness, and accountability and;
- Amtrak has inadequate oversight of or accountability for performance and results.
Taking each of the five areas that GAO covered in turn, GAO found fundamental lapses in basic corporate “strategic planning” or what is commonly referred to as basic business planning.
Amtrak Needs Fundamental Strategic Business Planning and Corporate Goals.
Concerning strategic planning, covered in Chapter 2 of the GAO report, GAO found that Amtrak has neither a written mission statement nor any corporate-wide goals linked to the pursuit of such a mission statement or business plan. “Also absent is a comprehensive strategic planning process, characteristic of leading organizations GAO has studied.” A basic question the AWG believes Amtrak and for the Committee should follow up on, therefore, is “How does Amtrak define itself as a business?”
Amtrak appeared before the AWG in December via Acting CEO, Mr. David Hughes, who submitted a draft “Recommendations for Executive Action” that seeks first and foremost to identify such a mission statement with corresponding goals. The Acting CEO recently met with Amtrak board members on this topic. Accordingly, some development of a corporate mission statement is under way. Amtrak has provided the AWG with a final copy of their Recommendations for Executive Action which attached as Appendix IV.
GAO noted in its report that Amtrak developed a working product entitled Strategic Reform Initiatives and FY 06 Grant Request in April 2005 containing a “new vision statement that would substantially change how the corporation operates.” However, GAO recognized that the proposal’s implementation would “require both legislative changes” and “extensive changes internally at Amtrak.” In essence GAO points out that Amtrak’s Strategic Reform Initiative is outside the fundamentals of basic business planning because it relies on critical components/assumptions that are not within the purview of Amtrak managers.
The exercise of taking a few baby steps by Amtrak in executing a strategic plan with realistic corporate goals would go a long way to restore Amtrak’s credibility. It would provide confidence that Amtrak is capable of implementing any legislative changes that may become necessary to assist it in pursuit of a well defined set of corporate mission statements and goals.
In 2002, Amtrak stated its goal was to achieve a “State of good repair.” This is a not an acceptable or comprehensive business plan. Amtrak needs to establish a fundamental business plan with a clear mission statement and corporate goals as soon as possible.
To build on the strategic planning efforts already under way at Amtrak, GAO recommended that Amtrak’s president (or current acting president) take the following four steps to create a strategic planning and performance-based management approach:
- Prepare a comprehensive strategic plan with a clearly defined mission, organization goals and objectives that encompass all of Amtrak’s activities, strategies and action plans to achieve those goals;
- Establish annual performance goals that tie to the mission and corporate goals;
- Develop a performance based management system that ensures responsibility for those goals;
- Develop the data systems and processes necessary to monitor, evaluate and report, internally and externally, on progress toward Amtrak’s mission and goals.
These are matters that can be carried out immediately by Amtrak and the AWG urges the Committee to take all necessary action to ensure these GAO recommendations are implemented.
Amtrak’s Financial Reporting and Internal Controls Remain Weak.
GAO found that Amtrak financial reports often lacked relevant information and contained a significant number of errors. Amtrak further has insufficient data mining capabilities, lacking adequate data on what it spends on goods and services. Amtrak’s monthly reports were of questionable reliability with incorrect information that needed substantial subsequent adjustment.
Lack of usable data prevents Amtrak from performing a “spend analysis” which would identify areas in order “to leverage buying power and reduce costs.” GAO recognized that Amtrak has made progress in recent years addressing internal control weaknesses but also found that more could be done to increase transparency and usefulness of information.
Amtrak’s cost data are unreliable. Of $4.3 billion in costs for 2002-03, only $357 million was directly assigned to each train line. Amtrak allocated the other costs to the various lines using arbitrary formulas. GAO found that these formulas were unsupported. Amtrak has made many large accounting errors. In 2002, it reported $44.4 million in depreciation when the real number was $479 million. From 2002-04, Amtrak understated employee benefit expenses by $105 million. This resulted in a loss of $12 million in revenue. Amtrak needs better business tools to more effectively manage and report its finances accurately.
To ensure that Amtrak’s financial reporting and management practices support sound business decisions and the efficient and effective use of federal funds provided to Amtrak, GAO recommended that the Secretary of Transportation direct the Federal Railroad Administrator take the following three actions:
- Require Amtrak to submit a plan, which includes specific actions to be taken with anticipated outcomes and completion dates to improve its financial reporting and management practices;
- Review and provide Amtrak with feedback and direction as necessary on Amtrak’s financial management plan; and
- Monitor Amtrak’s performance under the plan and have FRA report at least annually to Congress on Amtrak’s progress implementing the financial management plan.
These are matters that can be carried out immediately and the AWG urges DOT and FRA to follow GAO’s recommendation.
Amtrak Has Not Developed Adequate Cost Cutting Strategies
Amtrak annual operating losses have increased to over $1 billion and are projected to increase. GAO cited in particular Amtrak’s lack of unit cost data which prevents Amtrak’s ability to identify areas to reduce costs or measure results of cost control efforts. According to GAO, Amtrak needs to expand its use of industry wide cost control practices.
According to the GAO Report Amtrak’s operating losses will increase 40% from $1 billion to over $1.4 billion by fiscal year 2009. Which budget items will contribute the most to spikes in Amtrak costs and what can be done to contain them? Given this dire prediction, further testimony from GAO and Amtrak is needed for Congressional oversight. This oversight will ensure Amtrak’s loses remain as low as possible, maximizing the taxpayer investment in this key component of the nation’s transportation infrastructure. In the meantime the AWG believes steadfast monitoring of Amtrak’s finances is paramount and more accurate monthly reports detailing costs must be submitted.
Improvement of Management Accountability
The GAO report identified three main weaknesses in the bonus awards program at Amtrak. First, criteria to evaluate performance were absent. In one case, David Gunn, Amtrak’s president at the time, received a substantial cash performance bonus, even though the performance goals in his employment contract were missing. The second weakness in the bonus structure is that key terms needed to implement the processes effectively were not defined. Over $500,000 in performance bonuses were given to Amtrak managers, despite the lack of measurable performance goals. Finally, these awards were given even though the company’s financial results had not been finalized. The AWG urges the Committee to closely monitor Amtrak’s implementation of executive compensation and accountability in the future particularly concerning the new forthcoming CEO and senior management at Amtrak.
To ensure that Amtrak can better meet the challenge of increasing its efficiency and reducing its operating costs, GAO recommended that the Secretary of Transportation direct the Federal Railroad Administrator take the following four actions:
- Assess Amtrak’s cost structure and the performance of its assets;
- Establish efficiency and unit cost measures to benchmark Amtrak productivity in order to demonstrate efficient use of Amtrak resources;
- Develop a cost containment strategy that uses the new cost measures and guides the cost reduction actions across all departments;
- Make broader use of industry-wide cost containment strategies, including a spend analysis of goods and services procured, benchmarking, outsourcing and efficiency reviews.
These are matters that can be carried out immediately and the AWG urges DOT and FRA to follow GAO’s recommendation and likewise urges the Committee to take all necessary action to ensure these GAO recommendations are implemented.
Amtrak’s Acquisition Management Needs Reform
Although Amtrak procures $500-$600 million in goods and services per year, it was unable to provide GAO with a detailed comprehensive data on total spending. While labor costs account for nearly 50% of total Amtrak expenditures labor productivity is not tracked. It would be helpful to determine how Amtrak is addressing these issues. Amtrak has no reliable cost information or the ability to track or collect cost information across all departments. This lack of cost information prevents the creation of corporate-wide cost information standards or benchmarks and a companywide cost containment strategy.
GAO examined 61 Amtrak contracts in detail. Of that number 59% of these were no-bid contracts in violation of Amtrak’s own rules. Many of the examined contracts were changed and in some cases these changes were used to turn small jobs into lucrative contracts. For example, a software contract was increased from $60,000 to over $500,000. A contract for the Frequent Rider Loyalty Program was increased from $6 million to over $32 million. Finally, a signal survey services contract went from $45,000 to over $764,000.
GAO’s review of 41 of 91 contracts revealed that Amtrak contract dollar amounts had been increased by individuals who did not have the appropriate level of authority to approve such increases. The majority of these changes, 28, occurred in fiscal year 2003 or later. They included 6 extensions by Amtrak’s marketing department to Amtrak’s frequent rider loyalty program contract which costs increased from “an initial $6 million to over $32 million in payments - an increase of over 500% of the initial contract award.” Payment request tools with a $5,000 limit for the purchases of goods were used by the marketing department to procure $109,000 in professional photography services.
The GAO report reviewed Amtrak’s procurement of outside legal services “because of the relatively large dollar value of the legal services procured–$48 million during a 2-year period, ending September 30, 2003.”
GAO “found several weaknesses in the processes for the procurement and payment of outside legal services that increase the risk that Amtrak is not receiving the best value for these services and is making improper payments for these [legal] services.”
GAO identified several weaknesses in the Amtrak legal department including: 1) a lack of competition in selection of firms; 2) a lack of spend analysis on outside legal services; 3) a lack of documenting terms and conditions of services to be provided; 4) an inconsistent review of invoices for compliance with established billing guidelines; and 5) a lack of segregation of key approval and payment functions.
Amtrak has established Billing Guidelines for Legal Counsel promulgated in 1998. These guidelines anticipate among other things that Amtrak, its auditors, and /or the U.S. Congress would audit the legal fees charged to Amtrak from time to time. GAO did not discuss whether any prior audit of these fees has ever been conducted by the General Counsel’s office in Amtrak. Accordingly, the law department conducts no spend analysis as GAO found and therefore has no breakdown of how much it is spending on copying, research, or other line item costs other than cumulative totals of legal fees and expenses.
GAO reported that “Amtrak used 149 outside law firms in fiscal year 2002 and 157 the following year.” The law department did not purchase legal case management software until 2005 and that was only after inquiries into the law department operations were initiated by Congressional oversight staff and GAO. The GAO report indicates that “an [Amtrak] official acknowledged that the new system will not capture payment attributes, such as hourly rates, hours expended per matter, professional staff levels, and the time period of services covered.”
The AWG notes that Amtrak has spent over $120 million in outside legal fees in the past five years. How much has Amtrak paid in claims? Amtrak’s Legal Department has a substantial set of guidelines that are distributed to outside counsel according to GAO. How well are they followed? The guidelines anticipate audits of outside counsel by Amtrak as well as Amtrak’s Inspector General, the General Accounting Office, and Congress or its Committees. Specifically, the Guidelines state:
“Amtrak may, from time to time, in its sole discretion, audit outside counsel bills. Amtrak is itself audited from time to time by the General Accounting Office, the Company’s own Inspector General and other external auditors, usually at the request of Congress or a Congressional Committee. By undertaking to provide legal services to Amtrak, outside counsel agrees to cooperate fully with all such audits.”
Has Amtrak ever conducted the anticipated audits of its outside counsel? The Amtrak and Department of Transportation Inspector General’s offices are currently doing follow up work on aspects of Amtrak’s legal affairs pursuant to a request from Chairman Don Young and Congressman John Mica. A report is expected sometime in 2006.
To ensure that Amtrak’s acquisition management practices support sound business decisions and the efficient and effective use of federal funds provided to Amtrak, GAO recommended that the Secretary of Transportation direct the Federal Railroad Administrator take the following three actions:
- Increase oversight of acquisition practices at Amtrak by requiring Amtrak to submit an acquisition management plan to FRA;
- Review and provide Amtrak with feedback and direction as necessary on Amtrak’s acquisition management plan; and
- Monitor Amtrak’s performance under the plan and have FRA report at least annually to Congress on Amtrak’s progress implementing the acquisition management plan.
These are matters that can be carried out immediately and the AWG urges DOT and FRA to follow GAO’s recommendation and likewise urges the Committee to take all necessary action to ensure these recommendations are implemented.
More Oversight of Amtrak is Needed.
Developing transparency, accountability, and oversight is critical for achieving operational success at Amtrak according to the GAO Report. Since Amtrak is neither a publicly traded private corporation nor a public entity, it is not subject to many of the mechanisms that provide accountability for results.
Amtrak is not subject to SEC rules and regulations or SEC financial disclosure requirements such as10-K and 8-K reports, which are designed to provide information to the public and investors about a company’s financial condition. In publicly traded companies, these reports serve as a form of oversight and accountability concerning financial condition and business practices. By the same token, Amtrak is not covered by the federal CFO Act, GPRA, FMFIA or other public accounting standards.
Amtrak does make some information available to Congress, although the GAO found that it was not always provided in a timely manner. Each year Amtrak is required to submit to Congress an annual operations report that identifies such things as ridership, revenues, and federal subsidies for each of its intercity routes. Amtrak also is required to annually submit to Congress a general and legislative report that discusses its operations and activities including a statement of revenues and expenditures for the prior fiscal year. GAO found that “this report has been significantly late - repeatedly months after close of the fiscal year and the due date of the report to Congress.”
Oversight mechanisms that do apply to Amtrak, such as management by the board of directors and reviews by the Federal Railroad Administration, are limited or have not been implemented effectively according to the GAO. Amtrak operates as neither a public entity nor a publicly traded private organization. GAO indicated that this hybrid nature has been a key deficiency in holding Amtrak accountable.
The AWG endorses GAO’s conclusion that all stakeholders at Amtrak, its board of directors as well as its management, along with its federal overseers in DOT and Congress need to be more diligent in their oversight of Amtrak. FRA can and should take a more proactive role in managing the Amtrak grant.
Accordingly, the AWG urges the Committee to continue what it has begun in its fundamental recognition of the need for sustained and constant oversight to aid Amtrak as it addresses each of the GAO recommendations. There are no quick fixes but the GAO Report, along with the Amtrak IG Reports, are valuable guideposts in the near term for Congressional oversight.
The AWG recommends that the GAO conduct a comprehensive review of private and public accountability standards and report to the Committee by June 30, 2006, which standards could best apply to Amtrak. We recommend that the Committee use the information from GAO to craft legislation that requires Amtrak to prepare monthly, quarterly and annual financial statements, compliant with Generally Accepted Accounting Principles, which the chief executive officer and the board of directors must certify as to their accuracy and which must be filed with a public agency. Amtrak should be subject to regular accounting scrutiny by an independent auditor with federal enforcement powers, either via the Securities Exchange Commission or an empowered regulator with such specific authority.
The AWG also recommends that separate budget authority be granted by Congress for the Amtrak IG. This is one operating procedure that should be imposed on Amtrak’s annual grant. The IG can no longer be placed in the position of competing for Amtrak operation dollars when he is overseeing and investigating Amtrak management.
- We need to have a serious, quiet talk about an essential subject that has been bandied about in the press over the last few days as if this undertaking were a project conceived and promoted by Satan.Mississippi United States Senators Trent Lott and Thad Cochran have created an earmark in a funding bill for $700 million to be spent to relocate the CSX rail line from literally the shores of the Gulf of Mexico northward to an alignment with existing Norfolk Southern rail lines. The purpose of this project is to virtually eliminate rail service from a number of seaside cities and towns along the hurricane-prone Gulf shore, from Mobile, Alabama to New Orleans. This is an idea which has been considered for a number of years, and it’s a very good idea.
Before you start screaming “free federal monies” for a private company, consider what is at stake with this proposal. The CSX line, originally an L&N line, was put in place a century ago to serve what at the time was a booming local freight business. Today, that line hosts over 40 CSX trains a day, most of them originating in New Orleans at Gentilly Yard, assembled from trains and cars from the north and west, headed for the East Coast, or vice versa. Very little of the business is local business for cities and towns in Louisiana, Mississippi, and Alabama. This vital CSX line is both a superhighway of commerce, and also a national defense line.
We saw, before the final conclusion of Hurricane Katrina last year, CSX, Norfolk Southern, Canadian National/Illinois Central, and Kansas City Southern all scrambling to re-establish their freight lines in and out of New Orleans and Mississippi. All of this work was accomplished amazingly fast, which got vital survival and building supplies back into the hurricane ravaged areas. The railroads efficiently moved goods that could not have easily been moved by trucks or barges. CSX was the hardest hit of all of the railroads, but still managed to get the Gulf Coast line back up and running in about a seven month period, an amazing feat of prior planning, logistics, and reconstruction. The best part of all of this, was that each railroad accomplished its own rebuilding without having its hands out to state or federal governments looking for free government monies. The railroads, along with insurance carriers, simply swallowed the cost of rebuilding, and went about serving a very needy part of America. CSX spent over $250 million to bring its railroad back into service.
Now, politicians want to pay CSX to abandon that same newly rebuilt track. That’s very good. It should have happened a long time ago. The local, state and federal politicians have postured a good bit about getting rid of the noisy and dirty railroad trains that run within a few blocks of the Gulf beaches and expensive hotels and casinos. The trains are considered unsightly and an irritant, especially at the high volume of traffic which flows over the CSX line. That’s all just rhetoric.
The best reason for getting the railroad off the beach is just that - getting a railroad on an outdated right of way to a further inland location which is less prone to the initial storm impact of high intensity hurricanes storming ashore just about every year. Yes, the new line, aligned with the existing Norfolk Southern line will still be prone to hurricanes. But, look at last year’s experience. The Norfolk Southern line which will host the new CSX alignment was back up and running in a matter of a few days; the CSX line took seven months to rebuild. A few miles inland from the beach makes that much difference in a hurricane strike area.
In the big picture, Amtrak would have greater benefit from leaving the CSX line where it is now. But, Amtrak service to the Gulf Coast has been so weak and ineffectual, that loss of direct service to towns and small cities like Bay St. Louis, Gulfport, Biloxi, and Pascagoula is not an unreasonable price to pay for the strengthening of a commercial superhighway of steel rails and even more important, a national defense and national emergency corridor.
Conservatives may think of this as a boondoggle for a wealthy corporation. Liberals may think it is more corporate welfare. The real concept is that this is a much needed realignment of railroad infrastructure that has no large downside. For years, many have hoped the federal government will become interested in the improvement of railroad infrastructure that will benefit both freight and passengers. The “railroad to nowhere” as the project has been cynically dubbed by those who don’t fully understand the project, is an important step in a public and private partnership that can created a high amount of public benefit, with all federal monies accounted for, and no “free” label attached. We have seen other public monies spent to relocate railroads in major metropolitan areas such as Chicago, with hardly a peep of protest. What is good for the public benefit in Chicago is good for the public benefit in Mississippi.