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A Review of Amtrak Operations, Part I: Mismanagement of Food and Beverage Services
NTU Testimony to the House Committee on Transportation and Infrastructure:
August 2, 2012
By Pete Sepp
Chairman Mica, Ranking Member Rahall, and distinguished Members of the Committee, I am most grateful for the opportunity to provide comments on behalf of taxpayers in regard to your hearing today on Amtrak’s food and beverage service. My name is Pete Sepp and I am Executive Vice President for National Taxpayers Union (NTU), a non-partisan citizen group founded in 1969 to work for lower taxes and more efficient, accountable government. NTU is America’s oldest non-profit grassroots taxpayer organization, with 362,000 members nationwide. More about our transportation policy work is available at www.ntu.org.
NTU has long called for significant reforms to the Amtrak passenger railroad, which since its inception in 1971 has received cumulative taxpayer subsidies now approaching $40 billion. As far back as 1976, NTU advocated a “serious reevaluation of the federal government’s policy towards Amtrak.” In 1979 we endorsed a proposal from the Department of Transportation (DOT) that would have reduced Amtrak’s route miles by more than 40 percent all while continuing to serve over 90 percent of its existing passengers. It was projected that DOT’s plan, had it been adopted, would have saved taxpayers nearly $1.4 billion between 1980 and 1984.
In subsequent years, our members have sought changes in the law that have ranged from ensuring more transparency in Amtrak’s financial reporting, to phasing out the most unprofitable routes, to creating a blueprint for eventual commercialization of the government-backed enterprise. One NTU study from 2002 outlined a process that would allow Amtrak to partition its most lucrative assets, giving regional railroads a greater opportunity to develop routes with potential for private-sector (or state-level) investment. Such a plan remains our preferred approach today, even after Congress’s decision to take another direction through passage of the Passenger Rail Investment and Improvement Act of 2008. Its four-year, $10 billion price tag notwithstanding, this law did include some laudable fiscal stewardship initiatives.
Food and Beverage Service: An Unnecessary Burden on Taxpayers
We recount this history as a way of comparison to the topic upon which the Committee has focused today. Like some other aspects of Amtrak, the food and beverage operation has suffered from inconsistent oversight, unrealistic financial planning, and insufficient managerial innovation. Yet, unlike some parts of the national rail service equation, improving the way Amtrak delivers meals and drinks to customers should admit to some relatively straightforward solutions that lawmakers with all manner of opinions on Amtrak’s future can support.
NTU became increasingly concerned with Amtrak’s food and beverage service maladies after the Government Accountability Office (GAO) testified on the subject in June 2005 before the Committee’s Railroads Subcommittee. In GAO’s statement (“Amtrak: Management and Accountability Issues Contribute to Unprofitability of Food and Beverage Service,” GAO-05-761T), the agency’s Director of Physical Infrastructure Issues reported that Amtrak lost an average of nearly $82 million annually on its food and beverage service from Fiscal Year 2002 through Fiscal Year 2004. At the time GAO asserted that Amtrak’s agreement with an outside contractor – which covered stocking and supplying food but not serving it on-board – was structured in a way to furnish “little incentive for the contractor to reduce or contain costs.”
The testimony went on to contrast this arrangement with that of VIA Rail Canada (which directly managed all parts of food and beverage service on a fixed government subsidy) and the Alaska Railroad (which contracted out all parts of the food and beverage service to a private vendor, including on-board duties). One key factor to the success of these operations was, according to GAO, flexible labor policies. More than half of Amtrak’s total food and beverage costs could be chalked up to labor.
While some participants in the hearing questioned assumptions underlying GAO’s testimony, another source affirmed that losses were persistent and pervasive during years that followed. In 2011, Amtrak’s Office of Inspector General (OIG) released a report (“Food and Beverage Service: Further Actions Needed to Address Revenue Losses Due to Control Weaknesses and Gaps,” E-11-03) estimating a Fiscal Year 2010 net shortfall in food and beverage service of $61 million (omitting some indirect costs).
We understand that for Fiscal Year 2011, the Committee has data indicating direct costs for the food and beverage operation of $206 million versus $121.5 million in receipts, for a loss of $84 million. Although this would seem to demonstrate that the profitability picture has worsened since Fiscal Year 2010, we have been told that other data to be released by OIG might be tracking an improvement versus Fiscal Year 2006.
Some Amtrak and labor officials contend it is also important to account for Amtrak ridership figures, which might show different trends when comparing losses on a per-passenger basis. Yet, as GAO testified in 2005, other measurements, such as per-passenger miles, did at the time show a deepening loss trend.
Thus the situation remains troubling, especially given strictures supposedly militating against large losses for taxpayers. As Members of the Committee have no doubt discussed at length, according to a law enacted in 1981 (Title 40, Section 24305(c)(4)), food and beverage service can only be provided on Amtrak trains if the revenues “are equal to or greater than the total costs of such services.”
It may be true that Congress has permitted forbearance from this statute over time, and that there are differences of opinion over what constitutes “total costs.” As far as the latter point goes, however, none of the OIG loss figures cited above include substantial indirect costs such as power or maintenance associated with the dining or café facilities.
In any case, a law directing agencies to exercise prudence with tax dollars should be more than decorative. If that law is proving cumbersome or otherwise ill-suited to current conditions, Congress should clarify or update it, not leave it to languish in a gray area of enforcement for three decades.
Key Considerations for Reform
The June 2005 hearing at which GAO presented its testimony included several other panelists representing Amtrak’s leadership, rail passengers, and the union to which many of Amtrak’s workers belong. Our review of the proceedings indicates there was considerable debate about other facets of the food and beverage service, including:
Some circumstances have changed while others have remained the same since questions like these were raised. Still, the urgency of finding answers has never been greater.
For one, Amtrak’s admirers are touting record-breaking passenger figures that topped 30 million in 2011, representing a more than 30 percent rise since 2001. According to data from the Bureau of Transportation Statistics, this rate of increase handily beats a similar metric for air carriers on U.S. domestic flights over the same period. Yet the fact remains that Amtrak’s total ridership number was nearly dwarfed by that of just one major airline, Continental (the disparity is worse for Amtrak when comparing on a passenger-mile basis).
Meanwhile, consideration should be given to consumer interest in utilizing particular modes of transportation. One imperfect but still useful way to illustrate this is through load factors. BTS reports that in 2010 roughly 80 percent of available seat miles were filled on domestic commercial flights, compared to an equivalent of roughly 50 percent for Amtrak. Airlines have actually reduced “complimentary” meal service on flights in favor of charging passengers, even on those lasting several hours. While the two modes of transportation are not entirely comparable, such a disparity in load factors is not likely to shrink solely by transforming Amtrak’s cuisine – already about one-third subsidized – into culinary masterpieces that require an even bigger boost from taxpayers.
It is likewise important to bear in mind that with a few exceptions (such as Essential Air Service, which also should be reformed), air travel is not “subsidized” in the way rail travel is. Air passengers face a variety of government excises and other charges that comprise roughly 20 percent of an average domestic fare. These are often portrayed to the flying public as “user fees” for air traffic control and security. Airlines pay corporate income taxes into the Treasury if they manage to earn a profit. Amtrak and its customers do not suffer under these same burdens.
Though we would dispute the notion that past comparisons with other railroads are inappropriate, or that stalled attempts at private meal service options with Amtrak make this 2012 hearing superfluous, in our opinion seven years do make a difference. Any of several trends – from innovations in supply chain management, to the increased sophistication of mobile “food truck” concessions, to upgrades in secure cashless payment networks – could impact both the qualitative and the financial pictures for Amtrak’s own food and beverage operation. We therefore commend Members of the Committee for inviting witnesses to today’s hearing who may have insight into such developments.
In addition, Amtrak’s overall fiscal condition remains a major component of GAO’s decision to designate “Funding the Nation’s Surface Transportation System” as a “High Risk” area of federal operations for taxpayers. As GAO notes:
In response to the Passenger Rail Investment and Improvement Act of 2008, which reauthorized federal support for intercity passenger rail, Amtrak and the Department of Transportation (DOT) recently established minimum performance and service quality standards for Amtrak. Amtrak has also taken measures to improve its financial management. …However, these actions are too recent to determine how they will affect Amtrak’s financial performance, the need for federal subsidies, and the way subsidies are targeted to achieve public benefits.
Given GAO’s tenuous assessment of Amtrak’s financial future, Congress should remain vigilant for reform opportunities that preserve managerial flexibility but also protect taxpayers. The railroad’s food and beverage operations amply afford such an opportunity.
Ultimately, however, it is the government’s overall financial condition that makes today’s hearing more relevant than ever before. Since 2005, under two Presidents and four Congresses, gross federal debt as a share of national economic output has jumped by nearly two-thirds. Even if the economy recovers, the projected growth of entitlement and other federal spending programs (including massive capital expenditure demands from Amtrak) will ensure that the entire federal balance sheet remains precarious. In this environment, Congress must scrutinize every part of the budget to identify avenues for fiscal restraint.
Action Item: Move Forward with H.R. 3362
Accordingly, one direction the Committee could take from today’s hearing would be to consider H.R. 3362, the Amtrak Food and Beverage Service Savings Act authored by your colleague Jean Schmidt. This bill, which NTU endorsed in 2011, outlines procedures that would make it more difficult for bureaucracies to evade their responsibility to taxpayers and passengers. The Federal Railroad Administration (FRA) would, with assistance from the General Services Administration, be directed to issue requests for proposal from outside entities to provide food and beverage contracts on Amtrak’s Northeast Corridor, long-haul, and state-run routes. Winning bidders would be selected based on their ability to fulfill requirements at the lowest cost (or highest return) to Amtrak.
This legislation has been derisively characterized by its opponents as “privatization” – a tactic designed to conjure up images of union-busting and profiteering. Upon rational examination, however, H.R. 3362 would not herald a new age of railroad robber barons. Amtrak itself would be permitted to participate in any RFP proceedings, providing a helpful incentive for employees and managers to leverage their own advantages in healthy competition with other providers. Furthermore, FRA would be able to grant exceptions to the RFP requirement if no qualified bidders responded, thereby addressing a past concern among critics of open competition for food and beverage service.
The bill even goes so far as to require FRA to cover anticipated net losses from a contractor whose proposal for a given route is accepted. This provision could be fashioned to answer those who believe food and beverage service need not be profitable in itself, and should instead function as a ticket-sale inducement. Such language, appropriately crafted, could provide latitude for a marketing strategy of this kind in a common-sense manner, by ensuring food and beverage losses are deducted automatically from elsewhere in Amtrak’s fixed appropriation. After all, if Amtrak’s backers demand this type of business tool, then it should function in the way it does for the commercial world … by requiring managers to make decisions on prioritization of resources.
In short, while NTU supports additional safeguards, H.R. 3362 is a balanced piece of legislation that attempts to accommodate many views from various stakeholders in surface transportation policy, as it makes appreciable progress on behalf of taxpayers. Even though the Committee declined to add these provisions to its surface transportation reauthorization bill during mark-up, Members now have the chance to give H.R. 3362 new momentum.
Additional Actions: Amtrak Management
As the Committee deliberates and hopefully exercises legislative options, immediate administrative steps can also be taken on the part of Amtrak’s officials to demonstrate their commitment to more effective management.
For example, a report last month from Amtrak’s OIG (“Human Capital Management: Weaknesses in Hiring Practices Result in Waste and Operational Risk,” OIG-A-2012-14) indicated that in 38 of 50 cases studied, there were “inconsistencies between the employment application and the background investigation which raised employment suitability questions, yet the applicant was hired.” Eighteen of those 38 hires resulted in termination due to performance or discipline problems shortly afterward. In only four of the 50 cases was a background investigation report received in a complete fashion prior to the employee entering service.
In separate findings from last year’s report referenced earlier, OIG noted that “fraud, waste, and abuse are long-standing problems” with providing food and beverage service on trains, involving “falsification of documents to conceal missing food and beverage revenues and inventories.” Between March 2003 and January 2010, OIG identified over 900 cases where Amtrak’s Lead Service Attendants (LSAs) may have engaged in “theft, dishonesty, and policy/procedure violations,” generally entailing “the falsification of documents to conceal missing food and beverage revenues and inventories.”
While no personnel selection process can cull all potential “problem workers” from the process, surely Amtrak should work to immediately improve its use of background investigation information, especially for employees like LSAs who are directly responsible for handling cash.
Furthermore, although OIG praised Amtrak for introducing some checks and balances, the report stated that “internal control weaknesses and gaps … still exist.” Among its suggestions to bring Amtrak’s procedures in food and beverage service up to “industry best practices” were: creation of a dedicated loss-prevention unit, a management-sponsored program aimed at preventing fraud in advance, random management searches of inventories, and (where possible) creation of a cashless payment system much like those instituted for sales on-board commercial aircraft. Amtrak’s leadership agreed with OIG’s recommendations, and with the exception of a cashless system (which management believed could be implemented after introducing a new point of sale plan late this year) provided various timetables to initiate these reforms in late 2011 and 2012. Hopefully today’s hearing will encourage Amtrak to continue making progress on OIG’s advice.
Finally, an October 2011 OIG report (“Passenger Rail Investment and Improvement Act of 2008: Amtrak Has Made Good Progress, but Continued Commitment Needed to Fully Address Provisions,” OIG-A-2012-001) found that “implementing Amtrak’s new financial system is key to completing several remaining provisions” of the 2008 act, pertaining to modernization of financial accounting, planning, and data-gathering on “performance and service quality of intercity passenger trains, including cost recovery.” At that time, in the fall of 2011, OIG was told that debugging and reliability checks could take “several more months.” Here again, NTU is hopeful that this system is now completely operational, since its effectiveness is directly related to remedying some of the underlying weaknesses of food and beverage service. We urge the Committee to monitor this portion of the Passenger Rail Investment and Improvement Act with particular care.
As my remarks noted earlier, NTU has a wide-ranging interest in reforming the nation’s passenger-rail network and moving it toward a model that minimizes federal taxpayer involvement as well as maximizes commercial viability. The proposals associated with such reform carry with them some degree of controversy, but the topic the Committee has explored today should not. For the sake of sound management, solid customer service, and above all, simple accountability to taxpayers, Amtrak’s food and beverage operations require timely, dedicated leadership to ensure their improvement.
Whatever additional steps Committee Members may deem necessary or desirable, NTU urges you to find a bipartisan consensus and move forward with provisions such as those contained in H.R. 3362. Toward this end, NTU and its members pledge their support and maximum effort.
I appreciate the attention and consideration you have given to these views, and look forward to cooperating on solutions with you and your staff in the near future.