Amtrak Management
Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and Accountability Gao ID: GAO-06-145 October 4, 2005Amtrak has struggled since its inception to earn sufficient revenues and operate efficiently. In June 2002, Amtrak's new president began major efforts to improve efficiency. However, the financial condition of the company remains precarious, requiring a federal subsidy of more than $1 billion annually. Capital backlogs are now about $6 billion, with over 60 percent being attributable to its mainstay Northeast Corridor service. GAO reviewed Amtrak's (1) strategic planning, (2) financial reporting and financial management practices, (3) cost containment strategies, (4) acquisition management, and (5) accountability and oversight.
Amtrak's basic business systems need to be strengthened to help achieve financial stability and meet future operating challenges. Recently, Amtrak's management has taken positive steps to instill some discipline and control over operations. However, fundamental improvements beyond these efforts are needed to better measure and monitor performance, develop and maintain financial controls, control costs, acquire goods and services, and be held accountable for results. Several key themes emerged across all five areas GAO reviewed. Amtrak lacks a meaningful strategic plan that provides a clear mission and measurable corporatewide goals, strategies, and outcomes to guide the organization. Also absent is a comprehensive strategic planning process, characteristic of leading organizations GAO has studied. Also, while Amtrak has recently taken steps to improve its acquisition function, GAO found that some major departments independently made large purchases and did not always adhere to Amtrak's procurement policies and procedures. Amtrak lacks adequate data on what it spends on goods and services, preventing it from identifying opportunities to leverage buying power and potentially reduce costs. Similarly, while Amtrak has recently reduced costs, revenues are declining faster than costs, leading to operating losses exceeding $1 billion annually. These losses are projected to grow by 40 percent within 4 years; no effective corporatewide cost containment strategy exists to address them. Financial reporting and financial management practices are weak in several areas. Financial information and cost data for key operations, while improved, remain limited and often unreliable. For example, Amtrak's on-board food and beverage service lost over $160 million for fiscal years 2002 and 2003. Amtrak's poor management and enforcement of its food and beverage contract (an outside contractor is responsible for procuring and distributing food and beverages for most of Amtrak's trains) may have contributed to this loss. Regarding financial reporting, GAO found that Amtrak had omitted or misallocated key expenses in several areas, substantially understating operating expenses in reports that managers use to assess performance. Similarly, Amtrak has not developed sufficient cost information to target potential areas to cut costs, accurately measure performance, and demonstrate efficiency. Developing transparency, accountability, and oversight is critical for achieving operational success. 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. Mechanisms that do apply, such as oversight by the board of directors and the Federal Railroad Administration, are limited or have not been implemented effectively. Current congressional review of Amtrak offers an opportunity for addressing these transparency and accountability issues.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-145, Amtrak Management: Systemic Problems Require Actions to Improve Efficiency, Effectiveness, and Accountability
This is the accessible text file for GAO report number GAO-06-145
entitled 'Amtrak Management: Systemic Problems Require Actions to
Improve Efficiency, Effectiveness, and Accountability' which was
released on November 3, 2005.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Committee on Transportation and Infrastructure,
House of Representatives:
October 2005:
Amtrak Management:
Systemic Problems Require Actions to Improve Efficiency, Effectiveness,
and Accountability:
GAO-06-145:
GAO Highlights:
Highlights of GAO-06-145, a report to the Chairman, Committee on
Transportation and Infrastructure, House of Representatives:
Why GAO Did This Study:
Amtrak has struggled since its inception to earn sufficient revenues
and operate efficiently. In June 2002, Amtrak‘s new president began
major efforts to improve efficiency. However, the financial condition
of the company remains precarious, requiring a federal subsidy of more
than $1 billion annually. Capital backlogs are now about $6 billion,
with over 60 percent being attributable to its mainstay Northeast
Corridor service. GAO reviewed Amtrak‘s (1) strategic planning, (2)
financial reporting and financial management practices, (3) cost
containment strategies, (4) acquisition management, and (5)
accountability and oversight.
What GAO Found:
Amtrak‘s basic business systems need to be strengthened to help achieve
financial stability and meet future operating challenges. Recently,
Amtrak‘s management has taken positive steps to instill some discipline
and control over operations. However, fundamental improvements beyond
these efforts are needed to better measure and monitor performance,
develop and maintain financial controls, control costs, acquire goods
and services, and be held accountable for results. Several key themes
emerged across all five areas GAO reviewed.
* Amtrak lacks a meaningful strategic plan that provides a clear
mission and measurable corporatewide goals, strategies, and outcomes to
guide the organization. Also absent is a comprehensive strategic
planning process, characteristic of leading organizations GAO has
studied. Also, while Amtrak has recently taken steps to improve its
acquisition function, GAO found that some major departments
independently made large purchases and did not always adhere to
Amtrak‘s procurement policies and procedures. Amtrak lacks adequate
data on what it spends on goods and services, preventing it from
identifying opportunities to leverage buying power and potentially
reduce costs. Similarly, while Amtrak has recently reduced costs,
revenues are declining faster than costs, leading to operating losses
exceeding $1 billion annually. These losses are projected to grow by 40
percent within 4 years; no effective corporatewide cost containment
strategy exists to address them.
* Financial reporting and financial management practices are weak in
several areas. Financial information and cost data for key operations,
while improved, remain limited and often unreliable. For example,
Amtrak‘s on-board food and beverage service lost over $160 million for
fiscal years 2002 and 2003. Amtrak‘s poor management and enforcement of
its food and beverage contract (an outside contractor is responsible
for procuring and distributing food and beverages for most of Amtrak‘s
trains) may have contributed to this loss. Regarding financial
reporting, GAO found that Amtrak had omitted or misallocated key
expenses in several areas, substantially understating operating
expenses in reports that managers use to assess performance. Similarly,
Amtrak has not developed sufficient cost information to target
potential areas to cut costs, accurately measure performance, and
demonstrate efficiency.
Developing transparency, accountability, and oversight is critical for
achieving operational success. 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.
Mechanisms that do apply, such as oversight by the board of directors
and the Federal Railroad Administration, are limited or have not been
implemented effectively. Current congressional review of Amtrak offers
an opportunity for addressing these transparency and accountability
issues.
What GAO Recommends:
GAO makes recommendations in all five areas reviewed. These are
designed to improve the strategic planning process; improve financial
information; strengthen controls over costs and acquisition of goods
and services; and strengthen transparency, accountability, and
oversight. GAO also suggests that Congress ensure that future
legislation for intercity passenger rail service contains clear goals
and stakeholder roles, and incentives for results and accountability.
Department of Transportation officials, in general, agreed with the
report‘s findings. Amtrak‘s president was not convinced GAO‘s
recommendations would achieve the results GAO expects but, in general,
did not comment on specific recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-06-145.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact JayEtta Z. Hecker at
(202) 512-2834 or heckerj@gao.gov.
[End of section]
Letter October 4, 2005:
The Honorable Don Young:
Chairman, Committee on Transportation and Infrastructure:
House of Representatives:
Dear Mr. Chairman:
As requested, this report discusses the National Railroad Passenger
Corporation's (Amtrak) management and performance. This includes
information on Amtrak's strategic planning and a performance-based
framework, financial reporting and financial management practices, cost
containment strategies, acquisition management, and accountability and
oversight. We make recommendations in each of these areas as well
suggestions to Congress about intercity passenger rail policy.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. We will then send copies to other appropriate
congressional committees, the President of Amtrak, and the Secretary of
Transportation. We will also make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-2834 or [Hyperlink, heckerj@gao.gov]. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix III.
Sincerely yours,
Signed by:
JayEtta Z. Hecker:
Director, Physical Infrastructure Issues:
[End of section]
Executive Summary:
Purpose:
In recent years, it has become clear that intercity passenger rail
service has come to a critical juncture regarding its future in the
United States. The National Railroad Passenger Corporation (Amtrak),
the current provider of intercity passenger rail service, continues to
rely heavily on federal subsidies, now totaling more than $1 billion
per year. Since it began operating in 1971, Amtrak has received federal
subsidies totaling about $29 billion. Given the precarious financial
condition of the corporation, there is a wide diversity of proposals
for what might be done to provide more self-sufficient and efficient
intercity passenger rail service, ranging from limiting Amtrak's role
and introducing competing rail service to keeping Amtrak intact and
providing increased funding to improve its equipment and
infrastructure.
To help inform congressional deliberations on these issues, the
Chairman, House Committee on Transportation and Infrastructure, asked
GAO to examine Amtrak's management and performance. GAO's review
focused specifically on aspects of Amtrak's management and financial
operations. The five areas that GAO addressed, which collectively
provide insight into the performance of Amtrak, include (1) strategic
planning and a performance-based framework, (2) financial reporting and
financial management practices, (3) cost containment strategies, (4)
acquisition management, and (5) accountability and oversight.
To address these issues, GAO reviewed documents on Amtrak's strategic
planning process and preparation of goals and objectives, reviewed
control activities related to Amtrak's financial reporting and the
design of internal control policies over certain expenses, reviewed
financial reports and obtained data on Amtrak's operating costs, and
reviewed Amtrak's procurement policies and procedures. GAO also
reviewed legislation relevant to the management and governance of
Amtrak, including Amtrak's articles of incorporation and bylaws. GAO
reviewed recent grant agreements between Amtrak and the Federal
Railroad Administration, observed internal control practices over
certain operating expenses, and evaluated selected contracts for the
acquisition of various services for compliance with procurement
policies and procedures. Finally, GAO interviewed Amtrak officials
regarding the five areas addressed in this report, discussed management
and accountability issues with members of Amtrak's board of directors,
and interviewed officials at selected freight and commuter railroads. A
more complete discussion of GAO's objectives, scope, and methodology is
presented in chapter 1 of this report.
Background:
Amtrak, although federally established and unable to operate without
substantial federal subsidies to remain solvent, is not a government
agency, but rather a private, for-profit corporation. It currently
operates a 22,000-mile network providing service to 46 states and the
District of Columbia, mainly using track owned by freight railroads.
Amtrak also owns about 650 miles of track, primarily on the Northeast
Corridor between Boston, Massachusetts, and Washington, D.C. Amtrak
served about 25 million passengers in fiscal year 2004 and about two-
thirds of Amtrak's ridership takes trains on the Northeast Corridor.
Its financial condition remains precarious, and, according to Amtrak's
management, the corporation will require billions of dollars to improve
infrastructure for operation of the nationwide intercity passenger rail
service.
Amtrak's financial struggles have led to numerous changes in corporate
direction and organizational structure. Amtrak has also been influenced
by requirements in the Amtrak Reform and Accountability Act of 1997
that it become operationally self-sufficient by 2002--a goal Amtrak did
not meet. In 2002, under the direction of a new president, Amtrak
established a more centralized, functional organization; adopted a new
approach to management; and stated its intent to focus on financial
stability and achieving a "state of good repair."[Footnote 1] As a
centerpiece for these changes, Amtrak's president adopted a
multipronged management approach that is based on the following five
tools--all of which were designed to instill a sense of discipline to
company operations:
* department goals that are to be a basis for Amtrak's budget;
* defined organization charts that identify a clear chain of command
and are to be used to control labor costs;
* a capital program of specific projects and production targets needed
to stabilize the railroad;
* a zero-based operating budget with a focus on maintaining or reducing
the budget; and:
* monthly performance reports, which are to be Amtrak's primary tool
for reporting on company performance results, internally and
externally.
In April 2005, as GAO's report was being prepared, Amtrak's management
and its board of directors released a proposed set of strategic reform
initiatives--containing, among other things, a new vision statement--
that would substantially change how the corporation operates. Among
other things, this proposal would give states a larger role in deciding
what services to offer and introduces greater potential for competition
in providing intercity passenger rail service. The future of this
proposal is largely unknown, and implementation will require both
legislative changes (such as the federal government either assuming
annual debt service payments or eliminating Amtrak's debt burden as
well as removing Amtrak from the railroad retirement system) and
extensive changes internally within Amtrak.
Results in Brief:
At a time when Amtrak is at a critical crossroads, GAO found that the
corporation faces major challenges in instituting and strengthening its
most basic business systems. Fundamental improvements are needed in the
way Amtrak measures and monitors performance, develops and maintains
financial controls, controls cost, acquires goods and services, and is
held accountable for results. Although Amtrak management has taken
steps to instill discipline and control over its operations, the
corporation still lacks effective operating practices characteristic of
well-run organizations, whether public or private. Regardless of the
future role that the administration and Congress may determine for
Amtrak, major improvements are needed in the corporation's strategic
management and cost controls. The following are highlights of the
progress made and improvements needed in each of the five core areas
GAO reviewed:
* Strategic planning and management: Amtrak has improved its management
approach in recent years through the implementation of such things as
organization charts and operating budgets and the monitoring of
employment levels (called headcount). However, it lacks a comprehensive
strategic planning process and performance-based framework
characteristic of leading organizations (including government entities
and private corporations) that GAO has studied in the past. For
example, Amtrak lacks a meaningful strategic plan that articulates both
a comprehensive mission statement and corporatewide goals to indicate
how Amtrak plans to accomplish its mission. Amtrak has developed a
capital plan (which it calls a strategic plan) that focuses on the
corporatewide goal of achieving a state of good repair, but it lacks a
strategic plan that includes measurable corporatewide goals,
strategies, and outcomes to guide the entire organization. In addition,
without a mission or corporatewide goals, Amtrak cannot ensure that the
annual department-specific goals developed by Amtrak's various
departments support or improve overall corporate performance. Although
Amtrak's management tools provide a framework for developing annual
goals and budgets, these tools do not provide a long-term, integrated
approach for managing the corporation and focus on outputs, not
outcomes. Amtrak also needs a performance-based approach to its
strategic planning process--that is, developing action plans for
improving performance, generating key data to monitor performance, and
using incentives to ensure responsibility and accountability--to
achieve goals. As part of its newly proposed reform initiative, Amtrak
plans to release a strategic plan in the fall of 2005, which will
include a mission and goals for the company. This is a step in the
right direction, but challenges, such as the need for congressional
action and the ability to keep employees focused on long-term change,
exist to fully implementing these initiatives.
* Financial reporting and financial management practices: In recent
years, Amtrak's management has placed increased emphasis on providing
reliable financial information, and progress has been made. For
example, Amtrak's independent public accountant (IPA) previously
reported multiple areas of significant internal control weaknesses as
part of an annual audit of Amtrak's financial statements. For fiscal
year 2004, the IPA reported that much progress had been made. In
general, however, Amtrak has not implemented "preventive controls"
necessary to better ensure the production of relevant and reliable
financial information for management and stakeholders. GAO found that
improvements are needed in the usefulness of information provided to
management and stakeholders, in the design and implementation of
internal control practices over certain areas of expense, and in
Amtrak's efforts to strengthen financial management practices. For
example, one key report used by Amtrak's management on a monthly basis
omitted depreciation from each train route and business line, which
totaled $606 million in 2003 and $479 million in 2002; this omission
substantially understated reported expenses, which, in turn, hindered
making a meaningful analysis of operating results and an assessment of
performance. In another instance, as the result of omitting certain
accrued benefit expenses in allocating such costs, employee benefits
were understated by more than $100 million, and Amtrak failed to
adequately document more than $500,000 in supplemental retirement
benefits awarded to Amtrak executives.
* Cost containment: Amtrak has instituted measures (such as controls
over headcount levels) designed to contain costs, and its efforts have
had some success. However, Amtrak's annual operating losses have grown
and are now over $1 billion annually. These losses are projected to
rise about 40 percent over the next 4 years. Efforts to contain costs
have been limited for two main reasons. First, the company has not yet
developed a comprehensive, corporatewide cost containment plan that
provides cost reduction goals, identifies how those goals are to be
achieved, and provides for continuous improvement on those goals.
Second, Amtrak has not fully developed unit cost and asset performance
metrics that could help reduce costs and demonstrate efficient use of
its resources. As part of its cost containment strategy, GAO found that
Amtrak also needs to continue to use and seek to expand its use of cost
reduction practices prevalent in the railroad industry--such as
benchmarking and efficiency reviews. This would allow Amtrak to compare
its practices with those of more efficient railroads and other
transportation sector businesses to help decrease Amtrak's operating
costs. Absent any changes, continued and increasing federal
subsidization to keep the company solvent will be needed.
* Acquisition management: Amtrak's system for acquiring goods and
services--when compared with the best practices of leading
organizations--lacks critical elements needed to ensure efficiency,
cost-effectiveness, and accountability. In recent years, Amtrak has
taken steps to centralize its purchasing function to provide more
authority and oversight and Amtrak has recently published a procurement
manual, which provides detailed guidance on acquisition policies and
procedures. However, some Amtrak units have made spending decisions and
purchased services independent of the procurement department and
sometimes in violation of the company's stated procurement policies and
procedures. In addition, GAO's review of certain contracts, for the
purchase of such things as advertising and professional services,
showed a high frequency of noncompetitive contracts--that is, either
sole or single source awards--and questionable review and approval
practices. Further, review of expenditure data and selected
transactions revealed the inappropriate use of a purchasing tool
(designed for small purchases of $5,000 or less) for which standards
were clearly delineated. Finally, GAO found that Amtrak's knowledge and
information systems related to procurement are fragmented and have
limited ability to produce useful spending information. As a result of
these problems, Amtrak cannot ensure that it is receiving the best
value when acquiring goods and services.
* Accountability and oversight: Although Amtrak operates in the public
spotlight, few formal accountability mechanisms apply, and those that
do have not been effectively used. Amtrak's position as an organization
that is neither a publicly traded private corporation nor a public
entity means that it is not subject to many of the mechanisms that
provide information to stakeholders or hold the company accountable for
results. For example, Amtrak is not subject to either Securities and
Exchange Commission rules, regulations, or public disclosure
requirements, nor is it accountable to shareholders holding common or
preferred stock since, by law, shareholders have little or no role in
selecting members of the board of directors. Accountability and
oversight mechanisms that do apply, such as oversight by the board of
directors and the Federal Railroad Administration, are limited or have
not been implemented effectively.
Principal Findings:
Amtrak Lacks a Comprehensive Strategic Plan and a Performance-Based
Approach to Better Ensure Cost-effective Results:
Leading organizations GAO has studied--both public and private--use
strategic planning as a foundation for articulating a comprehensive
mission and goals for all levels of the organization. This effort
involves several important elements. (See fig. 1.) The first element is
developing a comprehensive mission that employees, clients, and other
stakeholders understand and find compelling. Leading organizations also
seek to establish clear hierarchies for performance goals and measures
for each organizational level linking them to overall corporate goals.
Without clear, hierarchically linked performance measures, managers and
staff throughout the organization will not have straightforward road
maps showing how their daily activities can contribute to attaining
corporatewide goals and mission.
Figure 1: Key Elements of a Strategic Plan:
[See PDF for image]
[End of figure]
In contrast, Amtrak has not yet developed a meaningful strategic plan
that includes critical elements characteristic of leading organizations
we have studied. Specifically:
* No comprehensive mission statement. Amtrak has no comprehensive
mission statement to provide and communicate a clear focus for the
company. Amtrak's president believes that the administration and
Congress are responsible for developing a mission, but federal law
already articulates the company's purpose--to operate a national rail
passenger transportation system. As any public or private organization,
Amtrak is responsible for taking this purpose and establishing a
clearly defined mission, a critical task that neither the management or
the board of directors has yet accomplished.
* Limited corporatewide goals. Although Amtrak's management has
established a goal for the corporation--returning the railroad to a
state of good repair--this goal is too narrowly focused and does not
encompass all corporate activities. For example, Amtrak's goal of a
state of good repair and related capital plan address infrastructure
aspects of the organization, such as repairing bridges and rails.
Although this plan guides Amtrak's capital function, Amtrak lacks a
strategic plan that articulates measurable corporatewide goals,
strategies, and outcomes for other important aspects of its operations,
such as human capital, and other lines of business, such as commuter
rail and reimbursable services.
* Annual goals are not tied to comprehensive mission or corporatewide
goals. Absent an overall comprehensive mission and corporatewide goals,
Amtrak's departments develop goals based on their activities and the
priorities of Amtrak's president. Without a process for developing
department-specific goals that relate to a comprehensive mission and
corporatewide goals, departments cannot effectively assess or
communicate whether their goals improve overall company performance.
Moreover, the departments' abilities to establish and achieve goals are
hampered by a lack of data analysis and Amtrak's organizational
restructuring. Amtrak officials said that, in some cases, these goals
are an expression of "aspiration," rather than a realistic target.
* Management tools focused on the short term, not the long term.
Although Amtrak's management tools provide a framework for developing
annual goals and budgets, these tools do not provide a long-term,
integrated approach for managing the corporation, and they focus on
outputs, not outcomes. Without a strategic plan to guide all business
activities, Amtrak does not have a process for integrating the efforts
across the organization or for assessing and addressing company risks.
Moreover, without a strategic plan, Amtrak does not have overall
corporate performance measures and cannot establish a clear
understanding of what it is trying to accomplish with its resources and
company activities.
Leading organizations GAO has studied also adopt a performance-based
approach to ensure that all activities and individuals are working
toward and achieving results. Although Amtrak's key departments are
making some progress in this regard, GAO identified a number of ways in
which they could improve. Specifically:
* Develop specific strategies and action plans. Amtrak's key
departments do not consistently develop specific strategies or action
plans for critical actions and milestones to achieve goals. For
example, in addressing train delays, one department was still in the
process of developing a plan that deals mainly with mitigating
passenger-loading problems and did not develop documented strategies or
actions for other problems that affect on-time performance, such as
freight or commuter train interference.
* Provide performance-based incentives. While Amtrak managers say they
hold their managers accountable for achieving department goals, Amtrak
does not have a pay-for-performance management system to provide
incentive for achieving goals. Although Amtrak has proposed such a
system to its board of directors, the board has concerns about the
system, such as which management positions would be eligible and the
operational and financial metrics to make merit pay and bonus
decisions.
* Improve performance-based data. Amtrak's ability to monitor,
evaluate, and report on performance is hindered by its data systems and
reporting processes. This was a theme that was common across virtually
every area GAO reviewed. For example, although the transportation,
engineering, and mechanical departments report on their goals in a
quarterly review, they do not report on all of their goals in this
report. For example, the transportation department did not report on
three of its eight goals at the end of fiscal year 2004.
In April 2005, the board, in conjunction with Amtrak management, issued
a set of strategic reform initiatives for Amtrak, which is a first step
toward developing a more strategic approach for the company. These
initiatives include a proposed vision for Amtrak and for the future of
intercity passenger rail and a proposed transition to planning and
reporting by lines of business. Amtrak intends to release a new
strategic plan for fiscal year 2006, which would ultimately result in
the development of a comprehensive mission and goals for each line of
Amtrak's business. Department goals would then be aligned to each line
of business, according to an Amtrak official. The proposed changes in
planning and reporting could provide Amtrak with a more all-
encompassing approach, but fully implementing these initiatives
requires overcoming major challenges. For example, as the chairman of
Amtrak's board noted, legislative action is required to implement many
aspects of the plan. These legislative actions include, among other
things, the federal government either assuming Amtrak's annual debt
service payments or eliminating Amtrak's debt burden (about $3.8
billion in short-and long-term debt at the end of fiscal year 2004) as
well as transitioning Amtrak out of the railroad retirement system.
Amtrak officials also noted that major challenges internally within
Amtrak, including the time and effort needed to implement these
initiatives and the ability to keep its employees focused on long-term
change, even with the uncertainty of Amtrak's future, may hinder
implementation of the new planning process.
Financial Management Practices Could Better Support Amtrak's Decision
Making:
GAO examined the following three aspects of Amtrak's financial
management and accountability framework: (1) the usefulness of
financial information provided to management and external stakeholders,
(2) the design of internal control over selected areas of expense, and
(3) Amtrak's efforts to strengthen financial management practices.
Opportunities for improvement are present in all three of these areas.
* Although Amtrak has made progress in establishing a more systematic
process to provide financial information to management and
stakeholders, much of the financial information it uses for day-to-day
management purposes lacks certain relevant information or is of
questionable reliability. Amtrak's monthly performance report, which
Amtrak's president had deemed a "critical" document for managing the
company, demonstrated this issue in several respects. For example, the
monthly reports did not include relevant information on Amtrak's food
and beverage revenue and expenses, even though food and beverage
financial losses were over $160 million for fiscal years 2002 and 2003.
Also, information in another key report was often of questionable
reliability. For example, data reported in monthly reports subsequently
required significant adjustments--requiring up to 7 months to complete-
-to correct errors in amounts before financial statements could be
issued. As a result, the reliability of the information provided to
managers and stakeholders during the fiscal year was limited.
* GAO reviewed internal control practices in two areas--employee
benefit expenses and food and beverage service--and found weaknesses in
both. Employee benefits, for example, as reported in monthly
performance reports, were understated by more than $100 million because
certain accrued employee benefit expenses were not considered. Further,
documentation was inadequate to fully support more than $500,000 of
supplemental retirement benefits awarded to Amtrak executives. In the
area of food and beverages, poor enforcement of contract provisions may
have contributed to Amtrak's spending $2 for every $1 in revenue from
on-board service. For example, Amtrak has never required the contractor
supplying food and beverages for its trains to submit an independently
audited annual report of budget variances for key items, even though
the contract requires such a report. Also, Amtrak has never audited the
contractor's purchase data--which is allowed under the contract--to
ensure that the contractor is passing along any discounts or rebates
the contractor receives on items purchased.
* For fiscal years 2003 and 2002, Amtrak's IPA reported multiple areas
of significant internal control weaknesses as part of an annual audit
of Amtrak's financial statements. However, for fiscal year 2004, the
IPA reported that much progress had been made and only one significant
weakness remained--involving accounting for capital assets.[Footnote 2]
Amtrak's progress in addressing its control weaknesses is an important
achievement. In general, however, its efforts have been achieved
primarily through the implementation of manual detective controls
instead of preventive controls. Thus, improvements made by the end of
fiscal year 2004 enable the production of useful financial information
after the fact--typically, 5 to 6 months after the end of the year.
However, until effective controls are established that prevent errors
in financial information and address their underlying causes, Amtrak's
ability to produce relevant and reliable financial information for
management and stakeholders to use for decision making will be
hampered.
Despite Increasing Operating Losses and Federal Subsidies, Amtrak Has
Not Developed a Comprehensive Cost Control Strategy:
Amtrak's annual operating loss was over $1 billion in fiscal year 2004
and is projected to increase about 40 percent to over $1.4 billion by
fiscal year 2009. (See fig. 2.) Amtrak has made efforts to cut costs,
reducing its total expenses by 9 percent (in constant dollars) from
fiscal years 2002 to 2004 by reducing headcount and introducing
organizational efficiencies, among other things. Amtrak reduced its
total employment by about 3,500 employees and reduced its labor costs
by about $200 million over the same period. Amtrak is working to reduce
its costs through, among other things, labor negotiations with its
unions; the introduction of health care contributions from its
employees; the use of outsourcing for several of its mechanical,
engineering, and other functions; and the creation of unit cost metrics
in some of its operating departments to measure productivity. During
the same period, Amtrak's revenues have decreased by 16 percent. In
addition, Amtrak's projected losses may be understated, since they do
not include interest expenses that are reported in its financial
statements and rely on $377 million in reduced costs that Amtrak
estimates could be achieved as a result of operating efficiencies and
benefits from capital investments it plans to undertake in fiscal years
2005 to 2009. Amtrak also faces serious challenges to reducing costs in
the future. For example, Amtrak's labor costs, which account for almost
50 percent of its total expenditures, are expected to increase over the
next 5 years, putting more of a burden on Amtrak to reduce its other
costs in order to significantly reduce its operational costs. These
projections also do not take into account the removal in April 2005 of
its Acela trainsets from service for an undetermined period due to
brake-related problems. The absence of the Acela trainsets could have a
significant impact on Amtrak's fiscal year 2005 revenues.
Figure 2: Amtrak's Constant Dollar Operating Losses and Federal
Operating Subsidy, Fiscal Years 2002 to 2009:
[See PDF for image]
Note: Amounts are in constant 2004 dollars. Fiscal years 2005 to 2009
figures for operating loss and federal subsidy are Amtrak projections.
Operating losses from fiscal year 2002 to 2004 and projected losses
from fiscal years 2005 to 2009 do not include interest expenses.
[End of figure]
Amtrak's cost containment efforts have had limited success for two main
reasons. First, Amtrak has not developed a comprehensive, corporatewide
cost containment plan. Management's focus has been on creating and
monitoring its yearly operating budget and managing headcount levels,
leaving its various departments to decide on how much emphasis, if any,
to place on other cost containment actions. Second, Amtrak has not
fully developed unit cost and asset performance metrics that could help
reduce costs and demonstrate efficient use of its resources. Amtrak
officials said that such factors as recent increases in ridership and
overhauls completed, when combined with recent decreases in employees
(headcount), show that the company is "doing more with less." However,
a significant portion of the reduction in headcount came as a result of
termination of a commuter rail service and mail and express freight
services--not necessarily from finding efficiencies while offering the
same level of service. Without unit cost or asset performance
statistics, Amtrak is less able to understand and measure its
performance as well as demonstrate progress toward being more
efficient. Some of Amtrak's departments are beginning to develop cost
metrics, but they are encountering difficulty in obtaining detailed and
reliable data as well as baseline statistics for trend analyses. Amtrak
has some corporatewide efficiency metrics, such as ticket and passenger
revenue per passenger mile, but these metrics do not demonstrate asset
performance, such as output per unit of labor or per gallon of fuel
consumed. The latter would give better insight into how efficiently
Amtrak is using its assets.
Amtrak also needs to continue and expand its use of widely used
industry cost containment practices--such as benchmarking, outsourcing,
and efficiency reviews. Doing so would allow Amtrak to compare its
practices with those of more efficient railroads and other
transportation sector businesses to help decrease Amtrak's operating
costs. Regarding benchmarks, freight railroads GAO contacted compare
their cost containment strategies against those of their competitors as
a means of incorporating best practices into their strategies. While
some of Amtrak's departments have used benchmarking, other departments
can use this technique to compare their performance against the other
companies in the industry. With respect to outsourcing, Amtrak has
outsourced several functions, including some maintenance of equipment
and maintenance of way functions, and its commissary operations, and it
has recently identified other noncore functions as possible candidates
for outsourcing. However, Amtrak management has recognized that it must
develop accurate cost statistics to effectively compare in-house costs
with the costs of outsourcing. With respect to efficiency reviews,
managers from freight railroads told us that they hire operational and
process engineers and use cross-functional teams to study key aspects
of their operations, such as internal processes, route schedules, and
yard operations, to find out how to improve these functions and track
improvement efforts. In 2001, an outside consulting firm reviewed
Amtrak's operations and recommended numerous actions. However, not all
of these findings were implemented, nor were any resulting savings
tracked, because changes in Amtrak's leadership and a subsequent
reorganization changed Amtrak's focus, according to Amtrak officials.
Amtrak's Acquisition Function Is Limited in Promoting Efficiency, Cost-
effectiveness, and Accountability in Acquiring Goods and Services:
Amtrak's system for acquiring goods and services, when evaluated
against a set of best practices that typify organizations with highly
successful systems, is missing critical elements needed to ensure
efficiency, cost-effectiveness, and accountability. In recent years,
Amtrak has made improvements in this area, strengthening its purchasing
function by (1) centralizing as well as elevating this function to the
same level as other key departments, (2) issuing a procurement manual
to communicate company procurement policies and procedures, and (3)
performing outreach to major company departments to clarify and provide
training on certain procurement policies and procedures. Nonetheless,
as noted below, GAO identified several opportunities for improvement.
First, Amtrak has not yet succeeded in fully integrating the
procurement function and adopting a more strategic approach to
acquisitions throughout the company. When planning acquisitions of
goods and services, departments that need these goods and services have
sometimes functioned independently of the procurement department. This
does not allow leveraged buying and may have resulted in Amtrak paying
more than necessary for some purchases. For example, in fiscal year
2004, the Amtrak technologies department issued and signed a contract
modification expanding an existing software contract without the
procurement department's knowledge and in violation of Amtrak's
procurement policy. This expansion increased the value of the contract
by $200,000.
Second, while the procurement department has made efforts to become
more involved with other departments' procurement of goods and
services, it has not adequately communicated and enforced policies and
procedures intended to promote competition, obtain best prices, and
protect the financial interests of the company. Amtrak only recently
(June 2005) issued a comprehensive procurement manual that provides
detailed guidance for procurement staff to follow when awarding
contracts, and, basically, some departments, acting independently in
purchasing goods and services, have not conformed to Amtrak's own
procurement policies and practices. The lack of clear direction and
accountability until recently may have contributed to goods and
services being acquired noncompetitively--that is, either sole or
single source contracts--and independently of the procurement
department. For example, GAO reviewed in detail a nonprobability sample
of 61 contracts that had expenditures in 2002 and 2003, a substantial
number (36) were awarded noncompetitively, and these contracts often
did not include sufficient justification, which was required for a
noncompetitive award. Further, review of selected transactions revealed
the inappropriate use of a purchasing tool (designed for small
purchases of $5,000 or less) for which standards are clearly
delineated. In some instances, this tool was used for purchases of over
$100,000. Additionally, some departments have authority to acquire
services independent of the procurement department. GAO's review of one
of these services--acquisition of outside legal services--showed
weaknesses indicating that Amtrak may not be receiving the best value
for the money and may be making improper payments. Problems with
respect to outside legal services included lack of competition, lack of
spend analysis, lack of specificity in documenting terms and conditions
of the services to be provided, inadequate review of invoices, and
inadequate supporting documentation for payments.
Finally, a poor knowledge and information system limits Amtrak's
ability to identify opportunities for potential cost savings. Simply
put, Amtrak cannot accurately determine how much it spends on goods and
services, thereby missing opportunities to better leverage buying power
and reduce overall spending. To make strategic, mission-focused
acquisition decisions, leading private and public sector organizations
establish spend analysis systems that provide knowledge about which
goods and services are being acquired, the amount spent, and who is
buying and supplying them. This knowledge allows organizations to
identify opportunities to leverage buying, save money, and improve
performance. In contrast, Amtrak's knowledge and information system
does not produce the data needed to enable Amtrak to identify strategic
sourcing opportunities. Such data could enable Amtrak to leverage its
buying power and potentially reduce procurement costs.
Amtrak Does Not Have Adequate Oversight of or Accountability for Its
Performance and Results:
Fundamental changes are required to implement the needed improvements
GAO identified with respect to measuring and monitoring performance,
developing and maintaining financial records and internal controls,
controlling costs, and procuring goods and services. However, as Amtrak
focuses much of its attention on restoring its infrastructure to a
state of good repair, there is a serious question regarding whether the
company will sufficiently address these areas.
Oversight and accountability mechanisms to better ensure that needed
improvements are addressed are limited or have not been exercised
effectively. A major contributing factor is the unusual situation under
which Amtrak operates--as neither a publicly traded private corporation
nor a public entity. This means that Amtrak is not subject to
accountability and oversight mechanisms by which other private or
public entities would have to abide. For example, unlike publicly
traded private corporations, Amtrak is not subject to accountability to
stockholders or financial markets or to Securities and Exchange
Commission rules, filings, and public disclosure requirements. Also,
unlike public entities, Amtrak is not subject to the Government
Performance and Results Act of 1993, the Federal Managers Financial
Integrity Act of 1982, or various other reporting and accountability
requirements established in law or regulation. Another factor is that
existing oversight mechanisms are not working or are limited in scope.
For example, although Amtrak has a board of directors with oversight
authority, the board has been operating with less than a full
complement of positions filled for considerable periods of time and
conducts little formal oversight of performance. Also, federal
regulators, such as the Federal Railroad Administration, have exercised
limited oversight of Amtrak's operations or overall performance.
Both the administration and Amtrak have proposed reforms that would
change the basic operating structure, establish competition for
intercity rail, and provide a different method for distributing federal
subsidies. The effect of these changes, if implemented, on improving
oversight and accountability mechanisms is unknown at this juncture.
Reaching agreement on to whom Amtrak is accountable, however, is a
critical first step. Without it, inadequate accountability will
continue, and the issues raised in this report may not receive the
visibility needed to resolve them. The board and other key stakeholders
can take actions within the current operating framework, such as
developing policies and procedures to increase oversight and
accountability.
Congress has a central role in this issue. It created Amtrak and has
continued to subsidize its operations over time. Amtrak's
reauthorization expired in September 2002, and Congress is now
considering what, if any, changes are needed in the structure and
financing of intercity passenger rail. As part of this reauthorization,
Congress will also play a role in determining the type of oversight to
be provided and the accountability mechanisms to be used to ensure that
the desired results and outcomes are achieved. As we reported in April
2003, the key components of a framework for evaluating federal
infrastructure investments include (1) establishing clear,
nonconflicting goals; (2) establishing the roles of government and
private entities; (3) establishing funding approaches that focus on and
provide incentives for results and accountability; and (4) ensuring
that the strategies developed address the diverse stakeholder interests
and limit unintended consequences. We continue to believe these
components are important in evaluating and establishing federal policy
toward intercity passenger rail.
Matters for Congressional Consideration:
As part of the deliberation about the future of Amtrak and intercity
passenger rail, Congress may wish to consider establishing a national
policy for intercity passenger rail, and determining the appropriate
role for Amtrak by ensuring that reauthorization or reform legislation
(1) establishes clear, nonconflicting goals; (2) establishes the roles
of both the federal and state governments as well as private entities;
(3) establishes funding approaches that focus on and provide incentives
for results and accountability; and (4) provides that the strategies
developed address the diverse stakeholder interests and limit
unintended consequences.
Recommendations for Executive Action:
GAO is making detailed recommendations to Amtrak in all five areas
examined. These recommendations are designed to improve (1) strategic
planning to better guide the company, (2) financial information and
financial management practices for better management of operations and
for transparency internally and with key stakeholders, (3)
corporatewide cost containment efforts to maximize efficiency and
minimize operating losses, (4) acquisition of goods and services to
ensure that the company gets the best value for the money, and (5)
accountability and oversight mechanisms to better ensure that needed
management improvements are sufficiently addressed and resolved and to
provide needed transparency among key internal and external
stakeholders. Specific recommendations in each area are found at the
end of each report chapter.
Agency Comments and GAO Evaluation:
GAO provided a draft of this report to the Department of Transportation
(DOT) and Amtrak for review and comment. GAO received oral comments
from DOT officials, including the department's general counsel. The DOT
officials told GAO that, in general, they agreed with the draft
report's findings, and they said the recommendations would be helpful
as they work with Amtrak to achieve significant improvements in program
and financial management (in accordance with Congress' statutory
mandate that Amtrak become self-sufficient). The DOT officials agreed
that if Amtrak receives federal funds, it needs to strengthen its
accountability to the public and the federal government in a way that
is effective, notwithstanding its peculiar corporate structure.
Further, DOT officials told GAO that the department has worked with the
Amtrak board of directors to enhance the board's oversight of Amtrak in
a number of beneficial ways. DOT officials said that in 2005, the board
has been especially active and has met with unusual frequency in an
effort to require Amtrak management to address necessary changes. They
also noted that the board's ability to work through board committees
might benefit by having a full roster of congressionally confirmed
directors in place, something that has not occurred since 2002.
Finally, the DOT officials emphasized the potential utility of an
expanded role for FRA, including additional legal authority to
implement tools for enhanced oversight, such as the authority to impose
more flexible and effective grant provisions for the funding it
provides to Amtrak and the associated withholding of funds for
nonperformance. FRA also provided clarifying and technical comments
that GAO incorporated into this report as appropriate.
Amtrak provided its comments in a letter from its president and chief
executive officer. (See app. II.) Overall, the president said that he
was not convinced that GAO's recommendations would produce the results
GAO expects, saying that there is no "silver bullet" for fixing Amtrak,
nor is there a cookie-cutter approach that can be taken. Rather, he
said that steady incremental improvements are best. In general, Amtrak
did not comment on GAO's specific recommendations. The president also
said that since coming to Amtrak, management has focused on maintaining
liquidity, cleaning up the books, and rebuilding its plant and
equipment, which has allowed the company to do more work with fewer
people and keep operating needs flat. Basically, he said that "the
results speak for themselves."
GAO believes that, although improvements have been made, the overall
results have not been satisfactory. During the last 3 fiscal years,
Amtrak's operating losses have increased to over $1 billion annually,
and such losses are projected to increase about 40 percent by 2009. In
addition, GAO found systemic problems in all five areas that it
reviewed and found that Amtrak faces major challenges in instituting
and strengthening its basic business systems. Certainly, the
president's actions have helped quell what would likely have been even
higher losses, but further fundamental changes are needed to help
address a situation that is not yet under control. The recommendations
contained in this report reflect sound and proven ways adopted by
leading organizations to efficiently and effectively manage their
operations. The importance of robust strategic planning, sound
financial management, across-the-board cost control strategies,
disciplined procurement practices, and strong oversight is undeniable.
In GAO's opinion, not recognizing the value of these areas and not
adapting them to Amtrak's environment will continue to lead to
suboptimal results.
The views reflected in the comments of Amtrak's president that steady
incremental improvements are the best approach for addressing Amtrak's
problems do not appear consistent with the magnitude of changes
discussed in Amtrak's April 2005 strategic reform initiatives. In April
2005, Amtrak's management and board of directors released their
strategic reform initiatives--initiatives characterized by Amtrak as a
dramatic departure from business as usual that would substantially
change how Amtrak operates. As Amtrak's board chairman stated in April
2005, these initiatives include structural, operating, and legislative
changes that, among other things, would outline a new focus on
planning, budgeting, accounting, and reporting of financial activity
and performance along Amtrak's business lines; increase state financial
involvement in existing and emerging rail corridors; and open the
market for virtually all functions and services of intercity passenger
rail to competition. The chairman also stated that, although Amtrak had
made substantial progress in establishing an organizational structure
and management controls that had resulted in cost savings, "we have
considerable room for further improvement." GAO believes the strategic
reform initiatives clearly acknowledge the substantial systemic
problems facing Amtrak, including those discussed in this report, as
well as the need for reform in how intercity passenger rail service is
delivered. GAO encourages Amtrak's president and management to work
together with the board of directors to ensure that the issues and
challenges raised in the strategic reform initiatives are addressed.
This will be important if Amtrak is to make meaningful progress in
addressing its problems and becoming more efficient.
Amtrak's president also commented about specific areas, as follows:
* Strategic planning: The president said that Amtrak's management team
has identified the problems "as only we can" and has developed an
approach that "works best for us." He said that the strategic planning
mechanisms we recommend or that government agencies adopt may not be in
line with those followed by Amtrak, but the goals are the same. He
reiterated that to him, while process is important, results are what
matter. GAO agrees that results matter, but, overall, results are not
improving. As both public and private organizations have long
recognized, sound strategic planning mechanisms or "processes" are
vital to chart a clear direction and mission, develop road maps for
cost-effective operations based on this mission, and measure and be
held accountable for results. The management tools Amtrak has adopted
since May 2002, while helpful, are focused too narrowly and are clearly
insufficient to stem the operating losses the company is experiencing.
By focusing on "outputs," such as overhauls and track laid, rather than
"outcomes," such as achieving on-time performance and a certain level
of customer service, company management has no assurance that limited
funds are being used for those areas that result in the highest return
with respect to the impact on operating losses and the efficient and
effective management of the company. GAO believes adopting a systematic
and organized strategic approach--in line with GAO's recommendations--
is necessary to achieve the results that both management and the public
expect.
* Procurement management: Amtrak's president said that many of the
issues GAO raised in the draft report are ones that Amtrak has focused
on for a number of years, and the company is in the process of
implementing changes in this area. GAO commends Amtrak for recognizing
the need to improve its procurement function. However, GAO's work shows
that there continues to be substantial systemic problems with Amtrak's
procurement function and that additional actions are needed to ensure
Amtrak is getting the best value for its money in the acquisition of
goods and services and in recognizing cost saving opportunities.
* Financial management: Amtrak's president commented that, during his
tenure, Amtrak's financial performance has improved dramatically and
that the company closes its books on time and reports monthly results
more quickly than most companies of its size. In addition, the
president noted that Amtrak's material internal control weaknesses and
reportable conditions (as reported by Amtrak's IPA), and the dollar
value of net audit adjustments, had all decreased. Amtrak's president
agreed that Amtrak's financial processes were labor intensive, but he
said that lack of modern technology had not stymied Amtrak's efforts to
produce results. GAO agrees that Amtrak has made improvements in its
financial management and reporting and that the number of material
internal control weaknesses and reportable conditions has decreased.
This report acknowledges these improvements. However, GAO's work shows
that there continue to be substantive problems related to financial
management at Amtrak--problems that act to undermine the usefulness of
financial information produced and adversely impact Amtrak's ability to
make sound business decisions. These problems include monthly
performance reports that are not as useful as they could be and that
contain financial data that are not reliable, inadequate internal
controls related to certain expenses (such as employee benefits
expenses and Amtrak's food and beverage service), and weak efforts to
strengthen management practices and make financial information
transparent. GAO believes Amtrak will find it difficult to make sound
business decisions related to its operations and its different lines of
business, control its costs and operating losses, increase its
efficiency and cost-effectiveness, and demonstrate progress in
achieving outcome-based goals and objectives without addressing these
financial management problems.
* Food and beverage service: The president said that Amtrak has
recently taken a number of actions to better manage this service,
including reforming the delivery of food service (such as eliminating
food and beverage service on selected short-distance trains) and
renegotiating its contract with Gate Gourmet (formerly called Dobbs
International). Amtrak's president also noted that GAO's draft report
failed to mention the cost of labor as it relates to food and beverage
service--a cost that both GAO and Amtrak agree is the largest single
cost of the operation. GAO agrees that Amtrak's actions regarding its
food and beverage service are steps in the right direction, and GAO
encourages Amtrak to continue to seek ways to improve management and
controls over this service. Both GAO's June 2005 testimony before the
Subcommittee on Railroads, House Committee on Transportation and
Infrastructure, and its August 2005 report on Amtrak's food and
beverage service discussed management and control problems related to
this service and made recommendations for improving this
control.[Footnote 3] Both the testimony and the report also
acknowledged the labor costs associated with Amtrak's food and beverage
operation. GAO agrees that labor costs associated with Amtrak's food
and beverage service are substantial and should be an integral
component in any strategies and plans Amtrak develops to improve the
efficiency and cost-effectiveness of this service. GAO's June 2005
testimony indicated that a recent Amtrak Inspector General report
suggested a way that Amtrak could address its food and beverage labor
costs. Since labor costs associated with the food and beverage service
are part of Amtrak's overall labor cost structure, it was beyond the
scope of GAO's work for this report to analyze these specific costs.
This present report discusses internal controls related to Amtrak's
food and beverage service and identifies ways Amtrak can strengthen
these controls to ensure this service is operated more efficiently and
cost-effectively.
Amtrak also made various clarifying and technical comments that GAO has
addressed in the text of this report. Among the technical comments was
a proposal by Amtrak's procurement department to liberalize Amtrak's
policy related to delegation authority for contract changes. This
proposal was in response to GAO's recommendation that Amtrak ensure
that contract changes be approved in accordance with the company's
current delegation of authority policy. At the time of GAO's review,
this policy limited change order approvals on the basis of the
cumulative value of contracts--that is, the level of authority needed
to approve contract change orders is determined by the cumulative value
of the contract, not the amount of the change order. Amtrak's proposal
would change this policy to allow approval of change orders by a
contracting agent until the total value of all contract changes meets
or exceeds the agent's delegated authority to approve changes.
Additional changes beyond this dollar value would then require approval
by an individual with a higher level of delegation authority. GAO
agrees that some flexibility in the approval authority may be
desirable, especially for relatively low-dollar value changes. However,
in liberalizing its approval authority for change orders, Amtrak should
proceed cautiously by setting monetary thresholds for contracting
agents that represent a relatively low-dollar value when compared with
the original value of the contract. Doing so would allow more efficient
use of procurement department resources while maintaining oversight of
contract changes. Also, as GAO recommends in this report, Amtrak's
procurement department, regardless of whether or not this proposal is
adopted, should exercise proper oversight of its contracting agents to
ensure adherence to its current delegation of authority policy.
[End of section]
Chapter 1: Introduction:
Intercity passenger rail is at a critical crossroads regarding its
future in the United States. The current provider of intercity
passenger rail service, the National Railroad Passenger Corporation
(Amtrak), has struggled since its inception in 1970 to earn sufficient
revenues and continues to rely heavily on federal subsidies to remain
solvent; currently, these subsidies total more than $1 billion
annually. Despite federal subsidies, the corporation has continued to
experience financial difficulties. For example, in June 2001, Amtrak
was forced to mortgage a portion of Pennsylvania Station in New York
City to raise $300 million; in July 2002, it had to obtain a $100
million loan from the federal government in order to meet expenses and
continue operating. In June 2002, under a new president and chief
executive officer, Amtrak underwent reorganization. However, the
financial condition of the corporation is still precarious, and,
according to management, the railroad will require billions of dollars
to improve its infrastructure and achieve a "state of good repair" as
it continues to operate a nationwide intercity passenger rail
service.[Footnote 4]
In recent years, various congressional and administration proposals
have called for restructuring intercity passenger rail in the United
States. These proposals have included breaking Amtrak up and
introducing competing rail service. For example, one recent proposal
would create a separate infrastructure corporation as a means to
maintain and rehabilitate the Northeast Corridor--which runs from
Washington, D.C., to Boston, Massachusetts, and is a critical component
in Amtrak's passenger rail system--and other infrastructure. A separate
operating corporation would be created to provide rail service. Under
this proposal, much of the responsibility for intercity passenger rail
service would be delegated to states or groups of states operating
through interstate compacts, and the operating corporation that
succeeds Amtrak would have to compete to provide service.[Footnote 5]
In contrast, other proposals call for little restructuring at all and
instead would keep Amtrak intact and provide it with increased funding
to improve equipment and infrastructure.
To aid Congress as it deliberates on the future of Amtrak and intercity
passenger rail in the United States, the Chairman, House Committee on
Transportation and Infrastructure, asked us to examine various aspects
of Amtrak's management and performance. This report discusses Amtrak's
(1) strategic planning and a performance-based framework for achieving
goals; (2) financial reporting and internal control practices and how
well they support management and accountability of the corporation; (3)
costs and cost containment strategies, including the existence and use
of metrics to identify and understand the nature of the corporation's
costs; (4) acquisition management, including the procurement
department's placement within Amtrak and integration into other
departments' acquisition activities, compliance with procurement
policies and procedures, and the quality of Amtrak's knowledge and
information systems; and (5) overall accountability and oversight of
the corporation.
Amtrak's Financial Struggles Have Led to Changes in Corporate Direction
and Organization:
The Rail Passenger Service Act of 1970 created Amtrak to provide
intercity passenger rail service because existing railroads found such
service to be unprofitable. Currently, Amtrak operates a 22,000-mile
network that provides service to 46 states and the District of
Columbia. In operating this network, Amtrak mainly uses track owned by
freight railroads. Amtrak owns about 650 miles of track, primarily on
the Northeast Corridor between Boston, Massachusetts, and Washington,
D.C. In fiscal year 2004, Amtrak served about 25 million passengers, or
about 68,640 passengers per day. According to Amtrak, about two-thirds
of its ridership is wholly or partially on the Northeast Corridor.
Amtrak has undergone numerous changes in its corporate direction and
organizational structure in an attempt to improve its financial
condition. These changes were influenced, in part, by the Amtrak Reform
and Accountability Act of 1997, which required Amtrak to become
operationally self-sufficient by December 2002.[Footnote 6] Examples of
changes over the last decade include the following:
* Establishment of strategic business units (SBU). In September 1994,
Amtrak's then president stated that a vision for the corporation needed
to be articulated and that decisions needed to be more market-driven.
Between October 1994 and January 1995, with the assistance of a
management consulting firm, Amtrak reorganized into the SBUs in an
attempt to address these issues. According to Amtrak, the SBUs were
established to provide a method for better managing performances and
differences in businesses or markets within the company and were
designed to anticipate and facilitate rapid response to change, place
decision making close to the customer, and establish authority and
accountability. Amtrak established three SBUs--Northeast Corridor,
Intercity, and West. The SBUs were largely self-contained units that
had their own chief executive officers, handled their own rail service,
procured their own materials and supplies, and handled their own
financial management and planning. Amtrak also established corporate
and service centers to support the SBUs and provide services that
either had economies of scales or required special technical
skills.[Footnote 7] In undergoing this reorganization and establishing
the SBUs, the expectation was that this new structure would, among
other things, result in fewer management positions, lower costs, and
establish accountability for results.
* Improvement of financial health by reducing service. In 1995, Amtrak
attempted to improve its financial condition by changing its approach
to route and service actions. In particular, Amtrak eliminated 9
routes, truncated 3 routes, and changed the frequency of service on 17
routes. The expectation was that Amtrak could save about $200 million
from these actions while retaining a high percentage of revenues and
passengers.
* Improvement of financial health by expanding service. In December
1999, Amtrak again changed corporate direction by adopting a strategy
that consisted of 15 planned route and service actions, the majority of
which involved an expansion of service. The expectation was that by
increasing service significant new revenue would be generated,
especially from hauling mail and express cargo.
None of the above changes met expectations. Instead of the SBUs leading
to decreased costs, Amtrak's operating costs generally increased. For
example, as we reported in May 2000, Amtrak incurred about $150 million
more in expenses than planned over the 1995 to 1999 period.[Footnote 8]
Employment levels were a significant factor. Although Amtrak's total
employment generally decreased from 1994 to 1996, by 1999 Amtrak had
about the same number of management employees and more agreement
employees (union-represented) than in 1994.[Footnote 9] In addition,
Amtrak's operating loss (total revenue minus total expense) fluctuated
between fiscal years 1994 and 2002 but generally increased from about
$770 million in fiscal year 1995 to about $1 billion in fiscal year
2002.[Footnote 10] At the same time, Amtrak continued to receive
substantial federal operating and capital support.[Footnote 11] (See
fig. 3.) Subsequent financial results from the service actions in 1995
and 1999 also did not meet expectations. As we reported in April 2002,
the 1999 service expansion failed, in part, because Amtrak
overestimated the mail and express revenue it was able to generate and
because Amtrak failed to obtain a full understanding of freight
railroad concerns before implementing the expansion strategy.[Footnote
12] At the time of our report, most of the route actions of the service
expansion had been canceled.
Figure 3: Federal Subsidies to Amtrak, Fiscal Years 1971 to 2005:
[See PDF for image]
Note: Amounts are in nominal dollars. Excludes $880 million in loan
guarantees but includes about $2.2 billion in Taxpayer Relief Act funds
received in fiscal years 1998 and 1999. Amounts for fiscal year 1998
exclude $199 million in capital funds since Amtrak received Taxpayer
Relief Act funds in that year. The receipt of Taxpayer Relief Act funds
precluded Amtrak from receiving the $199 million in capital funds.
[End of figure]
Amtrak's financial condition, instead of improving, deteriorated. In
June 2001, Amtrak mortgaged a portion of Pennsylvania Station in New
York City for $300 million to meet expenses. In November 2001, the
Amtrak Reform Council--an independent oversight body created by the
Amtrak Reform and Accountability Act of 1997--formally determined that
Amtrak would not reach operational self-sufficiency by December 2002,
as required by the act. Finally, in July 2002, Amtrak obtained a $100
million federal loan to meet expenses and continue operating. As we
reported in April 2003, Amtrak also had developed a substantial
deferred capital backlog of infrastructure improvements--about $6
billion worth ($3.8 billion, or about 63 percent, of which was
attributable to the Northeast Corridor).[Footnote 13]
Aside from the financial struggles, reorganizations, and route and
service actions, Amtrak has also struggled with a small share of the
intercity travel market (see fig. 4). On the basis of data obtained
from the Federal Railroad Administration (FRA), intercity passenger
rail accounted for a relatively substantial portion (15 percent or
more) of the travel market through the mid-1950s. However, by the early
1970s--about the same time Amtrak was created--the rail portion of
intercity travel had declined to just over 1 percent of the intercity
travel market. Since 1981, the passenger rail portion of the intercity
travel market has been less than 1 percent, and, in 2004, intercity
passenger rail was estimated at 0.5 percent of the market. FRA
officials said decisions to invest in a national highway program and
improvements in air travel, in part, led to the dramatic decreases in
rail ridership.
Figure 4: Intercity Passenger Rail Market Share, 1951 to 2004:
[See PDF for image]
Note: Data used to prepare this table are based on various estimates
made by FRA. Unit of measure is millions of intercity passenger miles.
A passenger mile is one person transported one mile. The market share
is based on intercity passenger rail's share of the total intercity
passenger miles of automobiles, buses, air carriers, and railroads.
[End of figure]
Most Recent Changes Have Focused on Improved Management, Financial
Stability, and Infrastructure Renewal:
In June 2002, under Amtrak's new president and chief executive officer,
the corporation abolished the SBUs and reorganized again. In making
this organizational change, Amtrak recognized that the previous
structure was too complex, had overlapping management duties, and had
inefficient management decision making. The reorganization was to
establish a more centralized, functional structure; establish
accountability; and form a more orderly, lean hierarchy. (See fig. 5
for Amtrak's current organization chart.)
Figure 5: Amtrak Organization Chart, as of October 2004:
[See PDF for image]
[End of figure]
According to Amtrak's new president, the company faced a multitude of
problems at the time of his arrival. These problems included (1) no
approved and distributed budget (even though the fiscal year was half
over); (2) a finance department that was unable to close its books for
fiscal year 2001 (and did not do so until 1 year after the close of
fiscal year 2001); (3) no organization charts; (4) little control over
employment (called "headcount"); and (5) an organization with
fragmented responsibility for large functional areas, such as
transportation, engineering, and mechanical (equipment). Amtrak's
president told us that, when he arrived, he needed a structure to help
him gain control of the company and that many functions were in poor
shape. For example, he said that the procurement function was a part of
the finance department and had no clear purchasing authority or review.
Amtrak adopted a number of strategies to address these problems. These
strategies included restoring company accounting practices to strict
compliance with generally accepted accounting principles; preparing a
multiyear project-specific capital plan to achieve a state of good
repair; and using the budget process to establish operating goals and
objectives and to hold managers accountable. Amtrak's president said
these strategies were used to reduce headcount; increase production
(e.g., ties installed, cars overhauled); and shift maintenance
activities into planned production lines as opposed to spot repairs.
In conjunction with the 2002 organizational change, Amtrak's president
also adopted a new approach to management that focused on five
management tools: (1) defined organization charts, (2) zero-based
operating budget, (3) capital budget (communicated through a 5-year
strategic plan), (4) department-by-department goals and objectives, and
(5) monthly performance reports. (See table 1.) The performance reports
were to contain financial as well as production and budget variance
information. Amtrak uses the five management tools not only to manage
the company but also to help contain costs. The changes were designed
to increase control over Amtrak, instill a sense of discipline in how
the company was operated, and simplify the management structure to
assign more responsibility to fewer people and hold them accountable
for results. Since the reorganization, Amtrak has centralized many of
its departments (such as the mechanical and marketing and sales
departments) and established a budget process focused on the five
management tools and control of headcount.
Table 1: Amtrak's Five Management Tools:
Tool: 1. Organization chart;
Description:
* Identifies a clear chain of command;
* Basis for developing Amtrak's budgets;
* Used to control Amtrak's labor costs.
Tool: 2. Operating budget;
Description:
* Based on the headcounts and resources needed to accomplish department
activities (zero-based budgeting process);
* Focuses on maintaining or reducing the budget.
Tool: 3. Capital budget;
Description:
* Based on capital investment needed to stabilize the railroad;
* Includes specific projects with production targets;
* Communicated through Amtrak's strategic plan.
Tool: 4. Goals and objectives;
Description:
* Developed by each department;
* Basis for Amtrak's budgets.
Tool: 5. Monthly performance report;
Description:
* Summarizes Amtrak's financial results, operating statistics, and
capital activity;
* Primary tool for reporting Amtrak's performance, both internally and
externally.
Source: GAO analysis of Amtrak data.
[End of table]
As part of the reorganization, Amtrak also refocused its efforts on
stabilizing the corporation financially and restoring the
infrastructure to a state of good repair. For example, Amtrak's April
2003 strategic plan (covering the period of fiscal years 2004 to 2008)
stated that intercity passenger rail was in crisis, in part, due to
physical deterioration and financial instability. To address these
issues, the plan identified over $5 billion in total capital funding
needs--with annual funding needs (both operating and capital) ranging
from about $1.8 billion in fiscal year 2004 to about $1.4 billion in
fiscal year 2008. These funds were to be used to, among other things,
return plant and equipment to a state of good repair, control operating
deficits, and restore liquidity to the corporation. The plan was
designed to address Amtrak's immediate problems and to buy time for
policy makers to decide the future structure of intercity passenger
rail. Amtrak's June 2004 strategic plan (covering the period of fiscal
years 2005 to 2009) similarly reiterated the need to stabilize the
railroad and make capital investments in infrastructure. It identified
about $4 billion in capital funding needs over the 5-year period--with
about $1.7 billion in average annual funding needs (operating, capital,
and debt service).[Footnote 14] Under this plan, operating support was
projected to remain constant at $570 million per year, while capital
funding needs were expected to increase from fiscal years 2005 to 2006
and then gradually to decrease. (See fig. 6.) Again, the June 2004 plan
was designed to address Amtrak's immediate problems of stabilizing the
railroad while bringing the infrastructure to a state of good repair.
Figure 6: Projected Funding Needs in Amtrak's June 2004 Strategic Plan:
[See PDF for image]
Note: The $203 million shown for fiscal year 2005 was a one-time need
for working capital and was also needed to repay a Department of
Transportation loan.
[End of figure]
Amtrak's Operations, Governance, and Oversight Are Covered by a Variety
of Requirements:
Amtrak's operations, governance, and oversight are covered by a hybrid
of public and private sector requirements. Amtrak was created as a
corporation under federal law. Until 1997, Amtrak was classified as a
mixed-ownership government corporation under the Government Corporation
Control Act. Although federally created and the recipient of
substantial federal financial assistance--about $29 billion since it
began operating in 1971--Amtrak is to be operated as a for-profit
corporation.
We reported in December 1995 that the Government Corporation Control
Act was intended to make government corporations accountable to
Congress for their operations while allowing them the flexibility and
autonomy needed for their commercial activities.[Footnote 15] A mixed-
ownership corporation can be defined as a corporation with both
government and private equity. In the case of Amtrak, the federal
government held preferred stock of the corporation, and there were
private entities that held common stock.[Footnote 16] At the time of
our 1995 report, Amtrak had nine board of director (board) members,
five were appointed by the President and the remaining four were the
Secretary of Transportation, the president of Amtrak, and two
individuals selected by Amtrak's preferred stockholder (the federal
government). Also at that time, Amtrak reported that it was not subject
to and did not administratively adopt such statutes as the Government
Performance and Results Act of 1993 (GPRA) and the Federal Managers
Financial Integrity Act of 1982 (FMFIA). GPRA was designed to impose a
new and more businesslike framework for management and accountability,
including a requirement that federal agency missions be clearly defined
and that both long-term strategic and annual goals be established and
linked to mission statements. FMFIA imposed requirements for heads of
federal agencies to evaluate and report on internal controls.[Footnote
17]
The Amtrak Reform and Accountability Act of 1997 changed Amtrak's
status as a mixed government corporation by removing Amtrak from the
list of mixed-ownership government corporations. Today, Amtrak is at
most similar in nature to a "government-established private
corporation." Reflecting its private stature, Amtrak is not subject to
most statutes that make federal establishments accountable. Statutes
such as GPRA and FMFIA do not apply to Amtrak. Amtrak is a closely held
corporation whose stock is not publicly traded; it is not subject to
Securities and Exchange Commission oversight or to provisions of the
Sarbanes-Oxley Act of 2002. However, as conditions to Amtrak's
continued receipt of federal subsidies, Amtrak is subject to such
federal statutes as the Freedom of Information Act and the Inspector
General Act of 1978. Recent grant agreements between FRA and Amtrak
have also made Amtrak subject to federal regulations applicable to for-
profit organizations as well as certain federal procurement
regulations.[Footnote 18] Amtrak is also subject to limited
jurisdiction by the Surface Transportation Board over matters such as
compensation disputes with other railroads, as well as federal railroad
safety laws administered by FRA.[Footnote 19]
As a private, for-profit corporation, most statutes and regulations
that govern the activities of federal entities do not apply to Amtrak.
This includes federal acquisition regulations. Instead, Amtrak develops
its own policies and procedures for handling the acquisition of goods
and services. Under the terms of grant agreements between Amtrak and
FRA, Amtrak is expected to comply with procurement, ethical, and other
standards, including standards governing the conduct of employees
engaged in the award and administration of contracts. Generally,
contracts are to be awarded competitively using written procurement
procedures, thereby ensuring that materials and services purchased with
federal grant funds are obtained in a cost-effective and appropriate
manner. The standards also require that procurement records and files
shall include the basis for contractor selections, justifications for
the lack of competition, and the basis for contract cost or price.
Amtrak has incorporated both the federal standards and their
requirements in its procurement manual issued in June 2005. FRA is
responsible for ensuring compliance with procurement standards.
Amtrak's corporate governance is defined in its articles of
incorporation and bylaws. Amtrak is domiciled in the District of
Columbia. The board is responsible for managing the affairs and
business of the corporation and for oversight of Amtrak's president and
management team. The Amtrak Reform and Accountability Act of 1997
reduced Amtrak's board from nine to seven members, who are appointed by
the President with the advice and consent of the Senate. The Secretary
of Transportation represents the federal government as a member of
Amtrak's board. The board has operated with less than a full complement
of voting members (seven members) since July 2003. Between October 2003
and June 2004, the board had only two voting members (excluding the
Secretary of Transportation or his designee).[Footnote 20] As of May
2005, the board had three members, (excluding the Secretary of
Transportation or his designee and the president of Amtrak). Amtrak's
bylaws also authorize the establishment of committees to assist the
board in carrying out its management responsibilities. In March 2002,
the board eliminated ad hoc committees, along with the corporate
strategy committee and the safety, service, and quality committee. At
that time, the audit, corporate affairs, finance, compensation and
personnel, and legal affairs committees were created. As of May 2005,
the board continued to have these five committees. Finally, Amtrak's
bylaws permit the corporation to conduct periodic shareholder meetings
as necessary. Following enactment of the Amtrak Improvement Act of
1981, which abolished election of members of the board of directors by
the common shareholders, Amtrak has not held a shareholders' meeting.
Oversight of Amtrak's activities, other than through the board, is
provided by a number of means. Congress plays a role through the
authorization and appropriations process. The Amtrak Reform and
Accountability Act of 1997 authorized federal appropriations for Amtrak
through September 30, 2002.[Footnote 21] Although a new authorization
had not been enacted as of July 2005, the authorization process permits
Congress to review Amtrak's previous and planned use of federal
resources. The appropriations process provides Congress with the
opportunity to oversee Amtrak's stewardship of federal funds on an
annual basis. Starting with Amtrak's fiscal year 2003 appropriations
legislation, Congress adopted measures to increase the Secretary of
Transportation's responsibility for providing oversight and
accountability for the federal funds used for intercity passenger rail
service. Among other things, these measures require that Amtrak
transmit a business plan to the Secretary of Transportation and
Congress, supplemented by monthly reports describing work completed,
changes to the business plan, and reasons for the changes. The business
plan is to describe the work to be funded with federal funds.
Consistent with requirements begun in the fiscal year 2003
appropriations act, Amtrak and FRA have entered into grant agreements
for the use of fiscal years 2003, 2004, and 2005 federal funds. FRA
determines Amtrak's compliance with these grant agreements.
Amtrak's activities are also subject to review by the Inspector
General's offices within Amtrak and the Department of Transportation
(DOT), as well as review by GAO. The Amtrak Office of the Inspector
General (Amtrak OIG) was established by the Inspector General Act
Amendments of 1988 to provide independent audits and investigations;
promote economy, efficiency, and effectiveness; and prevent and detect
fraud and abuse in Amtrak programs and operations.[Footnote 22] The
Department of Transportation Inspector General also plays a role in
assessing Amtrak's financial performance and is charged with assessing
Amtrak's financial performance and needs for every year after 1998 in
which Amtrak requests federal financial assistance. GAO has the
authority to review Amtrak activities and transactions. Over the years,
we have issued numerous reports and testimonies on Amtrak's financial
performance and the need for federal financial assistance.
Objectives, Scope, and Methodology:
The overall objective for our work was to determine whether Amtrak is
using its federal resources in the most efficient and cost-effective
manner. Our specific objectives were to determine (1) Amtrak's
strategic planning process and the extent to which Amtrak has
implemented a performance-based approach; (2) Amtrak's financial
reporting and internal control practices and how well they support
management and accountability of the corporation; (3) Amtrak's costs
and cost containment strategies, including the existence and use of
metrics to identify and understand the nature of the corporation's
costs; (4) Amtrak's acquisition of goods and services, including
organizational alignment and strategic focus, compliance with
procurement policies and procedures, and information management; and
(5) the overall accountability and oversight of the corporation. We
focused on these five objectives since these are key elements to
addressing the efficiency and cost-effectiveness with which federal
resources are used by Amtrak. We did not explicitly review information
technology and human capital issues--which are two additional elements
of a management and accountability framework used in leading
organizations to successfully manage resources. We also did not review
revenue issues, such as Amtrak's strategies and controls for setting
fares or projecting revenue estimates. Our scope was primarily limited
to Amtrak's policies and procedures from fiscal years 2002 to 2004.
However, we collected data prior to this time period to provide context
and to ascertain what trends, if any, exist.
To address strategic planning and performance-based issues, we reviewed
documents describing Amtrak's management tools; strategic planning
process; and the process for preparing budgets, goals, and objectives.
We reviewed minutes of Amtrak board meetings and interviewed Amtrak and
FRA officials and members of Amtrak's board to understand the
corporation's strategic planning process and interviewed Amtrak
officials on the extent to which a performance-based management
framework had been implemented. We used this information to analyze the
nature of Amtrak's strategic planning process, identify whether Amtrak
had established a clear statement of its mission, and determine whether
this mission was linked to measurable goals and objectives. We also
reviewed and analyzed Amtrak's monthly performance reports and the
department quarterly reports for the transportation, mechanical, and
engineering departments to assess performance information generated by
Amtrak. We interviewed commuter and freight railroad officials and VIA
Rail Canada (VIA Rail)[Footnote 23] officials to determine industry
strategic planning practices. We used relevant GAO reports and widely
used standards and best practices, as applicable, to determine criteria
for assessing Amtrak's management structure as well as to suggest best
practices to Amtrak.
To assess Amtrak's financial reporting and management practices, we
gained an understanding of control activities related to financial
reporting, the design of internal control practices over the expenses
related to food and beverage operations and employee benefits, and
efforts to strengthen management practices. We also reviewed selected
workpapers for fiscal years 2002 and 2003 that were relied on by an
independent public accountant (IPA) firm to issue an opinion on the
Amtrak consolidated financial statements, IPA letters that considered
internal control practices over financial reporting, and reports by the
Amtrak OIG. We observed control practices over certain key areas of
expense and analyzed interim financial information for areas such as
train route performance, food and beverage operations, and employee
benefit expense. To test the reliability of the financial data provided
by Amtrak officials, when practical, we compared such information with
amounts reported in Amtrak's audited financial statements for fiscal
years 2002 and 2003. We interviewed officials from various Amtrak
departments and the Amtrak OIG as well as officials from FRA, Amtrak's
IPA, and the food and beverage contractor. In addition, we interviewed
and collected information from officials from several freight and
commuter railroads. This information was used in conjunction with GAO's
Standards for Internal Control in the Federal Government, to assess how
well Amtrak's financial reporting and management practices support the
management and external stakeholders' efforts.
To address cost and cost containment issues, we reviewed Amtrak
financial reports and obtained data on Amtrak's operating costs. We
also interviewed Amtrak, FRA, freight and commuter railroads, and VIA
Rail officials about cost control practices. The freight railroads were
selected on the basis of their size in terms of operating revenue and
track mileage and carloads originated, and, in the case of commuter
railroads, both the volume of ridership in 2002 and the size of capital
and operating budgets, among other factors. VIA Rail was selected
because it is a large (in terms of route miles operated) intercity
passenger railroad and has characteristics similar to Amtrak in that
VIA Rail operates both long-and short-distance intercity passenger
service and relies on government support to maintain operations. We
used Amtrak documents and interviews with Amtrak officials to assess
Amtrak's cost containment strategy and the company's knowledge of its
costs. In performing our analysis, we used information from Amtrak's
audited financial statements for fiscal years 2002 and 2003. We also
used information from Amtrak's preliminary financial statements for
fiscal year 2004. These statements were in the process of being audited
during our review. Amtrak released its audited financial statements in
August 2005 after our audit work was completed. However, to test the
reliability of the preliminary information we used, where practical, we
compared data from the preliminary statements with the audited
statements. We found no major differences.
To address acquisition issues, we reviewed Amtrak's procurement
policies and procedures; drafts of Amtrak's procurement manual; and
other documentation, such as organization charts and department goals.
We also reviewed reports prepared by the Amtrak OIG on procurement
issues. We observed how procurement requests are handled and processed
and discussed Amtrak's acquisition practices with officials from the
procurement department. We reviewed data on expenditures made for
advertising, sales promotion, professional services, and consulting and
reviewed a nonprobability sample of 61 contract files associated with
these services to assess compliance with Amtrak's procurement policies
and procedures.[Footnote 24] (See app. I for our contract selection
methodology.) We also (1) reviewed expenditure data related to Amtrak's
use of outside legal services and the law department's guidelines
applicable to outside legal services and (2) discussed the law
department's practices for acquiring outside legal services with law
department officials--including specific examples of how they acquire
those services. In addition, we discussed procurement practices with
officials in other departments, such as the finance, marketing and
sales, engineering, and mechanical departments. To obtain an
understanding of acquisition practices in other railroads, we discussed
procurement practices with officials at four freight railroads and five
commuter railroads as well as with procurement officials at VIA Rail.
To assess the reliability of the procurement data Amtrak provided, we
compared them with Amtrak audited financial statement data for fiscal
years 2002 and 2003 for the accounts we reviewed. (The expenditure data
came from a different database.) We then asked Amtrak to reconcile
differences that we identified between the two sets of accounts.
Because Amtrak officials said this reconciliation had to be done
manually and would take substantial time, data were reconciled for only
one account--sales promotion. Consequently, we used the procurement
expenditure data only to select a nonprobability sample of procurement
contracts to review. Similarly, we could not reconcile expenditure data
for Amtrak's outside legal services--taken from the law department's
case management system--with audited financial data. As a result, these
data were only used to identify selected matters to discuss with law
department officials about how outside legal services are acquired.
Finally, we used information on payments of invoices for outside legal
services from Amtrak's accounts payable system. Again, because we could
not reconcile the accounts payable information with the audited
financial data, these data were used solely to select a nonprobability
sample of 10 invoices to assist us in understanding the controls over
payments for outside legal services.
To address overall accountability and oversight issues, we reviewed
legislation relevant to the management and governance of Amtrak,
Amtrak's articles of incorporation and bylaws, and recent grant
agreements between Amtrak and FRA. We also reviewed various proposals
to reform both intercity passenger rail and Amtrak operations put forth
by the administration and Amtrak's board and management. Finally, we
discussed oversight and accountability issues with Amtrak, board, and
FRA officials and reviewed previous GAO reports on Amtrak's financial
condition and operations. We used this information to identify the type
and degree of oversight and accountability that has been exercised by
various Amtrak stakeholders and the potential role that reform efforts
might play in future oversight and accountability of Amtrak or other
intercity passenger rail operators.
In performing our work, we reviewed and considered best practices
described in documents from leading organizations in each of our five
areas. These documents included various GAO reports and guides issued
over the years on strategic plans and planning processes, financial
management and internal controls, the implementation of GPRA
requirements, acquisition practices, and the components of a framework
for analyzing federal investments. These documents helped us to compare
Amtrak's management practices with those of leading organizations.
We conducted our work from April 2004 to July 2005 in accordance with
generally accepted government auditing standards.
[End of section]
Chapter 2: Amtrak Lacks a Comprehensive Strategic Plan and a
Performance-Based Approach to Better Ensure Cost-effective Results:
Although Amtrak has improved its management approach in recent years,
it still lacks a comprehensive strategic planning process and
performance-based framework characteristic of leading organizations.
Leading organizations we have studied use strategic planning to
articulate a mission and goals for all levels of the organization,
measure progress toward those goals, and ensure accountability for
results. Amtrak, however, has not developed a comprehensive strategic
plan that includes a mission statement and corporatewide goals to
articulate what it is trying to accomplish. In the absence of a clear
statement of its overall mission, Amtrak developed a capital plan
(titled by Amtrak a "strategic plan"), which focuses mainly on one
goal--restoring the company's infrastructure to a state of good repair.
Although this plan provides guidance for its capital funding, Amtrak
lacks a meaningful strategic plan that articulates measurable
corporatewide goals, strategies, and outcomes. Similarly, while the
five management tools instituted by Amtrak's president provide a
framework for determining annual goals and budgets, they do not provide
an approach that sufficiently focuses on outcomes (such as service and
on-time performance) rather than outputs (such as units of production).
The departments within Amtrak have developed their own department-
specific goals, but without a mission or corporatewide goals, Amtrak
cannot ensure that its department-specific goals support or improve
overall corporate performance. Further, many department goals were set
without a sufficient understanding of current baselines or what was
achievable.
Evidence of a robust, corporatewide performance management framework is
also absent. Key departments within the company--the engineering,
mechanical, transportation, and marketing and sales departments--could
benefit from a performance-based approach to achieving goals--that is,
developing and documenting strategies or action plans to achieve goals;
using an incentive-based system to help ensure clear responsibility and
accountability for supporting corporate performance; and generating key
data for monitoring, evaluating, and reporting on performance.
In April 2005, Amtrak's board and management released a set of
strategic reform initiatives that includes a vision for Amtrak and
suggests that Amtrak, among other things, plan and report by lines of
business--but challenges exist to fully implementing these initiatives.
Specifically, Amtrak officials noted such challenges as the need for
legislative action and the ability to keep its employees focused on
long-term change. These challenges, along with the uncertainty of
Amtrak's future, may all affect whether Amtrak's initiatives are
adopted and implemented.
Leading Organizations Manage by Focusing on Missions and Goals Spelled
Out in a Strategic Plan:
Leading organizations we have studied--both public and private--use
strategic planning as the foundation for their activities.[Footnote 25]
For these organizations, the strategic plan articulates a mission and
goals for all levels of the organization that are tied to the
strategies that will be used to achieve those goals. The strategic plan
provides a foundation for strategic management initiatives, such as
organizational realignment; performance planning, measurement, and
reporting; accountability for results; and improvements to the capacity
of the organization to achieve its goals. The strategic planning
process facilitates communication within the organization as well as
with external clients and allows oversight bodies to assess overall
performance. For example, in the federal arena, GPRA established a
strategic planning process as a way to demonstrate and communicate
performance and focus federal agencies on the results of their
activities (outcomes) as opposed to the activities themselves. Publicly
traded, private companies--such as the freight railroads whose
officials we interviewed--said they rely on strategic planning to
establish, assess, and communicate company goals, resources, and
strategies for the next 3 to 5 years.
Strategic plans developed by the leading organizations we studied
include the basic elements outlined in figure 7. One of these elements
is a clear linkage between the overall organizational mission,
organizationwide strategic goals, and the activities of all
organizational units. The first step in the process involves developing
a comprehensive mission statement that employees, clients, customers,
partners, and other stakeholders understand and find
compelling.[Footnote 26] The leading organizations we studied then seek
to establish clear hierarchies for performance goals and measures by
linking the performance goals and measures for each organizational
level to successive levels and ultimately to the corporatewide goals
and mission. Annual goals provide a connection between the
corporatewide strategic goals and the day-to-day activities of managers
and staff and provide measures of progress toward achieving the
corporatewide mission. Without clear, hierarchically linked performance
measures, managers and staff throughout the organization lack
straightforward road maps showing how their daily activities can
contribute to attaining corporatewide goals and mission.
Figure 7: Key Elements of a Strategic Plan:
[See PDF for image]
[End of figure]
In addition, a performance-based framework is essential for ensuring
that all activities and individuals within the organization are working
toward goals and achieving results. Within this framework,
organizations identify strategies and resources to achieve their goals;
hold individuals accountable for contributing to those goals; and use
performance data to monitor, evaluate, and report on progress toward
goals. Once these organizations develop fact-based understandings of
how their activities contribute to accomplishing their mission and
broader results, they evaluate and adjust their efforts, if necessary,
to optimize their contributions to corporate results.
Amtrak Lacks a Strategic Plan That Includes Key Elements Necessary to
Comprehensively Manage the Corporation:
Amtrak has not developed a comprehensive strategic plan that
articulates a mission, corporatewide goals that are tied to the
mission, strategies that will be employed to achieve those goals, and
outcomes for efforts needed to run all the components of its
operations--both capital and operating. Amtrak developed a capital
plan--which it calls a strategic plan--that covers capital projects,
ties to the capital budget, and supports the state of good repair goal,
but Amtrak does not have a documented plan that includes measurable or
comprehensive corporatewide goals or strategies for other aspects of
the company's operations. Units within Amtrak have developed department-
specific goals, but without a strategic plan, Amtrak cannot ensure that
these goals support corporatewide performance.
Amtrak Lacks a Comprehensive Statement of Its Overall Mission:
Amtrak does not have a comprehensive statement of its overall mission
to provide and communicate a clear focus for the company. One Amtrak
official noted that the issue of Amtrak's mission is at the heart of
the Amtrak debate. Amtrak's president has not established a
comprehensive mission for Amtrak. Instead, he has focused on repairing
and improving the railroad and believes that policy makers--such as the
administration and Congress--are responsible for determining Amtrak's
role. However, federal statute already articulates a purpose for the
company--to operate a national rail passenger transportation
system.[Footnote 27] To bring focus, Amtrak, like any public or private
organization, is responsible for taking that broad purpose and
establishing a clearly defined mission that describes specifically what
the organization plans to do and how it plans to do it.
Amtrak's board of directors has a role in defining this mission, but
until recently, the board has not been active in doing so. The chairman
of Amtrak's board agreed that the board is responsible for establishing
a mission for Amtrak, but the Amtrak board meeting minutes between
February 2002 and August 2004 did not contain any written documentation
of the board discussing a vision or mission for Amtrak. The board
chairman said the absence of a full complement of board members has
limited the board's ability to develop a mission for the
company.[Footnote 28]
Amtrak's Corporatewide Goal and Strategies Encompass Only Part of Its
Operations:
Since April 2003, Amtrak's president focused the company's efforts on
returning the railroad to a state of good repair--that is, to improve
the condition of its equipment and infrastructure. In testimony before
the Senate Committee on Commerce, Science, and Transportation in 2003,
Amtrak's president noted that repairing and improving the railroad is
in "everyone's interest" because regardless of Amtrak's future
structure, Amtrak's infrastructure will have to be in a state of good
repair to provide intercity passenger rail service. As we reported in
April 2003, Amtrak had developed a substantial deferred capital backlog
(about $6 billion--$3.8 billion of which was attributable to the
Northeast Corridor),[Footnote 29] and in reports dating back to 1995,
we noted that this issue needed to be addressed soon.[Footnote 30]
Amtrak officials have noted that, in the past, the absence of a focus
on a state of good repair had resulted in such things as deteriorating
bridges, increased trip times, and decline in overall ride quality.
Amtrak's goal of a state of good repair addresses infrastructure
deficiencies. However, the company's focus on this one issue leads to
an unbalanced approach to the management of its business. For example,
Amtrak's goal of a state of good repair addresses the company's capital
program, including the repair or replacement of rails, bridges, and
locomotives, but does not encompass important elements of Amtrak's
operations--such as human capital and customer service--and lines of
business--such as commuter rail and reimbursable services.[Footnote 31]
Focusing on one priority at the expense of others may skew the
company's overall performance and keep managers and oversight bodies
from seeing the whole picture. In the subsequent chapters, we explain
how Amtrak has significant challenges in a number of areas, such as an
increasing operating loss and the procurement of goods and services.
Not broadening its focus to include the myriad of other challenges and
critical areas at Amtrak could continue to jeopardize the future
viability of the company and undermine efforts to control the required
level of federal subsidies and ensure federal dollars are efficiently
and effectively spent.
Amtrak does not have a meaningful strategic plan but rather has
developed a detailed 5-year capital plan to support its corporatewide
goal of a state of good repair. Amtrak titled this document a
"strategic plan," but Amtrak's president and board chairman both
acknowledge that this plan is essentially a capital plan that covers
capital projects and ties to the capital budget. The capital goals in
Amtrak's plan translate to capital production goals for certain
departments, such as the mechanical and engineering departments, and
link to achieving the goal of a state of good repair. For example, the
engineering department had a performance goal to install 155,760
concrete ties in fiscal year 2004. By completing this goal, the
engineering department is supporting Amtrak's goal of achieving a state
of good repair, although without a strategic plan, it is unclear how
important this performance goal is toward achieving a state of good
repair or to what extent achieving this goal will remedy the
infrastructure deficiency.
Although Amtrak has a detailed capital plan, Amtrak lacks a strategic
plan that articulates a comprehensive mission, measurable corporatewide
goals, strategies, and outcomes for the efforts needed to run all the
components of its operations--both capital and operating. For example,
Amtrak does not have a documented plan that states measurable
corporatewide goals or strategies for controlling or reducing costs,
managing on-time performance, increasing the productivity of the
workforce, or reducing dependence on federal funding in its strategic
plan. Amtrak's capital plan for fiscal years 2005 through 2009 includes
information on Amtrak's operating loss--noting that its operating loss
will increase over the next several years. To offset this increase, the
plan proposes implementing "additional service, crew, and equipment
efficiencies." This plan, however, does not include measurable targets
or strategies to achieving these efficiencies. Amtrak's president
maintains that the operating budget provides guidance for these
initiatives. Although the operating budget provides financial targets
for the departments, it does not, however, articulate measurable goals,
strategies, or outcomes for the corporation.
Amtrak's president acknowledged that there was very little
documentation of plans, strategies, and goals. He said that Amtrak was
looking to produce results, not develop documents and written
strategies during this time. He also said that staff knew what they
needed to get done during the 2002 to 2005 time frame--reduce headcount
and increase production. In our view, however, this is a risky approach
since there is no assurance that goals and strategies are clearly
communicated and understood by those responsible for carrying them out.
Moreover, it is also important to establish clear, consistent goals at
the organization and agency levels in order to identify the risks that
could impede the efficient and effective achievement of these goals.
Unlike Amtrak, some of the railroads we contacted develop comprehensive
corporatewide goals to support their missions. Figure 8 illustrates
examples from these railroads. For example, one freight railroad
company developed a mission statement that focuses on its three
constituencies--customers, employees, and shareholders--and established
six categories of business objectives to implement that mission and
drive its strategic planning process. In another example, VIA Rail
established a mission statement that is supported by its six
corporatewide goals.
Figure 8: Examples of Missions and Goals from Other Railroads:
[See PDF for image]
[End of figure]
Without a Link to a Mission or Corporatewide Goals, Amtrak's Department-
Specific Goals Do Not Demonstrate Support of Corporate Outcomes:
Absent a strategic plan containing a comprehensive mission and
corporatewide goals and strategies, Amtrak lacks a process for
developing annual department-specific performance goals that ensures
these goals support or improve corporate outcomes. Leading
organizations we studied developed fact-based understandings of how
their activities contribute to accomplishing their overall mission and
broader results.[Footnote 32] In contrast, Amtrak's capital-related
goals link to its capital plan, while Amtrak's department heads
generate operations-related goals that are based on the priorities and
activities of their own departments and seek to align those goals with
the priorities of Amtrak's president. Except for providing a standard
template for stating the departments' goals, Amtrak has little
companywide written guidance on how to develop department goals and
objectives.
The process Amtrak uses provides no assurance that goals developed by a
department contribute to improved overall company performance. Amtrak
managers said some department goals, such as those related to on-time
performance, safety, and ticket revenue, are self-evident. We agree
that these goals are important for Amtrak's performance. However,
without a strategic plan that addresses all company activities, the
departments cannot (1) assess or communicate the extent to which their
department-specific goals are related to the priorities of the
organization or (2) contribute to Amtrak's overall performance.
In addition to the lack of a process for developing department-specific
goals that relate to a mission and corporatewide goals, Amtrak's
department-level targets[Footnote 33] in fiscal years 2003 and 2004
were not always set with a clear understanding of current baselines or
what a department could hope to achieve. This lack of clarity,
according to Amtrak officials, resulted from such things as the
following:
* Limited experience or data on which to set goals and targets.
According to Amtrak officials, in previous years, goals existed in
areas such as safety and on-time performance, and some departments
developed their own set of goals. However, prior to fiscal year 2003,
departments were not required to develop goals as a basis for Amtrak's
budgets. As a result, some department-level targets in fiscal years
2003 and 2004 were based on assumptions, not an analysis of data,
because data did not exist. An Amtrak official acknowledged that in
fiscal years 2003 and 2004, there was no hard link between goal setting
and data analysis. For example, the target for the transportation
department's injury goal[Footnote 34] in fiscal years 2003 and 2004 was
based on the previous year's target since, according to an official in
the transportation department, the department did not achieve its goal
of a 3.8 injury ratio in the previous fiscal years. The engineering
department established a delay minute target for fiscal year 2003 but
missed the target by over 60,000 minutes because, according to the
chief engineer, the department set the goal without an understanding of
the impact of the company's increased capital activities.[Footnote 35]
Without data, goals have also been set by making incremental
improvements to historical trends. For example, the engineering
department established an absenteeism target to reduce absenteeism by
10 percent over the fiscal year 2003 results. Amtrak officials said
that, in some cases, Amtrak's goals are an expression of "aspiration"
rather than a realistic target. For example, Amtrak's on-time
performance has averaged about 75 percent from fiscal years 1990 to
2003, yet the transportation department set its fiscal year 2004 on-
time performance at 85 percent.
* Organizational restructuring. According to officials, Amtrak's
organizational restructuring effort also affected the departments'
ability to establish and achieve goals. For example, officials in the
mechanical department noted that although the department established
goals in fiscal years 2003 and 2004, officials were more focused on the
restructuring effort than on achieving department goals and maintain
that organizing the department's structure, policy, and standards are
critical components required to meet the departments' goals.
Amtrak officials recognize that goal development at Amtrak is a work in
progress and believe that the departments are more focused in setting
more strategic and measurable goals. For example, in a review of the
marketing and sales department's ticket revenue goals for fiscal years
2003, 2004, and 2005, we found that the department had established more
specific targets for its 2005 goal than for its 2003 goal. However,
without a mission statement or corporatewide goals, Amtrak cannot
demonstrate or ensure that its departments' activities contribute to
accomplishing corporate results.
Amtrak's Five Tools Support Short-term Results but Not the Long-term
Management of the Corporation:
Amtrak's five management tools provide a process for identifying
Amtrak's need and use for resources on an annual basis and produced
some results. As noted in chapter 1, Amtrak's president instituted five
management tools--the organization chart, operating budget, capital
program (communicated through a document that Amtrak calls a strategic
plan), goals and objectives, and monthly performance reports. These
tools are used to manage the corporation, control costs, and address
the challenges that existed when Amtrak's president arrived at Amtrak.
Annually, each department is required to develop budgets that are based
on activity levels and clear, specific, measurable goals. Amtrak's
president stated that because of these tools, Amtrak has seen results,
including decreased headcount and increased production activities, from
what Amtrak characterized as "a program that had been all but
eliminated by fiscal year 2002" to a production line approach with
tangible results.
Although Amtrak's tools provide a framework for developing annual goals
and budgets, these tools do not provide a long-term, integrated
approach for managing the corporation and focus on outputs (units of
production), not outcomes (results, such as better service or on-time
performance). One important internal control standard is risk
assessment, and a precondition to risk assessment is the establishment
of clear, consistent goals and objectives both at the entity level and
the activity (program or mission) level.[Footnote 36]
Without a strategic plan to guide all business activities, Amtrak does
not have a process for integrating the efforts across the organization
or for assessing and addressing company risks. Moreover, without a
strategic plan, Amtrak does not have overall corporate performance
measures and cannot establish a clear understanding of what it is
trying to accomplish with its resources and company activities.
Amtrak's Planning Process Could Benefit from Increased Use of a
Performance-Based Framework to Achieve Its Goals:
While Amtrak's key departments--the mechanical, engineering,
transportation, and marketing and sales departments--have made some
progress in setting goals, they will likely continue to struggle in
achieving those goals without incorporating elements of a performance-
based framework. These elements include:
* developing strategies or action plans that describe the processes,
methods, and resources necessary to achieve the goals;
* linking unit goals to individual responsibilities to hold individuals
accountable for contributing to the achievement of the goals; and:
* using reliable performance data to monitor, evaluate, and report
performance results and determine how well activities and programs
contribute to achieving goals and improving performance.
Amtrak's Key Departments Do Not Consistently Develop Comprehensive
Strategies to Achieve Department Goals:
Amtrak's key departments do not consistently develop comprehensive
strategies or action plans for achieving their key goals. For example,
the marketing and sales department articulated specific objectives or
actions for achieving its ticket revenue goal in fiscal years 2003 and
2004. In contrast, the transportation department is still in the
process of implementing a plan to address train delays caused by
passengers boarding the train, but the department did not develop
documented strategies or action plans for other elements that affect on-
time performance, such as freight or commuter train interference. An
official in Amtrak's transportation department noted that some goals
lack action plans because some goals and objectives lend themselves to
action plans better than others and that "aspirational goals" often
come down to "just work harder."
Without action plans, Amtrak lacks clearly stated strategies for how it
intends to achieve its goals. For example, the mechanical department
established a goal in fiscal year 2004 to create a "national"
mechanical department but did not develop a specific action plan to
achieve that goal. Although Amtrak's president acknowledged that Amtrak
did not have a written action plan for establishing the national
mechanical department, he maintains that he and his staff knew what
needed to be done to establish the national department. Officials in
the mechanical department stated that organizational charts were used
to detail the position requirements and equipment assignments by
location, and that standard work scopes were also developed. However,
without a documented action plan, Amtrak cannot ensure that critical
actions and milestones are established and accurately communicated to
those involved in the transition or monitor progress toward the
transition.[Footnote 37]
An Incentive-Based Performance Management System Could Strengthen
Accountability for Achieving Goals:
To hold the department heads accountable for goals and budgets,
Amtrak's president holds quarterly and periodic reviews with department
heads, who are required to sign off on financial and headcount
information in the company's monthly performance reports. For example,
the department heads within the operations department--including the
engineering, mechanical, and transportation departments--review the
status of their budgets and goals every quarter in a meeting with
Amtrak's president and senior vice president of operations. Departments
outside of the operations department, such as the marketing and sales
department, meet with Amtrak's president on a periodic basis to review
the department's budget and discuss the status of some department
goals.
Although Amtrak managers told us that they hold their managers
accountable for achieving department goals and the results of the goals
are factored into annual personnel evaluations, Amtrak does not have a
pay-for-performance management system to provide incentive for
achieving goals. That is, individual performance is not directly tied
to compensation. Leading organizations we have studied seek to create
pay, incentive, and reward systems that clearly link employee
knowledge, skills, and contributions to organizational results. Amtrak
officials noted that management has considered implementing a
performance-based compensation system and has discussed a plan with
Amtrak's board of directors. However, because of other concerns being
addressed by the board, Amtrak management's pay-for-performance plan
has not been on the board's agenda as of March 2005, and, according to
an official, Amtrak does not plan to implement such a plan this fiscal
year.
According to an Amtrak official, the board has been working with
management to resolve their concerns about the pay-for-performance
system, such as which management positions would be eligible and the
operational and financial metrics to make merit pay and bonus
decisions. Another Amtrak official noted that the current performance
evaluations do not have much impact on performance because there is no
satisfactory or unsatisfactory rating and no tie to compensation. An
Amtrak official from the strategic planning department noted that a pay-
for-performance system is critical to successfully implementing
Amtrak's strategic reform initiatives. This type of system, he stated,
is essential for Amtrak to act more like a private entity. However, it
would be difficult for Amtrak to implement a pay-for-performance system
without first establishing organizationwide goals that provide the
basis for aligning daily activities with broader results.
Amtrak's Data Systems and Processes Limit Its Ability to Monitor,
Evaluate, and Report on Performance:
A common theme we found in numerous areas we reviewed involved Amtrak's
limited ability to effectively monitor, evaluate, and report on
performance due to the shortcomings of some of its data systems and
reporting processes. These shortcomings were manifested in several
ways. First, we found numerous instances where key reports were missing
relevant information or where information was of questionable
reliability. As discussed in more detail in chapter 3, we found that
Amtrak's monthly performance reports, a key document used by managers
and stakeholders alike, did not contain information that would enhance
their relevance to users. For example, information on Amtrak's food and
beverage service did not include gross profit analysis, revenues, cost
of meals, and other basic metrics. Second, as discussed in detail in
chapter 4, Amtrak lacks certain key cost metrics, such as cost-per-
revenue passenger mile and cost-per-locomotive overhaul that would
allow managers to better measure performance, assess whether resources
are being used efficiently, and identify potential cost-saving areas.
Finally, as discussed in detail in chapter 5, Amtrak's procurement and
financial databases are limited such that management does not have
detailed, reliable, and comprehensive data on total spending for the
estimated $500 million it spends annually on goods and services. The
absence of such information, which is due, in part, to limitations in
Amtrak's computer systems and lax controls over data reliability, makes
it difficult to identify strategic sourcing opportunities, leverage
Amtrak's buying power, and reduce procurement costs.
One department we reviewed had made progress. That is, Amtrak's
engineering department has developed a data system that allows the
department's managers to monitor performance in a real-time basis. The
department developed a computer "dashboard" system that is updated
every day and requires the department's 45 managers to review the
status of their goals on a daily basis after they log into their
computers. See figure 9 for a snapshot of the dashboard. For example,
one "dial" on the dashboard shows the real-time status of the
department's safety goal compared with the year-to-date and month-to-
date targets. The chief engineer said that if these data show a
variance in a goal, he can "drill" into the data to determine the unit
within the department that is experiencing problems and the person
responsible for that unit. He then contacts the head of the specific
division to discuss the cause and the actions taken to address the
problem. Although this system does not monitor all of the department's
goals, it allows managers to monitor, analyze, and quickly respond to
changes in performance goals on the basis of real-time information.
Figure 9: Snapshot of the Engineering Department's Dashboard System:
[See PDF for image]
[End of figure]
Despite positive developments in some areas, Amtrak's overall reporting
processes lack management controls, which can lead to an incomplete and
inaccurate picture of performance. Leading organizations we have
studied prepare annual performance reports that document the results
the organization achieved compared with the goals they established. To
be useful for oversight and accountability results, these reports,
among other things, clearly communicate performance results. In
contrast, although an Amtrak official noted that all departments are
encouraged to report on their goals through the monthly performance
reports, Amtrak's key departments do not consistently report on all
their goals through an established process, such as quarterly reviews
or the monthly performance reports. For example:
* Although the transportation, engineering, and mechanical departments
report on budgets and goals in a quarterly review process with Amtrak's
president and senior vice president of operations, they do not report
on all of their goals in these reports. For example, the transportation
department did not report on three of its eight goals at the end of
fiscal year 2004--including goals on reducing road vehicle equipment
expenses and meeting public health and Food and Drug Administration
standards relating to food handling, water point inspection, and
facility comprehensive plans. According to one official, these goals
are not included in these reports because they have less emphasis for
the department than safety and on-time performance goals and involve
only $1.5 million of the department's $1 billion budget. He noted that
the managers within the transportation department report on these goals
to the vice president of transportation. Without a formal process for
reporting on these goals, it is unclear whether these goals were
achieved.
* Similarly, officials in the marketing and sales department stated
that they work with the finance department to determine which goals to
report in the monthly performance reports. Through the monthly
performance report, the marketing and sales department reported on its
ticket revenue, ridership, and safety targets but did not report on the
status of its targets relating to developing and implementing service
and product improvements. Officials in the marketing and sales
department noted that the department monitors the progress of its goals
and updates the progress on a quarterly basis.
Amtrak officials told us that the departments report on "key"
department goals through the monthly performance reports and monitor
other goals within their departments. This selective reporting does not
provide the complete transparency needed to provide management and key
stakeholders with a complete and accurate picture of each department's
performance and the performance of Amtrak as a whole. Also, presumably
all established goals, while perhaps not all equal in terms of
importance to the department, are relevant and important or they would
not have been established. Reporting on only certain goals is counter
to a systematic performance-based approach and may ultimately impede
stakeholders from knowing the complete information from which to judge
overall performance.
Amtrak's Proposed Strategic Reform Initiatives Face Significant
Implementation Challenges:
In April 2005, the board, in conjunction with Amtrak management,
released its proposed strategic reform initiatives, which included a
proposed vision for the future of intercity passenger rail
service[Footnote 38] and Amtrak's role in this vision.[Footnote 39]
(See fig. 10.)
Figure 10: Amtrak's Vision and Strategic Reform Initiatives:
[See PDF for image]
[End of figure]
Unlike in prior years, the proposal notes that the strategic plan for
fiscal years 2006 through 2010 will contain business plans for each
line of business, along with operating and capital investment plans to
meet the objectives--driven by milestones, goals, and timetables.
According to an official in Amtrak's strategic planning group, Amtrak
intends to develop a strategic plan for fiscal year 2006 that would
include a company mission statement and goals that would tie to the
mission and goals of each line of business, and Amtrak's department
goals would be based on the mission and goals for Amtrak's lines of
business. In addition, the proposal states that Amtrak will (1) provide
regular reports on its progress toward this plan, as well as continued
monthly performance and financial reports, along with future annual
assessments of lessons learned at each phase, and (2) will propose any
adjustments to the plan details or overall objectives as necessary.
Amtrak proposes to complete the implementation planning process during
the summer of 2005 and release the plan in the fall of 2005.
If fully implemented, these proposed changes in planning and reporting
could potentially provide Amtrak with a more comprehensive management
approach and guidance for the various components of its business,
including its capital program, and provide better information both
internally and externally on Amtrak's overall performance. However,
challenges exist to fully implementing these initiatives. First, as
Amtrak's board chairman noted, legislative action is required to
implement many aspects of the plan. These legislative actions include,
among other things, the federal government either assuming Amtrak's
annual debt service payments or eliminating Amtrak's debt burden (about
$3.8 billion in short-and long-term debt at the end of fiscal year
2004) and transitioning Amtrak out of the railroad retirement system.
Second, Amtrak officials noted that major challenges within Amtrak
exist in implementing this new planning process, including the time and
effort needed to implement these initiatives and the ability to keep
people focused on long-term change, even with the uncertainty of
Amtrak's future.
As of May 2005, the missions and goals for the lines of business were
in the process of being developed and should be completed within the
next couple of months, according to an Amtrak official. In addition,
the departments were developing their goals for fiscal year 2006, using
the same process from the past 3 fiscal years. With the goal
development process already under way, this official noted that Amtrak
decided that the departments would continue to develop their goals
while the mission and goals for the lines of business were also being
developed. Once the mission and goals for the lines of business are
determined, Amtrak officials will assess whether the departments' goals
conflict with the goals established for each line of business and, if
so, adjust the goals accordingly. Amtrak officials also told us that
the departments met in June 2005 to discuss goals and ensure
coordination and support between departments.
Conclusions:
Amtrak's management tools have allowed the company to operate with a
more structured process. Among other things, these tools provide Amtrak
with a clearer organizational structure, a mindset of managing to goals
and objectives, and a means of reporting progress. These tools
represent a good first step. In a number of respects, however, these
tools present a limited framework when compared with other
organizations that have progressed further in their strategic planning
efforts. It is clear that Amtrak will need to continue moving
aggressively in this area, because current efforts have not been
sufficient to provide all elements of the organization with a clear
mission, an understanding of how to set and accomplish goals that
contribute to this mission, or sufficient information on the progress
being made toward a mission. This action will be needed in spite of
what may happen with regard to Amtrak's proposed changes to its
structure and its role in intercity passenger rail. To address the
multitude of challenges facing Amtrak and provide useful performance
information to Congress, Amtrak needs to build the capability to define
goals, set priorities, ensure follow-through, and monitor progress.
Recommendations for Executive Action:
To build on the strategic planning efforts already under way at Amtrak,
we recommend that Amtrak's 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, organizational goals and objectives that encompass all of
Amtrak's activities, and strategies or action plans to achieve those
goals;
* establish annual performance goals that tie to the mission and
corporate goals;
* develop an incentive-based performance management system that ensures
responsibility for goals is clearly articulated at all levels of the
organization; and:
* assess and develop the data systems and processes necessary to
monitor, evaluate, and report--both internally and externally--on
progress toward Amtrak's mission and strategic and annual performance
goals.
[End of section]
Chapter 3: Financial Management Practices Could Better Support Amtrak's
Decision Making:
Improvements are needed to ensure that Amtrak's management and
stakeholders are provided with useful financial information, and that
financial management practices are sufficient. We examined three
aspects of Amtrak's financial management: (1) the usefulness of
financial information provided to management and external stakeholders,
(2) the design of internal control over selected areas of expense, and
(3) Amtrak's efforts to strengthen management practices. While progress
has been made, all three areas are in need of further improvement.
First, although Amtrak has made progress in establishing a more
systematic process to provide financial information to management and
external stakeholders, much of the financial information it uses for
day-to-day management purposes lacks certain relevant information or is
of questionable reliability. Second, our review of the design of
internal control practices in two areas--employee benefit expenses and
food and beverage service---identified a number of weaknesses. For
example, not considering certain accrued employee benefit expenses
resulted in an understatement of more than $100 million in employee
benefit expenses and a potential lost revenue of $12 million under
reimbursable agreements, and poor enforcement of contract provisions
may have contributed to Amtrak's spending $2 for every $1 in revenue
from on-board food and beverage service. Third, although progress has
been made in responding to other internal control weaknesses identified
by Amtrak's IPA in recent reports, the progress has come mainly through
the implementation of manual after-the-fact detective controls that do
not prevent errors from entering the system. In addition, Amtrak missed
opportunities to increase the usefulness and transparency of financial
information by restricting public reporting of work performed by its
IPA.
Financial Reports Lacked Certain Relevant Information and Contained
Significant Errors:
In recent years, Amtrak has placed increased emphasis on improving the
financial information used to manage the company. However, although
Amtrak has made progress in improving its financial information, we
found that this information could be more useful. After reviewing 29
monthly performance reports and three year-end addenda[Footnote 40]
issued from May 2002 through September 2004, we found that the reports'
shortcomings limited their usefulness to management and external
stakeholders. They lacked certain relevant information and contained
significant errors. Since these reports were issued, Amtrak has made
further progress, but more remains to be done.
Certain Relevant Information Was Not Included in Monthly Performance
Reports:
Our past work has shown that one common component of strategies adopted
by leading organizations in the area of financial management is
providing meaningful information to managers and external stakeholders.
Amtrak has taken steps in this area by creating monthly performance
reports containing a variety of financial information, including
financial information for specific train routes, called route
performance information (RPI). According to Amtrak officials, these
reports are now one of Amtrak's key management tools. We view the
reports as a positive step: they represent a significant contribution
toward establishing a systematic process to provide financial
information to internal and external stakeholders.
Although the monthly performance reports are an improvement, we found
that practices were not in place to ensure the monthly reports
contained information that would enhance the relevance to management
and external stakeholders. The information available in the reports
included preliminary financial statements and budget reports. Amtrak
officials view the monthly reports as summary documents and believe a
sufficient amount of information is being provided. We agree the
monthly reports are summary documents. Missing, however, was
information that could enhance management decision making and
stakeholder input, such as information about food and beverage service
activities, employee benefits, and core business operations (see fig.
11). For example, enhanced food and beverage-related information would
include gross profit analysis, revenue information (including separate
amounts for food and beverage sales), information on the cost of meals,
and other metrics basic to a food service operation. The absence of
this information hinders the assignment of accountability for
performance internally or externally by key stakeholders.
Figure 11: Examples of Relevant Information Not Included in Amtrak's
Monthly Performance Reports:
[See PDF for image]
[End of figure]
The RPI included in the monthly performance reports also lacked certain
relevant information, as follows:
* First, the financial information was at a summary level that did not
allow detailed analysis of individual train routes. Only aggregate
amounts were provided for total revenue, expense, and net profit or
loss for each of the approximately 45 train routes that are Amtrak's
core business line (rail passenger transportation) as well as for its
noncore business lines (principally, commuter rail operations and
reimbursements for equipment and right-of-way maintenance services).
Not available, for example, were specific amounts for such expense
components as salaries, employee benefits, and overhead for each train
route and noncore business line. Also absent was comparative expense
information, such as month-to-month and year-to-year changes in
expenses. Such information could be useful in addressing issues raised
in congressional testimony by Amtrak's board chairman on April 19,
2005. In this testimony, the chairman outlined a need to focus on
providing reporting of financial activity and performance along
Amtrak's business lines.[Footnote 41]
* Second, even the summary information for each train route and
business line did not include depreciation expense. This expense, which
totaled $606 million in 2003 and $479 million in 2002, was not
allocated by train route or by business line. Amtrak did not include
the allocation of depreciation expense, because management believes
allocating such a large noncash item is not helpful in determining the
operational result of a route. For example, Amtrak told us that total
depreciation expense includes depreciation of the capitalized costs of
certain sale and leaseback transactions, the required accounting for
which Amtrak believes inflates the "true" capitalized costs of these
assets and, thus, the related depreciation expense. However, not
allocating these significant expenses had the effect of understating
reported expenses for core and noncore business lines by 19 percent and
15 percent, respectively. For a capital-intensive business, this
information is critical to assessing performance and making business
choices about individual train routes and noncore business line
activities, such as commuter rail operations.
Information in Monthly Performance Reports Was of Questionable
Reliability:
A third limitation of the information in the monthly performance
reports was that it was of questionable reliability. We identified
several problems related to reliability, as follows:
* Financial information was incorrect and had to undergo subsequent
adjustments. Information in the monthly reports was generated from data
that subsequently required significant adjustments to correct errors in
amounts before audited financial statements could be issued. As a
result, the reliability of the information provided to managers and
stakeholders during the fiscal year was questionable. For example,
according to Amtrak, after the close of the fiscal year, corrections
made to the Amtrak financial information included management entries
and audit adjustments, with the latter being made only after receiving
sign-off from the external auditor (the fiscal year 2002 opinion was
dated March 31, 2003 and the fiscal year 2003 opinion was dated
February 25, 2004).[Footnote 42] These adjustments, which totaled
hundreds of millions of dollars for fiscal years 2002 and 2003 and
required 197 separate entries to correct the books and records, were
not reflected in the monthly reports and the RPI data until 7 months
after the end of the fiscal year. The magnitude of these misstatements
might have been detected had Amtrak performed a comprehensive risk
assessment to identify the core causes of these vulnerabilities in
accounting and financial reporting controls that adversely impacted the
usefulness of the monthly performance reports and RPI data. Amtrak has
noted that financial audit adjustments, one of the types of corrections
made at year-end, have decreased significantly from fiscal years 2002
through 2004, which would have a positive effect on the reliability of
interim financial information provided to stakeholders. However, a risk
assessment would be particularly important to identifying the need for
and designing practices to improve the reliability of information in
monthly performance reports by reducing all types of adjustments at
year-end. In our discussions with Amtrak officials, we were told that
no such risk assessment had been performed.
* Changes to methods for allocating costs to individual train routes
were insufficiently documented. Amtrak officials could not provide us
with documentation to support any of the changes made to how expenses
were allocated for any of the reports we reviewed. For example, Amtrak
did not document who authorized the changes, the reason for or effect
of the changes, or even the number of changes that were made. Further,
without documentation to support changes made to how expenses were
allocated, it was not practical for us to independently replicate the
amount of expenses charged to individual train routes. As a result, we
were unable to determine the effect of the changes we identified on the
quality of information provided to stakeholders. In addition, officials
advised us that since the beginning of RPI publication in 1993, no
comprehensive review had been performed of the allocation methods to
assess the reasonableness, consistency, and reliability of
results.[Footnote 43] In providing technical comments on a draft of
this report, Amtrak officials told us on September 2, 2005, that many
areas, such as fuel and insurance expenses, have been reviewed through
special studies over the years and that allocation methodologies are
reviewed continuously, eliminating the necessity for a comprehensive
review. We were not provided with evidence of such reviews and, as
previously noted, we found that changes to how expenses were allocated
were not documented.
* Overreliance on allocation of cost. It is generally preferable to
directly identify as many costs as practical to cost centers or
activities such as train routes and to indirectly allocate the
remainder on some reasonable and consistent basis.[Footnote 44]
However, Amtrak relied heavily on indirect cost allocation methods in
assigning costs to individual routes. In all, for fiscal years 2002 and
2003, Amtrak allocated about $4.3 billion of costs using cost
allocation methods and directly assigned only about $357 million, or
about 8 percent. This practice impacts the reliability of the RPI being
presented to key stakeholders. Amtrak officials told us that a
significantly higher percentage of costs is, in effect, direct. That
is, certain costs pertain only to a single route and are accordingly
allocated fully to that route, producing the same result as direct
assignment. However, we were not provided with evidence to support the
assertion that a percentage significantly higher than 8 percent of
costs is directly assigned.
* Sufficient support for reported amounts was not available. Amtrak did
not generate sufficient support for amounts reported as reconciling
items of the RPI to the grand total of expenses reported in Amtrak's
statement of operations. For example, we requested support for $2
billion of expenses reported as RPI reconciling amounts in fiscal years
2003 and 2002. We sought this supporting information to assess the
reliability of the total expense amounts allocated to the individual
train routes. However, an Amtrak official said that the information was
not readily available and would need to be developed for our purpose,
and that such a reconciliation was considered redundant and
unnecessary. When we received some of the information that we requested
for 2003, we found errors affecting the reliability and credibility of
the RPI. For example, approximately $11 million of employee benefit
expense had been improperly included with the expenses for noncore
lines of business and was not, as should have occurred, allocated in an
equitable manner to all business lines. As a result, we estimated that
the information in the RPI for the expenses of core business lines
(intercity rail passenger transportation) was understated by an
estimated $9.5 million; the expenses for commuter rail operations and
other noncore business lines were overstated by the same amount.
In addition, we found that depreciation expense in the amount of $479.3
million was reported in the RPI for fiscal year 2002 at $44.3 million,
an understatement of $435 million. A corresponding overstatement of
$435 million was reported in the RPI for the expense of noncore
business lines. Amtrak officials have suggested this instance was an
insignificant "typographical error"; however, we view it as the product
of inadequate control procedures over the generation of the RPI. We
also found that an amount of $19.8 million, which was identified as
prior period adjustments, was not consistent with the audited financial
statements for 2003, which reflected no prior period adjustments. In
total, expenses per the RPI agreed with total expenses per the audited
financial statements. However, given the specific errors identified,
this situation could only occur with offsetting differences of like
amounts in other RPI-reported amounts. Thus, the RPI also included
misstatements in one or more other areas to adjust the report for these
errors.
Internal Control Weaknesses Existed in the Two Areas GAO Reviewed:
A sound, entitywide system of internal control is an integral part of
effective management. Internal control helps to ensure effectiveness
and efficiency of operations, reliability of financial reporting, and
compliance with applicable laws and regulations. Managers need to
continually assess and evaluate their internal control practices to
ensure that they are well-designed and well-operated, are appropriately
updated to meet changing conditions, and provide reasonable assurance
that organizational objectives are being met.
We reviewed the internal control practices in two key areas of Amtrak's
business and found weaknesses in both areas.[Footnote 45] The two areas
we reviewed, selected because of their size and importance, were the
following:
* Employee benefit expenses. These expenses totaled more than $1.5
billion over the 3-year period ending September 30, 2004, and represent
approximately 16 percent of the total operating expenses over that
period.
* Food and beverage service. Food and beverage service expenses totaled
more than $324 million over the 2-year period ending September 30,
2003, and represent approximately 5 percent of the total operations
expenses over that period. In addition, food and beverage service is
critical from a financial standpoint because, as our analyses show,
Amtrak loses substantial sums of money on food and beverage service.
The weaknesses we found adversely affected the quality of financial
information provided to management and external stakeholders. In the
employee benefit area, for example, control weaknesses resulted in a
misstatement of expenses among lines of business of nearly $105 million
and in potential lost revenue from third-party reimbursements totaling
$12 million for the 3-year period we reviewed. In the food and beverage
area, although Amtrak incurred $2 in expense for every $1 in revenue,
it did not ensure compliance with key contractual provisions that would
have enhanced the quality of the information available for management
purposes.
Internal Control over Employee Benefit Expenses Needs Further
Improvements:
During our review of the 3-year period ending September 30, 2004, we
noted improvements in Amtrak's monitoring of actual and allocated
employee benefit costs; however, control weaknesses exist in the
benefits programs for both Amtrak's employees and its senior
executives. The weaknesses in the larger program relate primarily to
how benefit costs are allocated and adjusted, while the weaknesses in
the senior executive program relate primarily to establishing the basis
for performance award amounts.
Costs of Providing Benefits Were Understated and Not Fully Recovered:
Amtrak did not allocate accrued postretirement health benefit expenses
among its lines of business; instead, it allocated only the company's
estimated cash contributions to fund health benefit expenses for
current retirees.[Footnote 46] As a result, the cost information
provided to stakeholders on the different lines of business was
incomplete and understated. Amtrak's practice of allocating only the
estimated cash contributions is also different from the practice used
by Class I freight railroads in developing shipping rates.[Footnote 47]
In setting their rates, these railroads identify and include as a basis
for setting rates the full costs of these benefits, whereas Amtrak
identifies and recovers only the cash basis costs for services
performed for third parties.
In addition, for fiscal years 2002 through 2004, Amtrak used standard
rates that did not result in the allocation of the actual amount of
benefit expenses to all of its different lines of businesses, including
reimbursable work performed for other entities in return for a fee,
which resulted in potentially lost revenue totaling $12 million. Amtrak
established standard benefit expense rates at the beginning of each
year and applied the rates to actual labor expenses as they were
incurred throughout the year. However, it was not until fiscal year
2003 that Amtrak began to periodically adjust its benefit expense rates
to reflect actual experience. We noted that the amount of the
misstatements decreased in 2004 when compared with the earlier years we
reviewed. Also, because the following year's benefit expense rates are
established before Amtrak issues its audited financial statements, the
company would need to adjust the rates used for the effect of prior
year-end adjustments--a practice it first employed in 2004.
The net effect of these weaknesses was an understatement of benefit
expenses among Amtrak's lines of business totaling nearly $105 million
and potentially lost revenue totaling $12 million. (See table 2.) The
largest understated amount--$76.9 million--resulted from the difference
between the amount Amtrak allocated using estimated cash contributions
($25.8 million) and the total accrued postretirement expenses ($102.7
million). Also, by not adjusting standard benefit rates to reflect
higher actual amounts, Amtrak understated expenses among its lines of
business by another $28 million.
Table 2: Summary of Effects of Understatements and Potentially Lost
Revenue for the 3-year Period Ending September 30, 2004:
Dollars in millions.
Not allocating full accrued costs of employee benefits;
Understatement: $76.9;
Potentially lost revenue: $7.5.
Not adjusting standard benefit rates to actual amounts;
Understatement: $28.0;
Potentially lost revenue: $4.5.
Source: GAO analysis of Amtrak data.
[End of table]
By not including accrued postretirement expenses in billings to outside
parties, Amtrak may potentially lose revenue; it also risks not
collecting all accrued benefit expenses should commuter or reimbursable
contracts be terminated. When we brought this issue to the attention of
Amtrak officials, they said that outside parties might be resistant to
reimbursing Amtrak for an allocable share of these expenses. However,
we reviewed examples of commuter and reimbursable contracts and found
that a reasonable interpretation of the contractual provisions supports
the use of full accrual expenses as the basis for amounts charged under
these agreements consistent with how such amounts are determined under
Amtrak's overall method of accounting.
Control Practices over Supplemental Executive Retirement Plan Awards
Were Weak:
Control practices over Amtrak's Supplemental Executive Retirement Plan
(SERP) were weak.[Footnote 48] In February 2000 and January 2004,
$551,765 was granted in 34 separate SERP awards. Five awards totaling
$147,580 were given to the two individuals who served as Amtrak's
president and chief executive officer during this period; the remaining
awards went to 25 other persons. We identified three main weaknesses
with the way in which these awards were made:
* Criteria to evaluate performance were absent. The employment contract
for Amtrak's current president provides that the board will authorize
payment of a SERP award after a review of performance, based on
criteria or goals set forth in a separate document as a guide. After we
inquired about these criteria, an Amtrak official told us that no
separate document existed setting forth the criteria that the board
should use in evaluating performance. Board minutes approving the
awards did not identify any specific performance goals that were
achieved. For example, the board approved an award to a former
president on the basis of Amtrak's performance in fiscal year 1999 and
the positive outlook for fiscal year 2000. However, Amtrak reported
losses of $846 million, $840 million, and $877 million for fiscal years
1998, 1999, and 2000 (ending September 30, 1998, 1999, and 2000,
respectively).
* Key terms needed to implement the process effectively were not
defined. The SERP document contains important terms that are not
adequately defined and, in some cases, are inconsistent with language
found in board minutes and resolutions that implemented the plan. (See
table 3 for examples.) The most important term that is not defined in
the SERP is the "target" that must be met before the board will approve
an award. Two terms included in the SERP--"financial targets" and
"corporate plan targets"--can mean different things. For example, the
latter term may include nonfinancial performance measures. Amtrak's
management informed us that these terms had not been expressly
defined.[Footnote 49] Such ambiguity leaves open the possibility that
the board could apply inconsistent definitions, adversely affecting the
credibility of award decisions.
* Awards were granted before financial results were finalized. The
board granted awards in February 2000 and January 2004; the awards
granted in 2004 were given before the company had issued its audited
financial statements. This practice may not be prudent, given Amtrak's
history of significant changes to reported operating results upon
audit.
Table 3: Examples of Key SERP Terms That Were Not Defined:
Term used in SERP document: Financial targets;
Term used in board resolution: Corporate plan targets;
Potential effects: No consistency in basis for award.
Term used in SERP document: Management committee member; senior staff
employee;
Term used in board resolution: Management committee member;
Potential effects: Lack of clarity as to who is eligible; when asked,
management could not provide a definitive list.
Term used in SERP document: Compensation;
Term used in board resolution: Pay;
Potential effects: Inconsistency in how amount of award is determined.
Source: GAO analysis of Amtrak data.
[End of table]
Adequate control practices over activities involving the SERP are
necessary for Amtrak to fulfill its responsibilities to be accountable
for stewardship of its resources, including federal subsidies.
On-board Food and Beverage Service Control Practices Need
Strengthening:
During fiscal years 2002 and 2003, Amtrak incurred $2 in expense for
every $1 in revenue from its on-board food and beverage service. The
total loss for these 2 years was over $160 million. This loss must be
funded by other revenue sources, including federal subsidies; reduction
in expenses; or some combination of the two. Amtrak's control practices
over its on-board food and beverage service need strengthening. We
found that, although this activity has significant inherent risk,
Amtrak did not ensure compliance with key provisions of its
contract[Footnote 50] or adequately monitor contractor activity.
Contract Provisions Were Not Enforced:
Amtrak has not enforced key contract provisions, which has negated its
ability to prevent and detect improper payments for food and beverage
service. We identified three key provisions that were not enforced.
* Providing an annual report. The contract requires the contractor to
provide an independently audited annual report within 120 days
following the end of each contract year. This report was to be
certified by contractor officials. Within the annual report, the
contractor was to provide (1) actual and budgeted amounts for key line
items and (2) a narrative explanation for any actual to budget variance
greater than 1 percent in the aggregate for all commissaries.[Footnote
51] However, Amtrak has not required the contractor to provide this
annual report for any of the 5 years the contract has been in place.
Amtrak was unable to provide documentation regarding why this key
contract provision was not enforced. Amtrak officials told us that they
relied on contractor-provided monthly operating statements and on
reports from the Amtrak OIG instead of the annual report.
These mechanisms, while useful, would not meet fundamental control
purposes. We found that the monthly operating statements lacked
critical information that was to be included in the annual report and,
importantly, lacked independence because they were prepared by the
party seeking reimbursement and were not audited. In contrast, the
contractually required annual report was to have been certified by
contractor officials and audited by a certified IPA. The Amtrak OIG
reports, while providing management with information on some aspects of
Amtrak's food and beverage service activities, should not be viewed as
a substitute for a comprehensive internal control program. Internal
control should be a continuous built-in component of operations that,
among other things, considers the results of audits and ensures prompt
resolution. This component is especially critical in an operational
area where Amtrak is losing considerable money. In addition, upon
reviewing the Amtrak OIG's work, we found that certain scope
limitations existed. For example, the Amtrak OIG noted in a report on
the food and beverage contract to Amtrak management that its work in
this area had been limited due to the contractor's failure to provide
certain requested information and documentation.
* Determining whether discounts and rebates were adequately passed
along. Under the contract with Gate Gourmet, Amtrak is permitted to
receive discounts and rebates on food and beverage purchases by the
supplier. However, Amtrak has not implemented processes to ensure that
rebates and discounts received directly from suppliers or indirectly
through its contractor are accurate and complete. The contract allowed
Amtrak to audit the contractor's allocations of trade and quantity
discounts received from purchases of food and beverages. However,
Amtrak has neither requested an audit of the discounts credited to it
over the 5 years the contract has existed, nor requested that the
contractor certify that all discounts due to Amtrak had been credited
to its account. Again, Amtrak was unable to provide us with written
documentation supporting its decision or its consideration of this
issue. Contractor representatives told us that many discounts are
immediately reflected in the prices billed and, therefore, directly
provided to Amtrak. They said that other supplier-offered discounts are
paid or credited to the contractor retroactively, which are then
allocated to individual accounts of the contractor (like Amtrak) on the
basis of the percentage of aggregate purchases of the discounted items.
Amtrak officials advised us that discounts and rebates totaling
$278,385 and $278,073 for fiscal years 2003 and 2002, respectively, had
been received on gross purchases subject to discounts and rebates of
$3.6 million and $2.9 million, respectively.[Footnote 52] Amtrak
officials also explained that the majority of rebates are received
directly from suppliers and reviewed. However, no formal procedures
have been established to review and verify the accuracy of the amount
of rebates and discounts actually received from the suppliers. Because
Amtrak did not require an independent audit or otherwise analyze the
trade and quantity discounts received, it has limited assurance that
such amounts were reasonable and complete.
* Measuring contractor performance. The contract called for performance
standards and measures to assist Amtrak in monitoring and evaluating
contractor performance. These standards and measures have not been
established in accordance with the provisions of the contract. Amtrak
officials explained that these standards are addressed elsewhere in the
contract. However, we believe that preparation of formal standards and
measures, as called for in the contract, would have facilitated
increased oversight. Under the contract, these standards include
timeliness and completeness of deliveries, adherence to product
specifications, food safety and sanitization practices, proper
accounting for stock, and compliance with laws and regulations.
Performance measurements could be used to evaluate performance against
established performance standards, with the appropriate incentives and
penalties applied on the basis of performance. In addition,
appropriately used performance standards would be a mitigating control
to partially address the risk associated with relying on contractor-
produced monthly reports as the basis for payment to the same
contractor.
Contractor Purchases Need More Monitoring:
While Amtrak performs several activities to monitor food and beverage
purchases by the contractor, these activities could be bolstered. We
found that items were purchased at amounts that varied significantly
without sufficient explanation or documentation of the variances.
Amtrak officials said that they monitored contractor purchases using
daily reports that listed quantity, unit size, cost, and the last prior
purchase of the previous day's purchases. Also, Amtrak staff at its
various commissaries sign off on a daily summary of invoices paid by
its contractor and randomly verify the consistence of supplier invoices
and receiving documentation. Further, Amtrak makes available to all
employees via its intranet, various revenue reports that capture
information by train, car type, location, dates, and usage reports that
allow the review of stock issued to trains. However, Amtrak has not
formally established internal control procedures, which would include
ensuring that (1) all reviews are conducted in a timely and consistent
manner, (2) identified errors or other issues are documented and
tracked, and (3) corrective actions taken are documented to ensure
completion. During fiscal years 2002 and 2003, Amtrak's data showed
that it incurred $2 in expense for every $1 in food and beverage
revenue, which resulted in a 2-year loss of over $160 million.
We used forensic auditing techniques, including data mining,[Footnote
53] to selectively review over $80 million of purchase order
information for fiscal years 2002 and 2003. Our review found that the
contractor was generating purchase orders with significant variances in
unit order prices during both fiscal years 2002 and 2003. For example,
the order prices of a 12-ounce Heineken beer ranged from $0.43 to $1.04
per bottle in 2003, the order prices of a 4-ounce beef tenderloin
ranged from $3.37 to $7.19, and the order prices of a 10-ounce strip
steak ranged from $3.02 to $7.58. In 2002, the Heineken beer order
prices ranged from $0.63 to $3.93 per bottle, the beef tenderloin
ranged from $0.30 to $6.60, and the strip steak ranged from $3.52 to
$16.35 per portion.
Amtrak officials told us that purchase order information did not always
reflect actual amounts paid--either in total or per unit. For example,
Amtrak officials said a price change may have occurred between the time
an item was ordered and when it was delivered. They also said record-
keeping errors may have occurred, and unit prices in the inventory
system may, for example, be based on a different pack size than that
received or from that used for the last purchase. However, given the
importance of purchase orders in a food and beverage operation, it is
important that internal control practices include processes to
systematically analyze and monitor purchase order information. No such
procedures were established by Amtrak.
To determine whether order prices reflected actual amounts paid, we
nonstatistically selected 37 payment transactions and reviewed the
underlying supporting documentation provided by Amtrak, including
purchase orders, receiving records, vendor invoices, and evidence of
payments. The supporting documentation provided for these transactions
identified significant variances in certain unit prices paid during
fiscal years 2002 and 2003. For instance, our review of the supporting
documentation provided for the 37 payment transactions found payments
for the Heineken beer ranged from $0.43 to $1.04 per bottle, payments
for the beef tenderloin ranged from $3.05 to $6.59 per portion, and
payments:
for the strip steak ranged from $4.70 to $5.28 per portion.[Footnote
54] Amtrak officials stated that the strip steak examples were
"emergency purchases." However, following our request for documentation
to support this claim, the Amtrak senior director of food and beverage
service told us on June 29, 2005, that documentation to support the
assertion that these were emergency purchases did not exist. The
establishment of internal control procedures that require the
documentation of the (1) identification and correction of errors and
(2) approval for emergency purchases would ensure that adequate
documentation is readily available for review by internal and external
parties.
We also found that, Amtrak, on the basis of amounts reported by the
contractor, paid the contractor each month for the cost of food and
beverages purchased for Amtrak, as well as for commissary and
associated labor expenses and other expenses incurred--the contract is
a reimbursable contract. The contractor was also paid a fee based on
the cost of on-board stock. However, Amtrak did not establish adequate
internal control to address the potential risk of paying the contractor
on the basis of contractor-reported amounts that did not include
adequate supporting documentation. During fiscal years 2002 and 2003,
contractor-prepared monthly operating statements were the basis for
amounts paid by Amtrak totaling over $138 million to the contractor for
goods and services provided. However, because proof of actual
contractor payments made to suppliers was not required, and because of
the other significant internal control weaknesses we previously listed,
Amtrak had limited assurance that the amounts paid to the contractor
were valid.
Amtrak Has Made Progress in Improving Financial Management Practices,
but More Work Remains:
For fiscal years 2002 and 2003, Amtrak's IPA reported multiple areas of
significant internal control weaknesses as part of an annual audit of
Amtrak's financial statement.[Footnote 55] However, for fiscal year
2004, the IPA reported that much progress had been made and only one
significant weakness involving accounting for capital assets
remained.[Footnote 56] Amtrak's progress in addressing its control
weaknesses is an important achievement. In general, however, its
efforts have been achieved primarily through the implementation of
manual detective controls instead of preventive controls. Thus,
improvements made by the end of fiscal year 2004 enable the production
of useful financial information after the fact--typically, 5 to 6
months after the end of the year. However, until effective controls are
established that prevent errors in financial information and address
their underlying causes, Amtrak's ability to produce relevant and
reliable financial information for management and stakeholders to use
for decision making will be hampered.
Progress Was Made in Addressing Internal Control Weaknesses:
In audits for fiscal years 2002 and 2003, Amtrak's IPA noted that the
company had made progress in addressing internal control weaknesses
that previously had been reported to Amtrak's board of directors.
Further, based on its audit of Amtrak's fiscal year 2004 financial
statements, the IPA reported that much progress had been made and that
only one significant weakness--involving accounting for capital assets-
-remained. However, the IPA noted that improvement had been achieved
primarily from the implementation of manual detective controls compared
with preventative controls. Such detective, or "back-end," controls
take place after transactions have been recorded and then corrected for
misstatements after the fact. These controls are subject to human
error, and a loss of key individuals could result in control
breakdowns. In addition, it is relatively labor-intensive to ensure
that such controls are operating effectively.
We reviewed Amtrak's response to the IPAs findings in fiscal years 2002
to 2003 with respect to internal control weaknesses regarding capital
assets and found that Amtrak's response could be improved. We selected
this area because of its size and significance--depreciation and
amortization represented approximately 20 percent of Amtrak's total
operating expenses for fiscal year 2003, and Amtrak's capital assets
represent more than 83 percent of its total assets. Amtrak's IPA had
identified ongoing problems in this area in fiscal year 2001 audits.
Similar to what the IPA observed, we found that Amtrak's response was
limited mainly to back-end control procedures--that is, Amtrak looks at
transactions after they had been recorded and corrects for
misstatements after the fact. Such back-end procedures do not identify
core causes of accounting mistakes and prevent the errors from entering
the system.[Footnote 57] In contrast, front-end prevention control
practices should, if fully and properly implemented, among other
things, improve the usefulness of Amtrak's internal financial
information. Importantly, without the appropriate front-end procedures
to prevent errors from entering the system, information used by
management and external stakeholders for decision making may not be
reliable. Potential front-end procedures could include such things as
monthly or more frequent reviews for accuracy and appropriateness by
management of (1) capital expenditures incurred to date, (2) expected
costs to complete against initial and revised project budgets, and (3)
all proposed manual journal entries.
Other Opportunities to Increase the Usefulness and Transparency of
Financial Information Have Been Missed:
Amtrak management missed several other opportunities to use its IPA's
work to increase the usefulness and transparency of its financial
information. These opportunities relate to making all audit reports
available to the public and expanding the work that the IPA conducts.
Report on Internal Control and Compliance Was Not Made Public:
Amtrak's IPA is engaged to report on the results of the audit of the
consolidated financial statements of Amtrak. The IPA reports on the
results of the audit of the consolidated financial statements,
conducting this work in accordance with Generally Accepted Auditing
Standards issued by the American Institute of Certified Public
Accountants. This set of standards is typically used for audits of
publicly and privately owned organizations. Amtrak's IPA is also
separately charged with reporting in accordance with generally accepted
government auditing standards issued by the Comptroller General of the
United States. These standards, which are designed to meet the needs of
users of government audits, prescribe two additional reporting
requirements--reporting on internal control and reporting on compliance
with laws, regulations, and provisions of contracts or grant
agreements.
The public sees the results of only one of these efforts. Amtrak tasked
its IPA with issuing two reports, but the only report that is publicly
available is the report that provides an opinion on the results of the
audit of Amtrak's financial statements. The second report, which covers
internal control and compliance with laws, regulations, contracts, and
grants, is restricted to the use of Amtrak's management and the board
of directors. DOT officials told us that they also receive the second
report. Many other entities with significant federal ties (through
direct subsidies, loan guarantees, or other direct and indirect
relationships) receive and make publicly available reports by their
IPAs that are in accordance with generally accepted government auditing
standards. These entities include the United States Postal Service,
Pension Benefit Guaranty Corporation, and Railroad Retirement Board.
Amtrak officials were not able to provide us with a distribution list
for this second report, and, according to these officials, they had no
recollection of these reports being requested by or sent to any
external parties.
The concept of accountability for public resources is important in our
nation's governing processes. Legislators, government officials, and
the public want to know, among other things, whether (1) government
resources, such as the over $29 billion in subsidies provided to
Amtrak, are managed properly and used in compliance with laws and
regulations and (2) services are being provided efficiently,
economically, and effectively. The desirability of transparency with
respect to audit information on Amtrak's internal control and
compliance with laws and regulations is, in our view, high given
Amtrak's public mission and the large federal subsidies involved.
Increasing IPA Role Could Help Improve Information:
Amtrak's financial information could also be improved by using
additional expertise available from the IPA--some of this expertise is
already called for by contract but not utilized. The contract between
Amtrak and its IPA called for work addressing compliance with certain
federal regulations concerning overhead rates developed and applied to
recover indirect costs associated with work performed for outside
parties.[Footnote 58]While the contract contemplated this type of work,
Amtrak did not engage the IPA to perform the work. Amtrak could also
use the IPA's experience and knowledge by engaging the auditor for
additional work related to making its financial information more useful
to management. For example, engaging the IPA to review financial
statements on an interim basis may have identified opportunities for
improvement in the reliability and timeliness of data provided to
stakeholders. Further, Amtrak could benefit from engaging an IPA to
perform work specific to enhancing the timeliness and reliability of
financial information used in monthly reports and for day-to-day
decision making by management and external stakeholders. While this
increased role by the IPA would not be without cost, the IPA is in a
good position to efficiently identify the core causes of errors in
financial information and other issues and develop controls and
processes to prevent these errors.
Conclusions:
Although Amtrak has made progress in providing financial information
for management purposes, the current information lacks the relevance
and reliability needed to support managers and external stakeholders in
exercising stewardship over the agency's operations, including federal
subsidies. The current information is incomplete, in terms of both what
is included and how specifically Amtrak's various train routes and
lines of businesses can be evaluated. This information also contains
significant errors. These deficiencies point not only to a need to
improve financial reporting practices, but also to a deep-seated set of
concerns: that is, the types of internal control practices that are
needed to help ensure the reliability of financial reporting are not in
place. Amtrak's management may be able to correct a number of these
issues on its own, but the company is likely to need outside help in
developing a comprehensive approach to address internal control
weaknesses and improve the financial information for management and
external stakeholders.
Recommendations for Executive Action:
To ensure that Amtrak's financial reporting and financial management
practices support sound business decisions and the efficient and
effective use of federal funds provided to Amtrak, we recommend that
the Secretary of Transportation direct the Federal Railroad
Administrator to take the following three actions:
* require Amtrak to submit a plan, which includes specific actions to
be taken, anticipated outcomes (consistent with the recommendations
outlined below), and completion dates, to improve its financial
reporting and financial management practices;
* review and provide Amtrak with feedback and direction, as necessary,
on this plan to ensure that the most effective approach(s) to improving
financial reporting and financial management practices are implemented;
and:
* monitor Amtrak's performance under the plan and report, at least
annually, to Congress on progress being made by Amtrak regarding
improvements of its financial reporting and financial management
practices--this report should identify any specific actions either
Amtrak or Congress should take to facilitate such improvements.
To improve Amtrak's efforts in addressing financial management
challenges and better support management decision making, we recommend
that the president of Amtrak take the following eight actions discussed
in table 4:
Table 4: Specific Recommendations--Financial Reporting and Financial
Management Practices:
Improve usefulness of financial reporting:
Issue: Include relevant information in monthly performance reports;
Recommendation: Add the following information to monthly performance
reports:
* Food and beverage services: separate revenue and expense information,
gross profit analysis, information on the cost of meals, and other
metrics basic to a food service operation;
* Employee benefits: cost trends, changes in the components of benefit
costs, and initiatives to manage these costs;
* Each line of business: components of key expense line items and
functional activities (such as salaries and benefits), trends in key
expense components, differences in actual versus budgeted results, and
appropriate performance metrics (such as revenue per passenger mile and
expense per passenger mile);
* Each train route in the route performance information (RPI):
comparative expense and net profitability or loss, amounts for
depreciation expense, and amounts for other components of expenses
(such as salaries and benefits).
Issue: Increase reliability of information in monthly performance
reports;
Recommendation: Perform a comprehensive risk assessment of financial
reporting processes that support preparation of monthly performance
reports and the RPI, to include determining areas of vulnerability,
implementing appropriate compensating and mitigating internal controls,
and ongoing monitoring to ensure compliance.
Issue: Make allocation policies and procedures more transparent;
Recommendation: Document policies and procedures related to controlling
the information in the monthly performance reports, including the RPI.
The policies and procedures should cover how expenses are allocated to
Amtrak's routes, as well as specific guidance on documenting the
justification and authorization of changes made to allocation methods.
Improve financial management practices.
Issue: Ensure benefit costs are complete and can be recovered in
billings to outside parties;
Recommendation: Allocate accrued postretirement health benefit expenses
among Amtrak's lines of business and reflect accrued costs in billings
for employee benefits under reimbursable agreements with outside
entities. Adjust standard benefit expenses rate on a timely basis.
Issue: Make compensation decisions more transparent;
Recommendation: Modify existing controls:
* Clearly define all significant terms used in Supplemental Executive
Retirement Plan (SERP) determinations (such terms include management
committee member, senior staff employee, compensation, financial
targets, and performance goals) so that they can be consistently
applied throughout the process;
* Reconsider the timing of management proposals for SERP awards to
ensure that decisions are based on information from audited financial
statements.
Issue: Develop internal control enhancements;
Recommendation: Develop a comprehensive action plan for immediately
implementing preventive controls to enhance the reliability of
financial data and address the reportable condition over accounting for
capital assets in the most recent reports and letters of comment from
the independent public accountant.
Issue: Seek assistance in strengthening procedures;
Recommendation: Engage an independent public accountant to provide;
* special services as necessary to provide assurance over compliance
with federal regulations concerning overhead rates developed and
applied to recover indirect costs associated with work performed for
outside parties and;
* review-level attestation work on Amtrak's quarterly financial
statements.
Issue: Enhance accountability and transparency;
Recommendation: Continue to have annual audits of its financial
statements performed under U.S. generally accepted government auditing
standards (GAGAS) and, effective beginning with its fiscal year 2004
financial statement audit, make publicly available the auditor reports
prepared under GAGAS reporting standards for financial audits,
including those on internal control and compliance with laws,
regulations, and provisions of contracts and grants.
Source: GAO.
[End of table]
Recommendations on the findings pertaining to Amtrak's food and
beverage service are contained in a separate report issued in August
2005.[Footnote 59]
[End of section]
Chapter 4: Despite Increasing Operating Losses and Federal Subsidies,
Amtrak Has Not Developed a Comprehensive Cost Control Strategy:
Although its operating losses and federal subsidy have been increasing,
Amtrak has not developed a comprehensive cost control strategy. While
Amtrak's operating expenses have decreased over the past 3 fiscal
years, its operating losses have grown each year and are now over $1
billion[Footnote 60] annually. These losses are projected to increase
by about 40 percent over the next 4 years. Amtrak's cost-cutting focus
has been on creating and monitoring its yearly operating budget and
managing headcount levels, with its various departments deciding how
much emphasis, if any, to place on any other cost control actions.
However, such cost control actions have not been integrated into a
comprehensive cost control strategy. Without a comprehensive strategy
for containing costs, Amtrak will likely miss opportunities to reduce
its operating losses. Furthermore, Amtrak does not have complete and
reliable cost data that would support a comprehensive strategy. Without
these data, Amtrak has limited ability to understand its corporate and
unit costs and to identify where potential cuts might be most
effective. Finally, Amtrak needs to continue to employ widely used
industry cost reduction practices--such as benchmarking, outsourcing,
and efficiency reviews--to help decrease its operating costs.
Amtrak's Annual Operating Loss Has Grown to over $1 Billion and Is
Projected to Increase to over $1.4 Billion, While Federal Subsidies
Have Increased:
Although Amtrak's operating expenses have decreased, Amtrak's annual
operating loss (total revenues minus operating expenses) has grown to
over $1 billion each year over the last 3 fiscal years. During this
same period, Amtrak's federal operating subsidy[Footnote 61] increased
over 200 percent, from about $200 million in fiscal year 2002[Footnote
62] to over $700 million in fiscal year 2005.[Footnote 63] Amtrak is
projecting that its federal operating subsidy will remain stable from
fiscal years 2006 to 2009, but that its operating losses will increase
about 40 percent to over $1.4 billion by fiscal year 2009.[Footnote 64]
(See fig. 12.)
Figure 12: Amtrak's Constant Dollar Operating Losses and Federal
Operating Subsidy, Fiscal Years 2002 to 2009:
[See PDF for image]
Note: Amounts are in constant 2004 dollars. Fiscal years 2005 to 2009
figures for operating loss and federal subsidy are Amtrak projections.
Operating losses from fiscal year 2002 to 2004 and projected losses
from fiscal years 2005 to 2009 do not include interest expenses.
[End of figure]
Amtrak's operating loss projections may be understated, however, since
they do not include interest expenses[Footnote 65] and rely on $377
million in operating efficiencies that Amtrak estimates it could
achieve as a result of operating efficiencies and benefits from capital
investments in its Fiscal Year 2005 to 2009 Strategic Plan. In its
April 2005 Strategic Reform Initiatives proposal, Amtrak estimates that
it can achieve operating savings of nearly $550 million by fiscal year
2011. To achieve these savings, however, all of the elements in the
reform proposal must be implemented, including the following: receiving
an 80 percent federal capital match for state intercity passenger rail
funds, realizing increased revenues from passengers, obtaining
additional state operating contributions for corridor trains, and
eliminating all of its legacy debt by the federal government. (See
table 5.)
Table 5: Assumptions in Amtrak's Strategic Reform Initiative for Fiscal
Year 2011 Operating Savings:
Dollars in millions.
Assumptions:
Revenue enhancements:
Cumulative benefit from gas price increases;
Proposed savings: $80.
Customer service enhancement benefit;
Proposed savings: $100.
Proportionate share access payment increase from Northeast Corridor
commuter agencies;
Proposed savings: $30.
Additional state operating contributions from fully allocated costing
on all corridor trains;
Proposed savings: $115.
Additional state operating contributions from fully allocated costing
on all long-distance trains;
Proposed savings: $15.
Subtotal;
Proposed savings: $340.
Cost reductions:
Outsourcing;
Proposed savings: $90.
Productivity;
Proposed savings: $60.
Phase-out of Railroad Retirement Tax;
Proposed savings: $55.
Subtotal;
Proposed savings: $205.
Total: $545.
Source: GAO analysis of Amtrak data.
Note: This table does not include the financial impact of a working
capital infusion or other assumptions, such as no restructuring
charges, from fiscal years 2006 to 2011.
[End of table]
These projections also do not take into account the removal in April
2005 of Amtrak's Acela trainsets from service for an undetermined
period due to brake-related problems. The absence of Acela trains could
have a significant impact on Amtrak's fiscal year 2005
revenues.[Footnote 66]
Both Amtrak's revenues and total expenses decreased between fiscal
years 2002 and 2004. Amtrak's revenues decreased by over 16 percent,
and its total expenses decreased by over 9 percent.[Footnote 67]
Amtrak's revenues decreased more than its expenses by over $50 million.
(See table 6.) The relationship between these decreases in both
revenues and expenses can be reflected by the change in Amtrak's
operating ratio, which shows that for every $1.00 in revenue, Amtrak
spent $1.51 in fiscal year 2002. In fiscal year 2004, this increased to
$1.63. As of July 2005, this number for the fiscal year to date
decreased slightly to $1.61.
Table 6: Amtrak's Real Total Revenues, Operating Expenses, Total
Expenses, and Operating Ratios, Fiscal Years 2002 to 2004:
Dollars in thousands.
Total revenues[C];
Fiscal year[A] 2002: $2,313,642;
Fiscal year[A] 2003: $2,117,908;
Fiscal year[A] 2004: $1,931,512;
Change from fiscal years 2002 to 2004[B]: ($382,130).
Operating expenses[D];
Fiscal year[A] 2002: $2,849,451;
Fiscal year[A] 2003: $2,652,004;
Fiscal year[A] 2004: $2,450,472;
Change from fiscal years 2002 to 2004[B]: ($398,979).
Operating ratio[E];
Fiscal year[A] 2002: 1.23;
Fiscal year[A] 2003: 1.25;
Fiscal year[A] 2004: 1.27;
Change from fiscal years 2002 to 2004[B]: 0.04.
Total expenses[F];
Fiscal year[A] 2002: $3,488,917;
Fiscal year[A] 2003: $3,417,610;
Fiscal year[A] 2004: $3,158,016;
Change from fiscal years 2002 to 2004[B]: $(330,901).
Total revenue to total expense ratio;
Fiscal year[A] 2002: 1.51;
Fiscal year[A] 2003: 1.61;
Fiscal year[A] 2004: 1.63;
Change from fiscal years 2002 to 2004[B]: 0.13.
Source: GAO analysis of Amtrak data.
[A] Amounts for fiscal years 2002, 2003, and 2004 include mail and
express revenues and expenses. For fiscal year 2004, operating expenses
and total expenses do not include $82.4 million in noncash special
charges for discontinuance of mail and express service.
[B] Amounts may not equal due to rounding.
[C] Total revenues exclude federal operating subsidies.
[D] The operating ratio is calculated as operating expenses divided by
total revenues. Operating ratios more than 1 indicate total operating
expenses are higher than total revenues.
[E] Total operating expenses do not include interest or depreciation
expenses.
[F] Total expenses include interest and depreciation expenses.
[End of table]
The reasons for decreasing revenues and expenses include the following:
* Revenues: The termination of the Massachusetts Bay Transportation
Authority (MBTA) commuter rail contract resulted in a $150 million
revenue loss in fiscal year 2004, or about 40 percent of the total
reduction in Amtrak's revenue. Revenues also decreased in part because
Amtrak phased out its mail and express freight line of business in
fiscal year 2004.[Footnote 68]
* Operating expenses: Decreases occurred in most of Amtrak's major
expense categories. Labor costs, Amtrak's largest single expenditure
category, accounted for about $200 million, or over 60 percent, of the
overall decrease in expenses. Amtrak reduced its overall labor costs
alone by almost 12 percent from fiscal years 2002 to 2004. This
reduction was mainly achieved by reducing employees by about 3,500 over
the same time period; about 1,500 of this reduction was due to the
termination of the MBTA contract.[Footnote 69]
Amtrak will likely face challenges to reduce its operating costs
through reductions in labor costs in the future. Amtrak's labor costs
account for almost 50 percent of its total expenditures in fiscal year
2004. The labor force is about 85 percent unionized; therefore,
attempts to reduce labor costs for much of Amtrak's labor force must be
negotiated with the unions. According to Amtrak officials, by April
2005, Amtrak had signed contracts with 3 of its 15 unions, representing
about 37 percent of Amtrak's union workforce. If the pattern from these
three agreements extends to the agreements with the other unions,
Amtrak officials estimate that wage costs could increase by almost 10
percent over the 5-year life of the agreements. Amtrak officials expect
that each labor union settlement will include this same level of wage
increase, since Amtrak has extended this level of wage increase to
every union as part of its initial offer in the current bargaining
round. Amtrak's labor relations officials are negotiating changes to
work rules to increase productivity and lower headcount, which could
lower labor costs. However, since Amtrak does not keep formal track of
labor productivity savings or have labor productivity measures for its
workforce, it is unclear how Amtrak will know if these savings are
actually being achieved. As union labor wages increase and other labor
cost reductions are uncertain, Amtrak may be pressured to reduce other
costs in order to achieve significant reduction in its operating costs.
According to Amtrak officials, Amtrak may be able to offset other cost
increases, such as health care costs, by introducing employee
contributions toward health insurance premiums. Prior to the current
round of labor negotiations, union employees did not contribute toward
their health insurance costs, which constituted about 18 percent of
Amtrak's total labor costs in fiscal year 2004. Amtrak officials stated
that Amtrak has successfully implemented employee contributions in the
three agreements it has already signed, and that these contributions
are a part of Amtrak's initial negotiation offer to each of its
unions.[Footnote 70] However, since both work rule changes and employee
health care contributions are subject to negotiation with each labor
union, it is uncertain if Amtrak will be able to implement them across
its workforce.
Amtrak Has Not Developed a Comprehensive Cost Control Strategy:
Amtrak has not developed a comprehensive cost control strategy that
uses performance or cost information to most effectively direct its
cost control efforts. In our work on GPRA, we noted that leading
organizations in the public and private sector--in their efforts to
improve performance while reducing costs--use performance information
as a basis for allocating scarce resources and for assessing which of
their processes are in the greatest need of improvement in terms of
cost, quality, and timeliness. In particular, we found that no picture
of how taxpayers' money is being spent is complete without adequate
cost and performance information. By analyzing the gap between where
they are and where they need to be in order to achieve desired
outcomes, management in leading organizations can target those
processes that are in the most need of improvement, set realistic
improvement goals, and select appropriate improvement
techniques.[Footnote 71]
We found examples of comprehensive cost strategies at several of the
railroads we studied. One freight railroad, for example, adopted a
corporatewide review of its entire cost structure to identify less
incremental and more strategic cost saving opportunities. Railroad
officials said this effort, under its chief financial officer, resulted
in $90 million to $100 million in cost savings per year. VIA Rail,
Canada's intercity passenger rail company, also has had a focused
corporatewide effort to reduce costs since its government funding
decreased in the early 1990s. Since that time, according to VIA Rail
officials, VIA Rail has maintained its corporatewide cost reduction
efforts in large part due to its fixed subsidy level from the Canadian
government. Because VIA Rail's management knows that it will receive a
set amount every year in government subsidy and no more, it has a clear
incentive to contain its costs below its revenues and subsidy amount.
VIA Rail is further incentivized to reduce costs because any amount of
the federal subsidy not spent can be set-aside by the railroad for
future use.
Amtrak's efforts to develop a cost control strategy or to obtain the
information necessary to do so have been unsuccessful. For example,
Amtrak's chief financial officer announced a department goal for fiscal
year 2003 "to develop system-wide costs and standards for major
activities," which would "provide a better understanding of its cost
structure, leading to better [cost] control." However, Amtrak's former
chief financial officer stated that this goal "did not take off,"
leaving no effective corporatewide impetus or action plan to ensure it
was implemented. Amtrak's controller cited two reasons why Amtrak has
not created a corporatewide cost containment strategy. First, Amtrak
does not have any detailed benchmarks (i.e., information or standards)
available that could be used in its efforts to create corporatewide
cost information. Amtrak has not developed reliable and accurate unit
cost information or standards to construct benchmarks because it has no
reliable cost information on which to base them. Second, Amtrak does
not have an integrated, reliable, or timely way to track and collect
cost information across all departments. Amtrak's controller told us
that Amtrak's current financial software was not designed to capture
cost information from different departments across the country. The
software currently in use has been implemented piecemeal over time,
making it difficult for different versions to interact and share data.
Amtrak's acquisition function is a good example of the company's
difficulties in identifying costs and cost saving opportunities.
Although Amtrak officials told us that they analyzed procurement
spending, we subsequently found that they were unable to conduct an
enterprisewide spend analysis[Footnote 72] to develop a picture of what
the company is spending on goods and services and to identify those
cost areas for strategic sourcing[Footnote 73] and potentially
substantial savings opportunities. When we asked Amtrak for examples of
a spend analysis, it took company officials several months to provide
such examples, and what was provided was primarily a compilation of
savings that had been achieved through various procurement department
initiatives. On the basis of data provided, we could not determine how
much, if any, of these savings had been achieved through an analysis of
spending. Procurement officials subsequently explained that no specific
individual or group within the department is responsible for conducting
a spend analysis, and there is no systematic process for conducting
such analyses. Rather, Amtrak officials told us that all procurement
department staff are responsible for identifying cost savings
opportunities. Moreover, while not disagreeing with the value of a
spend analysis, procurement department officials indicated that such
analyses would be extremely difficult without a system that accurately
produced the necessary data--a system that does not currently exist at
Amtrak.
Setting up a spend analysis program can be challenging, according to
our prior research on leading companies that have used this tool to
reengineer their approach to procurement and produce billions of
dollars in savings.[Footnote 74] Like Amtrak, companies have had
problems accumulating sufficient data from internal systems that (1) do
not capture all of what a company buys or (2) are being used by
different parts of the company but are not connected. What private
companies and federal agencies are doing to overcome the data
challenges could serve as a guide to improving Amtrak's ability to
conduct a spend analysis to strategically reduce procurement costs.
Private companies have developed formal, centralized spend analysis
programs through the use of five spend analysis key processes--
automating, extracting, supplementing, organizing, and analyzing
data.[Footnote 75] Companies that use a spend analysis find that they
are buying similar products and services from numerous providers, often
at greatly varying prices. For example, one company conducted a spend
analysis of the telecommunications services it used and reduced the
number of vendors from three to one, thereby saving $3.2 million in the
first 8 months of the new contract.[Footnote 76]
Similarly, other railroads confirmed the value of spend analyses as
well as the need to have consolidated, organized, and reliable
procurement data to conduct such an analysis. For example, officials at
VIA Rail indicated that they have not yet conducted a central,
comprehensive analysis of their spending because they have not had the
necessary information systems. However, they have worked to improve
their systems to a level that will permit this type of formal,
centralized spend analysis. An official at another freight railroad
indicated that the railroad has a department specifically dedicated to
conducting spend analyses and identifying ways to maximize the cost-
effectiveness of certain procurements. While this department does not
analyze the railroad's procurement spending across the board, it can
identify companywide areas for coordinated purchasing and potential
cost savings. Like the commercial best practices identified in our
prior work, members of this cross-functional group are drawn from other
departments, such as the finance department and a user department (a
department that needs acquisition services), to work on special
projects and analyze spending in given areas and to work closely with
the procurement department.[Footnote 77] This department found that
they could save $4.9 million in 1 year by paying for prep work services
(maintenance or repair services) for freight cars on a per car basis,
rather than by the hour. This new approach provides an incentive for
the service provider to work more efficiently.
Amtrak's Management Tools Do Not Constitute a Comprehensive Cost
Control Strategy:
Amtrak currently seeks to control costs through the use of five
management tools,[Footnote 78] which Amtrak's president has used to
manage and try to stabilize Amtrak's financial situation. For example,
according to Amtrak officials, Amtrak's management uses its annual
budget to focus on the structure and size of Amtrak's labor force,
which has facilitated Amtrak's making labor force reductions--resulting
in lower labor costs. However, even though they are implemented across
the company, these tools alone do not constitute a corporatewide cost
control strategy. These tools are not a part of a corporatewide plan
that identifies cost goals, identifies how these goals are to be
achieved, and provides for the continuous improvement on those goals.
For example, Amtrak's monthly performance reports, while providing
information about past performance, does not provide any explicit cost
reduction goals or identify ways to reduce costs.
In the absence of a corporatewide cost containment strategy, Amtrak's
cost control efforts, outside of using its five management tools, have
been largely unfocused and inconsistently applied throughout the
company. According to Amtrak finance officials, Amtrak's focus has been
on producing and monitoring its annual operating budget, among other
things, which has taken emphasis away from a more strategic view of its
cost structure. Amtrak's executive management provides verbal guidance
on department goals each year, but each department then individually
chooses what costs to focus on when creating their goals. Consequently,
each department's management decides how much focus (if any) to place
on cost containment. This practice may lead to a narrow focus on
specific costs or lead to conflicting cost containment efforts among
departments. For example, Amtrak's chief engineer said that, without
strategic coordination and planning, a goal to reduce overtime in the
engineering department could lead to an increase in repair times for
signals on the Northeast Corridor, which in turn could lead to
significantly increased train delays. This situation could adversely
affect the transportation and other departments.
Lack of Cost Data Limits Amtrak's Ability to Identify Areas to
Efficiently Reduce Costs or to Measure the Results of Cost Control
Actions:
In our work on effectively implementing GPRA, we found that in
establishing unit cost information, an organization can:
* demonstrate the cost-effectiveness and productivity to stakeholders,
* link levels of performance with budget expenditures,
* provide baseline and trend data for stakeholders to compare
performance, and:
* provide a basis for focusing an organization's efforts and resources
to improve its performance.[Footnote 79]
The railroad industry is an asset-intensive business, and the efficient
performance of those assets is critical to the financial performance of
any railroad. For example, unit cost metrics, such as cost-per-
passenger revenue mile, cost-per-locomotive overhaul, or cost-per-mile
of rail replaced, could show the cost performance of each of Amtrak's
core functions (e.g., transportation, maintenance of equipment, and
maintenance of track and infrastructure). However, Amtrak has not fully
developed unit cost and asset performance metrics like these that could
demonstrate the efficient use of its resources and help to identify and
reduce costs.
Most of the freight railroads we contacted, as well as VIA Rail, used
unit cost and performance metrics to inform their business decisions in
key areas, such as transportation, maintenance of equipment, and
maintenance of infrastructure. As one railroad executive stated, unit
cost and performance metrics are "predictive tools to understand how
improvement translates into increased revenue, lower expenses, and/or
higher profits." In addition, the Association of American Railroads has
developed a set of asset performance metrics for the freight railroad
industry, such as ton-miles per employee, ton-miles per locomotive, and
ton-miles per dollar of operating expense, to show how efficiently that
industry uses its assets and spends its money relative to output.
In 2000, we reported on the importance of these measures for Amtrak
because these measures indicate the efficiency with which Amtrak's
resources, such as labor, are being utilized.[Footnote 80] We said that
without productivity metrics, Amtrak can neither demonstrate nor manage
the efficiency of its individual resources. For example, Amtrak uses
production statistics like overall ridership, number of overhauls
completed, or miles of rail replaced to demonstrate production in its
core activities. Amtrak believes that recent increased production in
these core activities, when combined with its recent decrease in
employees, show that it is "doing more with less." However, as we
previously noted, a significant portion of the reduction in Amtrak's
headcount came from the termination of MBTA and mail and express
freight services--not necessarily from finding efficiencies while
offering the same level of service. Without unit cost or asset
performance metrics, it is unclear how well Amtrak is performing per
unit of production, how well it is utilizing any specific asset, or
where it could most effectively target its cost reduction efforts.
Some of Amtrak's departments are now beginning to develop some unit
cost metrics for selected maintenance of equipment and infrastructure
functions, such as cost per car or locomotive overhauled. These
efforts, which involve creating new metrics and data systems, have not
yet been coordinated across the company and have proven to be
challenging. One obstacle encountered so far is the lack of detailed
data. For example, Amtrak's chief mechanical officer stated that the
mechanical department had to first redesign the way information was
gathered in their maintenance facilities to create meaningful unit cost
statistics per car or locomotive overhauled, inspected, or repaired.
Current cost benchmarks for labor and material costs were developed
when the mechanical department's system was first implemented but have
not been updated with new labor rates or material prices--making
estimation and benchmarking for these costs unreliable until new
information is gathered.
Labor cost figures are also unreliable, since there is no link between
Amtrak's payroll system and the mechanical department's system.
Department officials stated that they plan to add links to Amtrak's
payroll and add material cost and ordering capabilities to their
current system once it is stabilized. A department official stated that
testing of the link to Amtrak's payroll system has started, and the
department is planning to fully implement the link by the end of fiscal
year 2006. In addition, a mechanical department official stated that
there are no production statistics available prior to fiscal year 2003,
thereby forcing the department to construct new baseline production
statistics for each maintenance facility. Department officials
attributed this lack of data to several recent reorganizations, the
storage of data in several unconnected computers, and the departure of
several key department staff. Department officials also stated that
because Amtrak's approach to equipment maintenance has changed since
fiscal year 2002, any production statistics that were available would
not be directly comparable.
According to Amtrak's chief engineer, the engineering department is
also currently designing an Internet-based system using Global
Positioning System devices in maintenance vehicles to help gather data
about how much time maintenance crews spend on maintenance tasks. The
department plans to use these data in developing unit cost information.
Prior to implementing this project, the department did not have a
mechanism for gathering accurate cost data. Further, the department has
just started to set productivity benchmarks and will soon begin an
infrastructure inventory. According to the chief engineer, this system
will take about a year to implement and to begin gathering data. This
information will be used to begin establishing cost and productivity
benchmarks. Using the information gathered by this new system, the
engineering department hopes to achieve 3 to 4 percent productivity
gains each year for the next 5 years.
A lack of detailed data also prevents Amtrak from creating more
comprehensive corporatewide efficiency metrics. Amtrak does have some
corporatewide efficiency metrics that demonstrate overall corporate
revenue and expense performance. These metrics include ticket and
passenger revenue per passenger mile and total and core revenues and
operating expenses per seat mile.[Footnote 81] However, these metrics
do not demonstrate asset performance, such as output per unit of labor
or per gallon of fuel consumed. The latter data would give insight into
how efficiently Amtrak is utilizing its assets. When we tried to
emulate some of Association of American Railroad's corporate
performance metrics for Amtrak, we found that Amtrak could not provide
comparable output or asset data to allow for the creation of some of
the measures. For example, we could not create a clear revenue-per-
passenger-mile-per-employee measure. Although Amtrak could provide the
number of revenue passenger miles for its core intercity passenger
business, it could not provide the number of employees broken out
between its different lines of business. An Amtrak official stated that
because some employees work across its different lines of business,
this breakout could not be completed.
Amtrak Should Continue to Use Common Rail Industry Practices in
Focusing on Its Cost Control Efforts:
Amtrak has implemented some commonly used rail industry practices--such
as benchmarking, outsourcing, and efficiency reviews of operations--to
contribute to its cost control efforts. Amtrak could also identify more
opportunities to use these practices. Doing so would allow Amtrak to
compare its practices with those of more efficient railroads and other
transportation sector businesses to help decrease Amtrak's operating
costs. Examples of actions Amtrak could take in this area include the
following:
* Benchmarking: Officials at most of the freight railroads we spoke
with stated that they compared their cost containment strategies
against their competitors in the industry. Such comparisons may be
beneficial to share best practices within the industry. While some
Amtrak departments have used benchmarking to improve their safety and
other practices, other departments could use the same techniques to
learn best practices and benchmark themselves against the best
railroads and other organizations to improve performance. DOT officials
also believed that Amtrak needs to do a better job at developing
benchmarks for assessing performance, and that such benchmarks should
be based on other passenger transportation providers, such as airlines.
* Outsourcing: Officials at some of the railroads we interviewed told
us that they have outsourced some of their noncore functions to reduce
their operating costs. For example, all of the freight railroads we
contacted have contracted out some of their functions, such as car and
locomotive maintenance services or legal representation, to outside
contractors. Amtrak officials stated that they have been very
aggressive in their use of outsourcing. They said Amtrak has outsourced
half of its engineering functions; most of its information technology
work; and some of its mechanical function, including locomotive
painting and some wreck repairs. Amtrak officials stated that they are
looking to outsource more locomotive repair activities in the future,
including overhauls of its Acela trainsets. Recently, Amtrak has
tentatively identified other noncore functions that it could outsource
to outside contractors, such as janitorial/cleaning and food service
functions. In addition, Amtrak's April 2005 Strategic Reform
Initiatives noted that accurate cost statistics for those functions
would have to be created in order to compare Amtrak's cost performance
against any prospective contractor's cost performance.
* Efficiency reviews: One railroad official with whom we spoke said
that his railroad had hired operational and process engineers to study
the railroad's internal processes, route schedules, and yard operations
to find out how to improve these functions and reduce their operating
costs. Another railroad had internal cross-functional teams--
comprising departments such as train operations, engineering, finance,
and others--that continually analyzed up to seven different areas of
operating costs, implemented ways to reduce costs, and tracked the
resulting savings. An outside consulting firm studied Amtrak's
operations and organization in fiscal year 2001. This review
recommended several changes to reduce or control costs, including,
among other things, increasing employee productivity, reducing crew
sizes and overtime expenditures, and reducing food and beverage costs.
However, not all of these findings were implemented nor were any
resulting savings tracked because changes in Amtrak's leadership, and
its subsequent reorganization, changed Amtrak's focus, according to
Amtrak officials.
Conclusions:
With operating losses having reached $1 billion and projected to
increase even more, Amtrak's cost reduction efforts need to have as
much impact as possible. Cost containment efforts are of particular
interest for the federal government because without significant
progress in reducing operating losses, substantial and continued
federal subsidies will likely be needed to keep the company solvent.
Our review of Amtrak's cost containment efforts indicates that Amtrak
has opportunities for a more corporatewide approach for containing
costs--for example, it can ensure that all relevant departments are
taking meaningful steps to examine such issues as ways to reduce
injuries or overtime. While Amtrak has looked to outsource functions to
reduce costs, there are also indications that it can learn from other
railroads' efforts in this regard as well as from these railroads'
efforts to benchmark performance and conduct efficiency reviews.
However, developing a successful strategy will be challenging, if not
impossible, unless Amtrak can develop comprehensive and reliable cost
data. A lack of cost standards and benchmarks, coupled with the lack of
corporatewide integrated data collection software, will continue to
prevent Amtrak from obtaining the detailed information it needs to
understand its cost structure and to develop a sound strategy for
attacking costs.
Recommendations for Executive Action:
To ensure that Amtrak can better meet the challenge of increasing its
efficiency and reducing its operating costs, we recommend that the
president of Amtrak take the following four actions:
* comprehensively assess Amtrak's cost structure and the performance of
its assets;
* establish efficiency and unit cost measures with clear inputs to
benchmark individual asset and corporate productivity, which will
demonstrate efficient use of Amtrak's resources;
* develop a cost containment strategy that uses these new cost measures
and guides the cost reduction actions across all departments; and:
* continue the use of and seek more opportunities to use cost
containment practices that are widely used in the railroad industry,
including a spend analysis of goods and services procured,
benchmarking, outsourcing, and efficiency reviews.
[End of section]
Chapter 5: Amtrak's Acquisition Function Is Limited in Promoting
Efficiency, Cost-effectiveness, and Accountability:
Amtrak's system for acquiring goods and services, which accounts for an
estimated $500 million to $600 million in annual expenditures for the
company, is missing critical elements necessary for efficient, cost-
effective purchasing. Our past work in assessing the effectiveness of
the acquisition function in leading organizations shows that several
elements are key to ensuring that sound purchasing processes are being
followed and to promoting efficiency, cost-effectiveness, and
accountability. These elements include placing the function
appropriately in the organization and backing it with organization
leadership, creating and enforcing clear and consistent policies and
procedures throughout the organization, and ensuring that its knowledge
and information system[Footnote 82] can provide meaningful and reliable
data.
Amtrak's acquisition function, while improving, continues to face
challenges in all three areas. First, although Amtrak has centralized
and elevated its procurement function, there is still ample evidence to
show that other departments have made sizable acquisitions without
involving the procurement department. This practice can limit Amtrak's
ability to obtain goods and services at the most economical prices or
to otherwise protect the company. Second, in the past, Amtrak did not
adequately communicate or enforce its procurement policies and
procedures, limiting its ability to ensure that sound contracting
practices are followed. Amtrak has recently taken actions that may help
in this regard, including developing a procurement manual, conducting
more training, and monitoring purchases more thoroughly. Finally, an
inadequate knowledge and information system limits Amtrak's ability to
analyze spending and identify opportunities for potential cost savings.
As a result, Amtrak cannot ensure that its resources have been utilized
appropriately when acquiring goods and services.
Effective Acquisition Requires Key Organizational Elements:
Our body of work on acquisition best practices has identified several
factors that can help organizations better ensure that their
procurements are undertaken in an efficient and effective
manner.[Footnote 83] As figure 13 indicates, these factors include a
company's or agency's organizational leadership and alignment,
acquisition policies and procedures, and knowledge and information
management system.[Footnote 84]
Figure 13: Organizational Elements Critical to Effective Acquisition:
[See PDF for image] --graphic text:
Organizational leadership and alignment:
The appropriate placement of the procurement function within an
organization can facilitate effective management of acquisition
activities, including planning and overseeing acquisitions throughout
the organization. In addition, organization leaders need to create a
climate that fosters good acquisition practices.
Policies and procedures:
To facilitate effective planning, award, administration, and oversight
of contracts, and to help ensure the best value for goods and services,
the organization must have clear, consistent, and enforceable policies
and procedures. Internal controls and performance and accountability
measures help to ensure that policies and procedures are implemented
and have the desired outcomes.
Knowledge and information management:
To make informed strategic decisions aimed at reducing costs, improving
service levels, measuring compliance, and managing providers, the
organization must have a knowledge and information system that can
produce meaningful and reliable data.
Source: GAO-04-544, p. 2.
[End of figure]
Elevating Procurement Function in Organization Structure Has Not Yet
Resulted in a More Strategic Approach to Acquisition:
An effective acquisition function requires the appropriate placement
within the organization, leadership's fostering of good acquisition
practices, and a strategic focus toward acquisition planning and
management throughout the company.[Footnote 85] To its credit, Amtrak
has made improvements to its procurement function, particularly related
to its organizational leadership and alignment. For example, after
Amtrak's current president eliminated the SBUs in 2002, the procurement
units from each of the SBUs were centralized into a single procurement
department, and the department head was elevated to the level of vice
president, reporting directly to the president.[Footnote 86] In
previous years, the procurement department had been part of Amtrak's
finance department, which, according to the vice president of the
procurement department, made it difficult to ensure the use of sound
acquisition practices. He also said that elevating his position to the
level of other key departments within the organization, such as
operations, marketing, and finance, provided him with more authority to
oversee and enforce acquisition policies throughout the company.
Additionally, Amtrak adopted a new electronic system--known as eTrax--
that tracks the acquisition process and allows for greater oversight.
For example, this system includes controls over purchase requisitions
prepared by user departments--those departments that need acquisition
services--as well as controls over payment requests, a tool used for
small dollar purchases.
Further, adherence to acquisition policies has taken on greater
significance as a result of the grant agreement between FRA and Amtrak.
As we discussed in chapter 1, the grant agreement requires Amtrak to
follow procurement standards that ensure that goods and services are
acquired in a cost-effective manner and in compliance with applicable
federal statutes and executive orders. Although FRA is responsible for
ensuring compliance with procurement standards, its oversight has been
limited because of a lack of resources. FRA officials have told us that
they have had to rely on Amtrak for assurance that they are in
compliance with the requirements of the grant agreement. An FRA
official told us that, although the grant agreement for fiscal years
2003 and 2004 included language that Amtrak comply with federal
procurement standards, it was not until the fiscal year 2005 grant
agreements that Amtrak, for the first time, was expected to fully
comply with the procurement standards in the grant agreements. This
compliance includes seeking, to the maximum extent practicable,
competition in the acquisition of goods and services. The FRA official
said that, in fiscal years 2003 and 2004, FRA was concerned about
whether Amtrak could comply with such standards, and, therefore, the
standards were not strictly enforced.
Despite these attempts to oversee and increase controls over the
acquisition process, the procurement department has yet to become fully
integrated into Amtrak's planning and management process, limiting the
extent to which good acquisition practices have spread throughout the
organization. When planning spending for service acquisitions, user
departments have often functioned independently of the procurement
department and made spending decisions without coordinating or
partnering with the procurement department. Procurement department
officials told us that the extent of their involvement in user
departments' planning process depends on whether user departments
inform them of their plans before submitting requisitions.
Our work disclosed numerous examples of acquisitions made by user
departments independent of the procurement department. For example:
* The engineering, mechanical, and marketing and sales departments
frequently used payment requests to purchase services well in excess of
$5,000, the maximum threshold specified by Amtrak.[Footnote 87]
* In 2003, the operations planning department agreed to terms and fees
with a software vendor for a pilot program, although Amtrak policies
require that only the procurement department agree to terms and
conditions. Documentation in the contract file indicated that the
operations planning department had already authorized $8,500 in travel
expenses by the time the procurement department was brought into the
process. Subsequently, the vendor refused to provide the procurement
department with a cost breakdown and comply with certain travel
requirements because of the agreements already reached. The contract
was initially valued at $60,000, and 1½ years later, its value
increased by another $500,000 when Amtrak fully implemented the pilot
program. When the contract manager processing the acquisition learned
what the operations planning department had done, she required that it
document why the travel requirements were not included in the contract.
* More recently, in fiscal year 2004, Amtrak technologies (a unit of
Amtrak's finance department) issued and signed a contract modification
expanding an existing software services contract without the
procurement department's knowledge. This expansion increased the value
of the contract by $200,000. The Amtrak OIG detected what Amtrak
technologies had done during the course of an audit that the
procurement requested on the contract. The Amtrak OIG recommended that
Amtrak technologies follow established procurement policies when
acquiring services.
These activities were detected after the fact; no controls existed at
the time to prevent their occurrence. In the case of payment requests,
the vice president of procurement has since taken on the role of
approving payment requests for departments that have used them
inappropriately. In the case of user departments awarding contracts and
agreeing to terms and conditions independently, procurement department
officials indicated that, before fiscal year 2002, very few controls
were in place and departments frequently operated independent of the
procurement department. Since fiscal year 2002, the vice president of
procurement has been working to reign in departments that were
considered to be "out of control." While procurement department
officials believe that they have brought more acquisitions under
control, they explained that changing the culture within Amtrak has
been a gradual process, and they believe that they still have a long
way to go.
The independent acquisition of services has prevented the procurement
department from managing these procurements and controlling spending.
Moreover, Amtrak has likely paid more for services than it would have
otherwise. When user departments negotiate terms and fees on their own,
they lose the opportunity to use the procurement department's expertise
in negotiating terms that are in Amtrak's best interest. Further, when
user departments award contracts independently, they put Amtrak at both
a business and a financial risk. The procurement department's standard
service contracts are written to ensure that Amtrak's interests are
protected. Contracts issued outside of the department may obligate
Amtrak to the prices and terms of the agreement, but may not include
the language that protects Amtrak's interests.
Both in previous studies and in discussions with freight railroads, we
have found that a more centralized approach can save money and provide
other benefits. As we reported in 2002, leading companies have taken a
more strategic approach when acquiring services by identifying
opportunities to leverage their buying power, reduce costs, and better
manage their suppliers.[Footnote 88] For example, these companies
helped business managers acquire key services and made extensive use of
cross-functional teams to help better identify service needs, select
providers, and manage contractor performance. Similarly, officials from
a freight railroad we contacted for this study told us that they used
strategic sourcing[Footnote 89] to completely restructure their
acquisition function. They explained that, as a result of significant
staff reductions and a need to outsource to suppliers, they changed
from a department that primarily processed purchase orders to one that
used cross-functional teams focused on procurement planning, sourcing,
and managing suppliers. The officials indicated that this restructuring
saved the railroad more than $240 million over 3 years. We also
recently reported that the Department of Homeland Security had
demonstrated some successes in implementing a strategic sourcing
program to leverage the department's buying power. These successes
involved greater collaboration among the department's various
organizations and a savings of over $14 million since the program's
creation.[Footnote 90]
Amtrak's procurement department has recently taken additional steps to
more fully integrate the procurement department into user departments'
acquisition planning and management. For example, the procurement
department is currently working with the human resources and labor
relations departments to identify all health benefits contracts. Once
these contracts have been identified, procurement department officials
told us that they will develop a strategy, consolidate the contracts,
and open them for competition as they come up for renewal in an effort
to achieve cost savings. Additionally, the procurement department
official responsible for services contracts is becoming more involved
in user departments' planning activities by attending their staff
meetings and developing a tracking system to alert departments when
contracts are expiring or running low on funds.
Communication and Enforcement of Policies and Procedures Have Been
Limited:
Amtrak has not always adequately communicated and enforced acquisition
policies and procedures for services, which limited its ability to
ensure that sound contracting practices were followed. Recent steps
have been more positive: that is, the procurement department has issued
a manual of acquisition policies and procedures, and the department
also is taking steps to ensure that existing policies, along with
review and approval processes, are followed. The types of problems we
identified with past procurements illustrate the importance of these
steps.
Acquisition Policies and Procedures Were Not Clearly Communicated in
the Past:
Amtrak's acquisition policies and procedures have not always been
clearly communicated to the entire organization. Leading organizations
we have studied adopt clear, transparent, and consistent policies and
procedures that govern the planning, award, administration, and
oversight of acquisitions. These policies and procedures must also be
clearly communicated to all involved in the acquisition
function.[Footnote 91] Although the procurement department periodically
issued directives specifying policies and procedures for the
acquisition of goods and services, these directives did not provide
detailed guidance for procurement staff to follow when awarding
contracts. Additionally, according to procurement department officials,
user departments either circumvented or were unaware of existing
acquisition policies and procedures set forth in these directives.
Recently, Amtrak has taken steps to address the lack of clear and
comprehensive guidance. In June 2005, the procurement department issued
a comprehensive procurement manual for acquisition staff. The
procurement department's staff said their initial goal was to complete
the manual by October 2003. However, according to a procurement
department official, completion of the manual was delayed because of
needed reviews by the law department and the need to incorporate FRA
grant agreement language during the course of developing the manual.
Amtrak's procurement department officials also have conducted outreach
efforts to inform user departments of current acquisition policies and
procedures. For example, since February 2005, the vice president of the
procurement department has made presentations about acquisition
policies and procedures to user departments. (See table 7.) According
to a procurement official, the intent was to deliver these
presentations only to major departments. However, other departments,
such as the human resources and transportation departments, which are
responsible for providing medical benefits and food and beverage
service, were not scheduled to receive this presentation. Procurement
and finance department officials have also made presentations to field
offices about the various acquisition tools available. These
presentations covered specific acquisition tools, such as payment
requests for small purchases and the use of purchase cards for low-cost
items, as well as the process for paying invoices.
Table 7: Procurement Presentations to Major Amtrak Departments in 2005:
Department or unit: Engineering;
Date of presentation: February 1, 2005.
Department or unit: Finance;
Date of presentation: February 15, 2005.
Department or unit: Law;
Date of presentation: March 3, 2005.
Department or unit: Police and security;
Date of presentation: March 7, 2005.
Department or unit: Amtrak technologies (unit of the finance
department);
Date of presentation: March 21, 2005.
Department or unit: Mechanical;
Date of presentation: April 12, 2005.
Department or unit: Environmental, health, and safety;
Date of presentation: May 2, 2005.
Department or unit: Marketing and sales;
Date of presentation: June 20, 2005.
Source: Amtrak.
[End of table]
Established Acquisition Policies and Procedures Have Not Been Enforced:
Amtrak has not consistently enforced established policies and
procedures for the acquisition of goods and services. As we recently
reported, leading organizations recognize the need to ensure that their
prescribed policies and procedures are being enforced so that
acquisitions are made appropriately.[Footnote 92] We found, however,
that Amtrak was not following such policies and procedures in many
instances. Our review of a nonprobability sample of 61 service contract
files covering $85.3 million (75 percent) of the expenditures for
professional services, consulting, marketing, and sales promotion
services in fiscal years 2002 and 2003, as well as our review of
expenditure data and our discussions with officials from both the
procurement department and user departments, demonstrated the following
four problems:[Footnote 93]
* a high frequency of noncompetitive awards,
* insufficient or no justification for many noncompetitive contract
awards,
* a lack of appropriate approval for sizable increases in contract
costs, and:
* bypassing of the procurement department through inappropriate use of
payment requests.
Frequency of Noncompetitive Contract Awards:
Of the 61 contracts we examined in detail,[Footnote 94] a substantial
number, 36 (59 percent), of the awards were made
noncompetitively.[Footnote 95] As table 8 indicates, the majority of
them were made before fiscal year 2003. The vice president of the
procurement department generally acknowledged that the extent of
Amtrak's noncompetitive procurement of services was too high and needed
to be reduced. Leading organizations we have studied[Footnote 96]
recognize the importance of competition to better ensure that the best
value is obtained in awarding contracts. In fact, Amtrak's acquisition
policies and procedures require that goods and services be acquired
competitively to the maximum extent practicable.
Table 8: Number of Contracts GAO Reviewed, with Expenditures in Fiscal
Years 2002 and 2003, That Were Competitively and Noncompetitively
Awarded:
Time frame awarded: Before fiscal year 2002;
Contracts reviewed: Competitively awarded: 12;
Contracts reviewed: Noncompetitively awarded: 14;
Contracts reviewed: Undetermined: 3;
Contracts reviewed: Total: 29.
Time frame awarded: Fiscal year 2002;
Contracts reviewed: Competitively awarded: 6;
Contracts reviewed: Noncompetitively awarded: 13;
Contracts reviewed: Undetermined: 0;
Contracts reviewed: Total: 19.
Time frame awarded: Fiscal year 2003;
Contracts reviewed: Competitively awarded: 3;
Contracts reviewed: Noncompetitively awarded: 9;
Contracts reviewed: Undetermined: 1;
Contracts reviewed: Total: 13.
Total;
Contracts reviewed: Competitively awarded: 21;
Contracts reviewed: Noncompetitively awarded: 36;
Contracts reviewed: Undetermined: 4;
Contracts reviewed: Total: 61.
Source: GAO analysis of Amtrak data.
[End of table]
Insufficient or No Justification for Noncompetitive Contracts:
A significant number of the noncompetitive contracts we reviewed had
either no justification or insufficient justification. Amtrak
acquisition policies in force at the time these contracts were awarded
required justifications spelling out the specific circumstances
warranting a noncompetitive procurement for procurements valued at
$100,000 or more.[Footnote 97] Guidance in effect at the time
identified specific circumstances that were not acceptable
justifications for noncompetitive awards, such as a preference for a
particular vendor by the user department. Of the 36 noncompetitively
awarded contracts we reviewed, 21 were valued at $100,000 or more and
thus required justifications. However, 10 of these 21 contracts did not
include justifications or had justifications that did not conform to
the guidance in effect at the time. As table 9 illustrates, the degree
of compliance has increased since 2002, when SBUs were eliminated.
Procurement department officials attributed the lack of compliance
before 2002 to poor overall controls over service acquisitions.
Table 9: Extent to Which Noncompetitive Contract Awards GAO Reviewed
Included Adequate Justifications:
Time frame awarded: Before fiscal year 2002;
Contracts reviewed: Justification conformed to Amtrak requirements: 1;
Contracts reviewed: No justification provided or justification did not
conform to Amtrak requirements: 5;
Contracts reviewed: Insufficient documentation to determine: 2;
Contracts reviewed: Total: 8.
Time frame awarded: Fiscal years 2002 or 2003;
Contracts reviewed: Justification conformed to Amtrak requirements: 8;
Contracts reviewed: No justification provided or justification did not
conform to Amtrak requirements: 5;
Contracts reviewed: Insufficient documentation to determine: 0;
Contracts reviewed: Total: 13.
Time frame awarded: Total;
Contracts reviewed: Justification conformed to Amtrak requirements: 9;
Contracts reviewed: No justification provided or justification did not
conform to Amtrak requirements: 10;
Contracts reviewed: Insufficient documentation to determine: 2;
Contracts reviewed: Total: 21.
Source: GAO analysis of Amtrak data.
[End of table]
Beginning in 2002, after the procurement function was centralized and
continuing through 2004, the procurement department began instituting
new controls, which included adherence to the justification requirement
for noncompetitive procurements. Current policies allow noncompetitive
procurements in circumstances such as the following:
* Only one source is known to satisfy Amtrak's requirements.
* Contractor has unique capability, expertise, or equipment.
* Emergency situations.
* Follow-on work, when awarded to another contractor, would increase
cost substantially or result in unacceptable delays or risk.
* Need is of such compelling urgency that Amtrak would be seriously
harmed without the acquisition.
Several procurement department officials indicated that, more recently,
user department requests for noncompetitive procurements have been
rejected more often, and it has become much more difficult for user
departments to get approval for such contracts. To illustrate,
procurement department officials provided several examples of
noncompetitive requests that the vice president of procurement had
rejected. For example, an August 2004 request from the mechanical
department and a March 2005 request from the engineering department
were both rejected because they would have likely resulted in
additional noncompetitive acquisitions. The vice president of
procurement also noted that the engineering department's request was
based on a noncompetitive acquisition that had been obtained
inappropriately through the use of a tool intended for small dollar
purchases.[Footnote 98]
Contract Changes Were Inappropriately Approved:
Many of the contracts we reviewed--38 of the 61--included changes, some
of which increased the contract's cost. In four instances, the final
dollar amount was several times larger than the initial amount as a
result of these changes. (See table 10.)
Table 10: Contracts with Numerous Extensions Resulted in Significant
Dollar Increases:
Type of contract: Frequent rider loyalty program;
Number of extensions: 6;
Initial dollar amount: $6,118,407;
Final dollar amount: $32,362,167.
Type of contract: Software support;
Number of extensions: 7;
Initial dollar amount: $397,200;
Final dollar amount: $1,029,688.
Type of contract: Software development;
Number of extensions: 12;
Initial dollar amount: $318,418;
Final dollar amount: $1,460,238.
Type of contract: Signal survey services;
Number of extensions: 4;
Initial dollar amount: $45,000;
Final dollar amount: $764,418.
Source: GAO analysis of Amtrak data.
Note: The above information was based on our review of 61 contracts for
professional services and advertising, sales promotion, and consulting
services. Dollar amounts in this table represent the amounts authorized
in the contracts, not the expenditures actually made.
[End of table]
Although the cost of contracts can change over time, many of the
changes to the 38 contracts were not approved in compliance with
Amtrak's policies and procedures. Amtrak requires that, when a contract
is changed, the person approving the extension should have approval
authority equal to the new total dollar value of the contract. Of the
91 total changes in these contracts, however, at least 41 were approved
by individuals who did not have the appropriate level of authority. The
majority--28--occurred in fiscal year 2003 or later.[Footnote 99] For
example, in the software development contract identified in table 10, a
director with an approval authority of $100,000 for noncompetitive
contracts approved a series of changes that were each individually less
than $100,000. However, as indicated in the table, the cumulative value
of the contract exceeded his level of authority. Amtrak's vice
president for procurement indicated there is debate within the
procurement field about change order approval authority. In his
opinion, the authority to approve changes should be based on the
incremental amount of the change because having higher level officials
approve small dollar changes is not an efficient use of their time.
However, as evidenced by our contract file reviews, a series of small
changes could result in a much larger contract.
Inappropriate Use of Payment Requests:
We found many instances in which user departments were inappropriately
using payment requests to purchase services. Payment requests are
intended to be used for small dollar acquisitions having a maximum
threshold of $5,000.[Footnote 100] These requests allow user
departments to acquire goods and services directly from vendors without
involving the procurement department. Goods and services acquired using
payment requests are not obtained competitively, and user departments
lose the opportunity to use the procurement department's expertise in
negotiating contract terms. Additionally, payment requests are not
considered contracts and, therefore, do not protect Amtrak's rights and
interests as would a contract. Using payment requests makes it
impossible for the procurement department to track and oversee
acquisitions because they obviate the need for purchase orders,
Amtrak's primary means of monitoring contract purchases.
Because reliable expenditure data were absent, we did not quantify the
extent to which payment requests were used. Nevertheless, procurement
department officials acknowledged that payment requests are often used
inappropriately, and we found numerous instances of their inappropriate
use. Some of these requests exceeded the threshold substantially. For
example:
* In fiscal year 2002, the engineering department used a payment
request for inspection services from a single supplier valued at more
than $72,000.
* In fiscal year 2004, the engineering department used two payment
requests for the same vendor to acquire services valued at more than
$79,000.
* In fiscal year 2004, the mechanical department used a payment request
for software services from one vendor valued at almost $13,000.
* In fiscal year 2004, the marketing and sales department used a
payment request for photography services from one company valued at
$109,000.
We also found instances in which user departments utilized payment
requests for goods and services when Amtrak also had contracts in
effect. For example:
* The marketing and sales department used payment requests to pay
invoices of $68,596 and $109,888 in fiscal years 2003 and 2004, even
though a specific contract covering those services was already in
effect.
* The mechanical department used payment requests to pay invoices of
$2,500 for professional services to a vendor for 3 consecutive fiscal
years, despite having contracts for similar services in effect with the
same vendor.
Amtrak officials gave several reasons for the inappropriate use of
payment requests. First, not all officials were aware of the
procurement policies and procedures. Marketing and sales department
officials said they incorrectly interpreted the policy governing the
use of payment requests. For example, one department official said he
incorrectly thought that involving the procurement department was
required only for significant and recurring expenditures, such as those
exceeding $1 million; he was not aware of the $5,000 limit for the use
of payment requests. Second, procurement officials noted that user
departments likely find it more convenient to use payment requests
because the vendor gets paid faster. Officials in the engineering and
mechanical departments confirmed this. For example, Amtrak's chief
engineer said that engineering department staff had likely used payment
requests out of convenience, but he acknowledged that their use was not
justified. Similarly, the chief mechanical officer also said that his
department probably found payment requests to be more convenient and
noted that they sped up the acquisition process. Procurement officials
also explained that if funding or time is running out on a purchase
order, user departments will use payment requests to ensure that the
vendor gets paid.
Marketing and sales, engineering, and mechanical department officials
all acknowledged that their departments had used payment requests
inappropriately in the past but said this situation had been corrected.
The vice president of marketing and sales also indicated that she had
taken corrective actions to ensure adherence to procurement policies
and procedures. These actions include scheduling training for staff and
bringing acquisitions previously made using payment requests under the
control of the procurement department.
Procurement department officials indicated they also have been working
to reduce the misuse of payment requests through several means. For
example, as previously mentioned, the vice president for procurement
approves all payment requests--through eTrax--from user departments,
such as engineering and mechanical, that have misused these payments in
the past. Information from the procurement department indicates that
the vice president denied 29 payment requests totaling more than
$255,000 between December 2004 and May 2005. Also, a new database has
been established to better track the expiration date and remaining
funds for contracts exceeding $1 million. Although smaller contracts
are not included in the database, a senior director in procurement
indicated that individual contract managers in the procurement
department are expected to monitor them on their own. He noted,
however, that user departments are ultimately responsible for
monitoring their contracts.
Review of Procurement of Outside Legal Services Showed Weaknesses in
Areas Exempt from Procurement Department Review:
In addition to the acquisition activities under Amtrak's procurement
department, we also discussed acquisition activities with officials
from other departments authorized to acquire selected services
independently. Amtrak's delegation of authority specifically provides
selected departments with the authority to procure goods and services
in five areas without the involvement of the procurement department. We
reviewed one of these areas,[Footnote 101] 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.[Footnote 102] We found several weaknesses in the processes for
the procurement and payment of outside legal services that increase the
risk that Amtrak is not receiving best value for these services and is
making improper payments for these services. These weaknesses included
(1) a lack of competition in selecting firms, (2) a lack of spend
analysis on outside legal services, (3) a lack of specificity in
documenting terms and conditions of the services to be provided, (4) an
inconsistent review of invoices for compliance with established billing
guidelines, (5) inadequate documentation supporting purchases for
certain matters, and (6) a lack of segregation of key approval and
payment functions.
Lack of Competition:
Amtrak makes limited use of competition in acquiring outside legal
services. Law department officials said they normally contract with
firms they have used in the past as long as their performance has been
good and their prices are reasonable. While Amtrak's procurement policy
is to obtain goods and services as competitively as possible, law
department officials said the only time the department would have firms
compete for outside legal services is if a matter is highly sensitive
or visible, or if the matter concerns a relatively new area. They
explained that many matters are time-sensitive and do not allow time
for competition. Other matters require specific legal expertise,
including an understanding of Amtrak's history, business, and statutory
and regulatory environment. Additionally, law department officials said
they need to use attorneys admitted to the bar in the states in which
lawsuits are filed and thus need to use attorneys throughout the
country.
While selecting outside legal counsel may involve many important
considerations besides price, officials of other railroads we contacted
indicated that they have been successful when using competition to
acquire either some or all of their outside legal services. For
example, VIA Rail requires that all user departments, including their
law department, obtain two or more bids before acquiring goods and
services. Although VIA Rail's law department acquires its own outside
legal services, it is still subject to the company's procurement
policies and procedures. Officials from one freight railroad said they
competitively selected a law firm to handle all of their outside legal
work on intellectual property. Additionally, officials responsible for
acquiring outside legal services at three commuter railroads indicated
that they periodically compete legal services to develop a list of
firms that they plan to use over a period of time, such as 3 to 5
years.
In commenting on a draft of this report, Amtrak indicated that it has
retained law firms based on solicitation to multiple firms with varying
degrees of success. We acknowledge that the acquisition of legal
services can be unique, and it can be difficult in certain
circumstances to obtain competition for such services. However, we
believe Amtrak can more aggressively seek competition in its
acquisition of outside legal services. The examples we describe
represent a variety of ways in which other railroads have tried to use
competition and leverage buying power that Amtrak should consider in
its efforts to more efficiently manage spending on outside legal
services.
Lack of a Spend Analysis on Outside Legal Services:
Amtrak's law department has not used a spend analysis[Footnote 103] on
outside legal services in order to determine whether it receives the
best value possible in terms of service and cost. Law department
officials said they have undertaken some efforts to control spending--
for example, within a given practice area or for support services such
as copying. However, the department has not analyzed its spending as a
whole to identify opportunities to reduce spending.
One such opportunity to reduce spending could be to reduce the number
of law firms used. Although law department officials said they do not
have enough work to direct to a specific firm to leverage buying and
obtain volume discounts, Amtrak used 149 outside law firms in fiscal
year 2002 and 157 the following year. In contrast, officials at one
freight railroad (that operates in multiple states similar to Amtrak)
indicated that they analyzed spending on outside legal services and
found that they could effectively reduce the number of firms they used.
At one time, the freight railroad used about 250 outside law firms but
decided to pare down this number in order to develop stronger
partnerships. They believed that frequently used firms would be more
familiar with the railroad's business and be in a position to serve the
railroad more efficiently. Ultimately, this railroad reduced the number
of firms to 8 core counsels and about 50 additional firms to be used
for specific areas of expertise or to obtain geographic coverage.
According to railroad officials, this action reduced costs and enhanced
collaborative cooperation between the railroad and the outside law
firms.
Amtrak officials advised us that in 2005 they purchased and installed
legal case management software that will allow the tracking and
analysis of legal fee expenses. However, an official confirmed that the
new system still will not capture payment attributes, such as hourly
rates, hours expended per matter, professional staff levels, and the
time period the services covered.
Lack of Specificity in Documenting the Terms and Conditions of
Services:
Amtrak units do not specifically document the scope and terms of
outside legal work to be performed. According to law department
officials, the work to be done is frequently discussed with the firm by
the attorney working on a matter, but there is not necessarily a record
of these discussions. Outside law firms are provided with a copy of
Amtrak's billing guidelines.[Footnote 104] These guidelines include
topics such as how bills are to be processed, allowable reimbursable
costs, budgets, staffing, and conduct of litigation. However, the
guidelines do not specifically outline the scope of work to be
completed, outline the costs of services provided, or require
acceptance of terms by authorized signature for each individual
engagement. In contrast, Amtrak procurement policies generally require
that contracts be signed and that they outline the scope of work to be
performed and delivery dates for work products. The lack of
documentation for outside legal services leaves Amtrak vulnerable to
miscommunication concerning the work expected of outside law firms.
Inadequate Review of Invoices:
The law department does not have a sufficient process to ensure that
the outside legal firm invoices submitted for payment are compliant
with Amtrak's billing guidelines, which are to be used to ensure
payments are made properly. Formal protocols--such as specific review
procedures to ensure compliance with the billing guidelines--do not
exist, thereby limiting the effectiveness of the compliance reviews.
When the law department receives an invoice for services, an attorney
is expected to review it for compliance with the guidelines, in
addition to verifying that the work was authorized and the time charged
was reasonable based on their knowledge of the case.[Footnote 105] Law
department officials told us an attorney's review of invoices for
compliance with billing guidelines is limited to assessing general
compliance and identifying prohibited practices such as "block
billing," which is the aggregation of time spent on different
activities into one amount and billing increments other than 6 minutes-
-the standard increment for billing purposes. We reviewed 10 invoices
from fiscal years 2002 and 2003, totaling $843,105, to gain an
understanding of the attorney review process. We found that 4 of the 10
invoices, valued at $118,947, did not comply with one or more of the
requirements in the billing guidelines.[Footnote 106] All 4 of these
invoices had insufficient detail to assess compliance, and 1 of the 4
invoices reflected billed time increments greater than the 6-minute
standard billing increment.
Inadequate Documentation Requirements for Payments:
For settlement agreement payments, the law department does not provide
sufficient documentation to the accounts payable section of Amtrak's
finance department when seeking payment. Amtrak policy requires that
accounts payable receive adequate documentation to avoid making
duplicate payments. However, law department officials have determined
that settlement payments are confidential; therefore, they only send
"disclaimer" sheets showing the firm's name, the amount of fees and
expenses, a stamp of authorization from the department, and a statement
that the original document is on file. Amtrak officials told us that
payment requests associated with settlements receive three levels of
review within the law department prior to approval and, therefore, any
concerns about inappropriate payment processing is misplaced. We
disagree with this conclusion. The lack of documentation ensuring
adequate review has taken place by the internal group with such
responsibility--accounts payable--increases the possibility of
duplicate payments and payments for other than approved amounts.
Insufficient Segregation of Key Duties:
The law department does not adequately segregate key duties related to
authorizing, reviewing, and receiving payments for outside legal
services. These key duties need to be segregated among employees to
reduce the risk of error, including improper payment. Law department
officials said that it was common practice to have attorneys obtain the
payment on behalf of the vendors (rather than having accounts payable
send the payments directly to the vendor) and then forward these
payments with accompanying documents. Also, attorneys are allowed to
create and edit the payee's name and address in addition to approving
and receiving payment. This practice increases the risk that payments
may be sent to unauthorized parties and to addresses other than that of
the vendor. According to an Amtrak official, the practice of the
accounts payable section sending payments to the law department ended
sometime in fiscal year 2004, in all cases except settlement
agreements. For payments related to settlement agreements, the law
department still receives and determines when payment in a settlement
agreement will be disbursed to vendors, because management has
determined that the law department is in the best position to disburse
the check. Again, the basis for not establishing sufficient procedures
does not mitigate the fact that these payments are subject to a higher
risk of being improper due to inadequately designed control practices.
Amtrak's Knowledge and Information System Does Not Support a More
Strategic Approach to Acquisitions:
Amtrak is missing the third key element of an effective acquisition
process--meaningful and reliable data stemming from an organization's
knowledge and information system. Amtrak's knowledge and information
system currently does not produce the data needed that would enable
Amtrak to identify strategic sourcing opportunities. Such data could
enable Amtrak to leverage its buying power and reduce procurement
costs.
In discussing the first key element of an effective acquisition
function, we described how a number of leading companies have achieved
significant savings by adopting a strategic approach to their
procurement activities.[Footnote 107] To do so, companies and a small
number of federal agencies use a spend analysis, which involves
automating, extracting, supplementing, organizing, and analyzing
procurement data. However, Amtrak's procurement and financial databases
were able to provide only limited information on specific accounts or
the types of goods and services being purchased (such as professional
services, advertising, and sales promotion), which precludes conducting
a spend analysis. Although the vice president of procurement estimated
that the company's annual expenditures for goods and services totaled
$500 million to $600 million, the company was unable to provide
detailed, reliable, and comprehensive data on total spending.
Our review identified several reasons impeding Amtrak's ability to
improve its knowledge of procurement spending to support a more
strategic approach. These reasons include the following:
* Amtrak's knowledge and information system is old and requires manual
manipulation. Leading companies have adopted systems that are
programmed to routinely extract vendor payment and related procurement
data from other financial and information systems, thereby allowing
them to easily obtain needed information. In contrast, procurement
department officials indicated that the Amtrak Accounting, Material and
Purchasing System (AAMPS), which is used to process acquisition
information and interfaces with Amtrak's financial systems, is a "batch
system" that dates to the early 1980s.[Footnote 108] As such, this
system requires manual manipulation to retrieve data. To retrieve data,
each data request must be individually programmed, by an employee who
is very familiar with the complex coding inherent in the system, and
then manually processed. Officials told us that it is difficult to
obtain needed data because they must be requested in the precise manner
necessary.
* Amtrak cannot readily ensure that data are reliable. We identified
significant discrepancies between the procurement expenditure data we
obtained and the data shown in the audited financial statements,
bringing the reliability of these data into question. For example,
fiscal year 2003 AAMPS expenditure data showed that Amtrak spent $34.2
million on advertising; however, the audited financial statements for
the same year listed advertising expenses of $31.6 million, a
difference of about 8 percent. Similarly, fiscal year 2003 AAMPS data
showed expenditures of $31 million for professional services; financial
statement data showed $24.4 million, a 27 percent difference. One
control procedure that can ensure data reliability is to reconcile the
discrepancies between AAMPS and the financial system. However, this
type of reconciliation is difficult and, therefore, not part of
Amtrak's normal procedures. For example, company officials recently
undertook--at our request--a reconciliation between AAMPS data on sales
promotion and the amounts reported in Amtrak's audited financial
statements--discrepancies totaled almost $3 million in fiscal year 2002
and $165,000 in fiscal year 2003. This process took about 1 month and
considerable staff time because it had to be done manually.
* Questionable reliability of AAMPS data prevents accurate tracking of
spending. Our review disclosed two problems that resulted in inaccurate
acquisition data that hinders Amtrak management's ability to accurately
track spending. First, a limited review of acquisition transactions
revealed charges coded to incorrect accounts. For example, payments of
about $2 million to municipal and state governments between fiscal
years 2002 and 2004 were incorrectly charged to the professional
services and consulting accounts. Amtrak procurement officials agreed
and said these payments were likely tax payments. We found several
other instances of miscoding and brought these to the attention of
procurement officials, who agreed that they too were incorrectly
charged to wrong accounts. Other incidents of miscoding involved the
cost of a dump truck ($122,000) and ballast ($150,000), both of which
had been charged--in total or in part--to the professional services
account. Procurement officials attributed data reliability problems to
poor data entry and review procedures in user departments. Various
employees in user departments often select the accounts to be charged
when initiating transactions, and they may select accounts incorrectly.
Although approving officials within the user departments are supposed
to check to ensure that the accounts are charged correctly, they may
not do so. Moreover, neither the procurement department nor the finance
department reviews the coding of expenditure transactions, even on a
spot-check basis. Even if errors are found, the extent to which they
can be corrected is limited. Procurement and finance officials
explained that AAMPS data cannot be corrected. They further explained
that data in the financial systems can be corrected. However, this
adjustment would correct only the dollar amounts in the account; it
would not correct the information used by procurement officials to
track spending on individual transactions.
A second source of unreliable data results from the heavy use of
payment requests by user departments. As previously mentioned, Amtrak's
ability to track spending is constrained when payment requests are used
to acquire goods and services. Payment requests are used for a variety
of expenditures, such as outside legal services, utility bills, and
payments to other railroads. As previously discussed, user departments
have inappropriately used payment requests to acquire goods and
services. In these instances, Amtrak cannot track spending on
acquisitions because payment requests do not require purchase orders,
which are Amtrak's primary means of monitoring contracting spending.
Conclusions:
Amtrak's improvements in its acquisition function, such as elevating it
to the same level as other key departments and centralizing activities,
are good first steps in establishing better control over acquisitions.
There are, however, several opportunities for improvement on the part
of Amtrak and FRA. One opportunity relates to more fully integrating
this centralized function throughout the company, so that user
departments are aware of and follow established company policies and
procedures concerning acquisitions and coordinate more closely with the
procurement department so that it has greater opportunity to add value
to the acquisition process. Another opportunity relates to ensuring
that established policies and procedures are followed more closely
within the procurement department, and that adequate controls are in
place for acquisitions handled outside of the procurement department
(such as procurement of outside legal services). Our review showed that
not following policies and procedures has likely increased what Amtrak
has paid for services. Addressing these issues, as well as taking steps
to develop a more meaningful knowledge and information system, would
allow Amtrak to track and analyze spending and thus better manage its
acquisitions. Further, increased oversight by FRA could help ensure
that procurements are cost-effective and in compliance with federal
requirements.
Recommendations for Executive Action:
To ensure that Amtrak's acquisition management practices support sound
business decisions and the efficient and effective use of federal funds
provided to Amtrak, we recommend that the Secretary of Transportation
direct the Federal Railroad Administrator to take the following three
actions:
* Increase oversight by requiring Amtrak to submit a plan, possibly as
part of the company's application for grant funds, identifying the
specific actions that will be taken, consistent with the
recommendations outlined below, to improve its acquisition management
practices.
* Review and provide comments on this plan to Amtrak and work with
Amtrak management and staff to develop the most cost-effective
approach(es) to improving acquisition management practices. The
approach(es) developed should ensure that Amtrak, FRA, and others, as
appropriate, have adequate information on which to make business
decisions regarding the acquisition of goods and services and the use
of federal resources provided to do so.
* Report at least annually to Congress on progress being made by Amtrak
regarding improvement of its acquisition management. This report should
identify any specific actions either Amtrak or Congress should take to
facilitate improvement in acquisition management, particularly
improvement in its knowledge and information system and the use of
acquisition data in identifying opportunities for cost savings.
To help improve Amtrak's acquisition function and better promote
efficiency, effectiveness, and accountability when acquiring goods and
services, we recommend that Amtrak's president work with the vice
president of procurement to take actions that will address the various
issues raised in this chapter. These issues, along with the five
specific recommendations to address them, are shown in table 11:
Table 11: Specific Recommendations--Acquisition Management:
Issue: Distributing and promoting current procurement policies and
procedures;
Recommendation: Ensure that all departments receive information on
procurement policies and procedures, similar to the presentations that
have already been given to a number of departments, and ensuring that
all departments are held accountable for following those policies and
procedures.
Issue: Enhancing the role of the centralized procurement function;
Recommendation: Take additional action to become more integrated into
the planning of all service acquisitions, similar to the actions
Amtrak's human resources and labor relations departments are taking
with regard to awarding health benefits contracts.
Issue: Building greater adherence to established procurement
procedures;
Recommendation: Develop an action plan to better ensure that
acquisition policies and procedures are communicated, followed, and
enforced. This includes;
* ensuring that user departments required to procure goods and services
through the procurement department cannot acquire them independently;
* ensuring that services are acquired competitively to the maximum
extent possible, such as enforcing the requirement to obtain
justifications for noncompetitive acquisitions;
* ensuring that changes increasing the cost of contracts are approved
in accordance with current delegation of authority, which requires that
approvals are based on the cumulative value of contracts, not the
incremental value of change orders; and;
* ensuring the appropriate use of payment requests by enforcing the
requirement that payment requests not exceed $5,000 and ensuring that
they are not used when a contract and corresponding purchase order are
in effect for a particular vendor.
Issue: Providing better control over acquisition of outside legal
services;
Recommendation: Together with the law and finance departments, develop
standardized acquisition policies and procedures for acquiring outside
legal services to ensure that;
* acquisition of outside legal services is competitive to the maximum
extent possible;
* spending on outside legal services is analyzed to identify
opportunities to control and reduce spending;
* documentation specifying the terms and conditions of the work to be
prepared;
* attorneys completely and consistently review invoices for compliance
with Amtrak's billing guidelines;
* the law department follows Amtrak policy by providing approved
invoices to the accounts payable section for payment; and;
* key duties, such as authorizing, reviewing, and receiving payments
for outside legal services, are segregated, and that attorneys not be
allowed to create and edit payees' names and addresses.
Issue: Addressing knowledge and information system problems;
Recommendation:
* Create an automated, centralized spend analysis system for capturing
the type of reliable and complete spending data needed to identify
opportunities to leverage Amtrak's buying power and provide better
management and oversight of purchasing activities and suppliers. The
system should include features that would;
* provide data on what categories of goods and services are being
acquired; how many suppliers are being used for specific categories;
and how much is being spent on specific categories, in total and for
each user department and with each supplier; and;
* ensure that data are more readily and reliably retrievable on an
automated and repeatable basis.
Source: GAO.
[End of table]
[End of section]
Chapter 6: Amtrak Does Not Have Adequate Oversight of or Accountability
for Its Performance and Results:
Our work demonstrates that fundamental improvement is needed in the way
Amtrak measures and monitors performance, develops and maintains
financial records and internal controls, controls costs, and acquires
goods and services. In the preceding chapters, we have outlined
recommendations to improve the policies, procedures, and practices in
these areas. However, as long as Amtrak continues to focus much of its
attention on capital needs, there is a serious question concerning
whether the company will sufficiently address these areas. Without
sufficient accountability mechanisms and oversight to ensure that
needed actions are implemented, Amtrak increases the risk of its having
continued ineffective use of resources; increasing federal subsidies;
and, in an extreme case, facing possible bankruptcy.
Currently, Amtrak's accountability mechanisms are weak and oversight is
insufficient. Two factors contribute to this situation. First, although
the federal government has an interest in Amtrak's mission, Amtrak
operates in an unusual situation--that is, as neither a publicly traded
private corporation nor as a public entity. This means Amtrak is not
subject to the accountability and oversight mechanisms by which those
types of entities would have to abide. For example, unlike publicly
traded private corporations, Amtrak is not accountable to stockholders
or financial markets and is not subject to Securities and Exchange
Commission (SEC) rules, regulations, or public disclosure requirements.
Also, unlike public entities, Amtrak is not subject to GPRA, FMFIA, or
to various other reporting and accountability requirements established
in law or regulation. The second factor is that accountability and
oversight mechanisms that are applicable, such as oversight by Amtrak's
board of directors and FRA, are limited or are not being implemented
effectively.
Both the administration and Amtrak have proposed reforms that would
change Amtrak's basic operating structure, establish competition for
intercity rail, and provide a different method for distributing federal
subsidies. The effect of these changes, if implemented, on
strengthening oversight and accountability mechanisms is unknown.
Reaching agreement on to whom Amtrak is accountable, however, is a
critical first step. Without such a step, inadequate accountability
will continue, and the issues raised in this report may not receive the
sustained visibility needed to resolve them. Even within the current
operating framework, Amtrak's board and other key stakeholders can take
actions, such as developing policies and procedures and identifying
needed information for conducting oversight, to increase oversight and
accountability. Congress may also want to play a stronger role in (1)
establishing an accountability mechanism for Amtrak or (2) determining
the extent and parties involved in holding Amtrak accountable for its
performance and results and for the efficient and effective use of
federal resources.
Public-Private Nature of Amtrak Significantly Influences Oversight and
Accountability Efforts:
Amtrak operates as neither a public entity nor a publicly traded
private organization, a factor that influences both the degree of
oversight it receives and the ability to hold it accountable for
results--potentially reducing both. In general, Amtrak does not receive
the same type of oversight that publicly traded, for-profit companies
or a government corporation might receive. Some typical accountability
and oversight mechanisms from which Amtrak is exempted are discussed
below:
* Stockholder accountability. In general, Amtrak is not subject to the
oversight and accountability of the financial markets. This situation
is attributable to the fact that Amtrak's stock is closely held and not
publicly traded. In publicly traded companies, poor financial or
operational performance and nonachievement of goals can quickly be
reflected by falling stock prices, declining ratings on bonds or other
forms of corporate financial instruments, and a possible change in
board membership. As a result, publicly traded companies have a strong
incentive to perform as efficiently and effectively as possible and to
take action if performance is not up to expectations. In addition,
company management has an incentive to work on behalf of its owners--
stockholders--to maximize the value of the business and achieve the
highest return to stockholders possible. Currently, Amtrak does not
have such an explicit incentive, since stockholders do not hold Amtrak
accountable for its performance and results.[Footnote 109] Amtrak has
common stockholders,[Footnote 110] but they have not played a
significant role in corporate governance since the early 1980s when the
Amtrak Improvement Act of 1981 removed the authority of common
stockholders to elect board members. Since 1981, selection of board
members has been controlled by the federal government--which holds all
of Amtrak's preferred stock. The President appoints board members with
the advice and consent of the Senate. The Secretary of Transportation
currently has a seat on Amtrak's board. Although this is a voting
membership, the degree of accountability is questionable since the
Secretary represents only one of seven votes and does not appoint board
members. Finally, according to FRA, it can withhold grant funding until
Amtrak has complied with the specific requirements of that funding.
Consequently, in this instance, Amtrak is accountable to FRA for grant
compliance, not necessarily for corporate performance.
* Financial market scrutiny. Since Amtrak is not a publicly traded
stock company, there is no stock market discipline to hold Amtrak
accountable for its performance and results. The financial market does
play some role in overseeing Amtrak's financial performance, since
Amtrak receives credit ratings that assess the company's capacity to
pay its financial obligations. For example, Amtrak receives credit
ratings from Standard & Poor's and Moody's Investor Service.[Footnote
111] Debt has become more of an issue for Amtrak since the
corporation's total short-and long-term debt has increased in recent
years--from about $1.7 billion to about $4.8 billion from fiscal years
1997 to 2002. At the end of fiscal year 2004, Amtrak's total short-and
long-term debt was about $3.8 billion.[Footnote 112] However, the
credit market assesses Amtrak's ability to repay its debt obligations,
not overall corporate performance or achievement of results. The
limited market assessment of Amtrak's debt reflects Amtrak's continued
and heavy reliance on federal subsidies to remain solvent.
* Public disclosure requirements. Although organized as a for-profit
company with a substantial investment of public funds, Amtrak's stock
is closely held by a limited number of stockholders, and the stock is
not publicly traded. As a result, in general, Amtrak is not subject to
either SEC rules and regulations or SEC public financial disclosure
requirements. This includes the filing of 10-K and 8-K reports--which
are designed to provide information to the public and investors on a
company's financial condition and major events shareholders need to
know about.[Footnote 113] In publicly traded businesses, these reports
serve as a form of oversight and accountability concerning financial
condition and business practices. In lieu of SEC financial disclosure
requirements, Amtrak does make certain information available about its
business. Each year, Amtrak is required to submit to Congress by
February 15TH 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 and includes a statement of revenues and expenditures for
the prior fiscal year. In recent years, this report has been
significantly late--repeatedly months after the close of the fiscal
year and the due date of the report to Congress. Since fiscal year
2003, Amtrak also has been required to prepare and submit to the
Secretary of Transportation and Congress a business plan to support its
request for federal grant funds, which, according to FRA, Amtrak has
done.
* Application of certain federal laws and requirements. Many laws and
requirements that apply to federal entities do not apply to Amtrak. As
discussed in chapter 1, Amtrak is not a government corporation even
though it continues to rely heavily on federal support to remain
financially solvent. Certain laws, such as GPRA (which is designed to
ensure that programs are efficiently and effectively administered, and
that agencies are held accountable for results) and FMFIA (which
requires that financial systems and internal controls are in place and
functioning as intended) are not applicable to Amtrak. As a result, the
federal government must rely on other means, such as congressional
oversight during authorization and appropriations hearings and FRA's
oversight of grant agreements, to ensure that Amtrak is using federal
monies wisely, and that results and expectations from federal
investments are achieved. These means do not necessarily provide for a
systematic mechanism to ensure adequate oversight of Amtrak or ensure
that Amtrak is held accountable for achieving the results it sets out
for itself.[Footnote 114]
Amtrak's Board of Directors Has Not Exercised Sufficient Oversight or
Held Management Accountable for Results:
Amtrak's board of directors and its committees have also not played a
strong oversight role and held the company accountable for results.
Generally, an organization's board of directors plays a key role in
corporate governance through its oversight of executive management,
corporate strategies, risk management and audit and assurance
processes, and communications with corporate stakeholders. As we
recently reported, corporate governance can be viewed as the formation
and execution of collective policies and oversight mechanisms to
establish and maintain a sustainable and accountable organization,
while achieving its mission and demonstrating stewardship over its
resources.[Footnote 115] Accountability requires that an organization
effectively demonstrate, internally and externally, that its resources
are managed properly and used in compliance with laws and regulations,
and that its programs are achieving their intended goals and outcomes
and are being provided efficiently and effectively.
Amtrak's Board Has Not Been Fully Engaged in Oversight and
Accountability Efforts:
Although responsible for managing the affairs of the corporation and
ensuring good stewardship over resources, Amtrak's board has not
exercised sufficient oversight of the corporation or held management
accountable for results. Three main factors have contributed to the
board's ineffectiveness in this area. First, the board has not had a
full complement of members over the last several years. As previously
discussed in this report, Amtrak has not had a full complement of seven
voting members since July 2003. Over the period of October 2003 to June
2004, the board only had two voting members, exclusive of the Secretary
of Transportation or his designee. According to Amtrak's board
chairman, in the absence of a full membership, the board has tried to
provide adequate oversight of the company, but he acknowledged that
oversight has been difficult without a full complement of members.
Further, he said that, the board has relied heavily on FRA for
oversight of company operations. In his opinion, FRA has both the staff
and expertise to evaluate operational-type issues, and it can "bridge
the gap" on oversight until a full board is in place. DOT's General
Counsel, in commenting on a draft of this report, said that the
department first looks to Amtrak's board of directors to perform
adequate oversight of the company and then, working through grants,
performs a more limited and focused oversight of the company. The
General Counsel acknowledged that lack of a full complement of members
has hindered Amtrak's board from providing sufficient oversight.
However, he believes that given its limited resources, the board has
done the best job it can and has been proactive in getting management
to address problems.
Second, board oversight has been hindered by the lack of an established
process or structure for conducting oversight or for ensuring
management is held accountable for achieving financial and operational
goals. Although Amtrak's board is to meet monthly, there is no
established process or protocol for reviewing corporate performance,
and, according to the board chairman, the board has mainly focused on
capital spending and capital projects. The board has deferred to Amtrak
management to handle issues that arise if financial or other
performance does not match established goals or budgets. The chairman
noted that the board's action in this regard is to ask questions of
Amtrak's president and senior vice president for operations about
whether Amtrak is achieving results; however, in general, the board
does not take specific actions when there are variances between
expectations and performance results. Amtrak's board chairman believes
that Amtrak's management is doing a good job in running the company,
and that the president, in particular, has done a good job in bringing
discipline to the corporation. However, he acknowledged that the board
has not been as engaged in oversight of the company as it should have
been.
Third, as discussed in previous chapters, good information necessary
for effective oversight has been lacking. For example, Amtrak's monthly
performance report--a report, deemed by Amtrak's president as
"critical," that is a primary means for reporting Amtrak's financial
and nonfinancial performance, both internally and externally--has
significant limitations in the context of oversight and accountability.
These limitations include the following:
* Few measures of overall corporate performance exist. For example, one
of Amtrak's stated goals is to bring the railroad to a state of good
repair. However, there is little in the monthly performance report
indicating the corporation's overall progress toward achieving this
goal or how much remains to be done to accomplish the goal. While
individual pieces of information, such as the number of concrete ties
laid, may indicate work accomplished, these data are not useful as an
oversight mechanism if they are not set in the context of specific
goals, objectives, and performance targets that must be accomplished to
achieve a state of good repair. Amtrak's board chairman agreed, saying
that, although the reports provided much financial information, more
and better metrics on company performance are needed. He said that the
availability of such information would better assist the board in its
oversight role.
* Information on the status of operating improvements is lacking. The
monthly performance report includes little information about
initiatives to increase Amtrak's operational efficiency. Amtrak's June
2004 strategic plan identified nearly $380 million in proposed
incremental operating improvements[Footnote 116] over fiscal years 2005
to 2009. These improvements included such things as additional service,
crew, and equipment efficiencies and increased ridership and revenue.
While there is information on some specific initiatives, such as
ridership and revenue, there is little, if any, comprehensive,
consolidated information about the status of these initiatives in the
monthly performance report. This may be partially attributable to the
fact the strategic plan did not link the dollar value of incremental
improvements to specific initiatives. Since these initiatives were
integral in determining the amount of Amtrak's operating grant needed,
such information is important for the oversight of actual grants as
well.
* Usefulness of financial information is limited. As discussed in
chapter 3, much of the financial information provided to management and
external stakeholders lacked certain relevant and reliable information.
For example, the monthly performance reports contained significant
errors that were not corrected until several months after the end of
the fiscal year as part of the annual audit process. This delay affects
the accuracy of the information for oversight purposes. Further, the
monthly performance reports we reviewed did not separately report any
relevant information on food and beverage revenue or expense, despite
food and beverage-related financial losses totaling about $160 million
in fiscal years 2002 and 2003. Finally, Amtrak's president told us that
cost data for individual routes were unreliable.
Amtrak Board Committees Also Have Not Been Fully Engaged in Oversight
and Accountability Efforts:
Not only has the board exercised insufficient oversight, but the
board's committees[Footnote 117] also have not fulfilled their
oversight requirements as set out in their charters. In March 2002,
Amtrak revamped its board committee structure.[Footnote 118] Several
board committees, such as the audit, corporate affairs, and finance
committees, have oversight responsibilities. However, many board
committees have not met since September 2003. Under the board committee
charters, the audit committee should meet at least four times annually,
and the legal affairs committee should meet at least quarterly or as
necessary. The corporate affairs and finance committees should meet
monthly or as necessary.
Amtrak's audit committee is a good example of a board committee's not
fully fulfilling its oversight responsibilities. This committee's
primary functions include oversight of the corporation's accounting and
financial reporting processes and the audits of Amtrak's financial
statements and internal controls. Although we found that Amtrak's audit
committee charter, as amended, contains audit committee duties and
responsibilities that are consistent with good governance, the audit
committee meets irregularly and did not fully carry out its oversight
responsibilities. In fiscal year 2004, the audit committee did not meet
at all. Amtrak officials told us that there were never enough members
on the board in fiscal year 2004 to constitute a quorum. Further, while
the committee met eight times in fiscal year 2003, it met only once in
fiscal year 2002. Our review of committee minutes for fiscal years 2002
and 2003 and through August 2004 found there was no written record of
the committee's reviewing and discussing auditor independence, or of
management's code of ethical conduct and its compliance with such code.
Further, the meeting minutes did not reflect that any independent
meetings were held by the audit committee with the IPA.
In commenting on a draft of this report, both DOT and Amtrak officials
told us that given the limited number of board members, Amtrak's board
had assumed the functions of the audit committee. DOT officials said
these functions included meeting with Amtrak's IPA to discuss audit and
internal control issues, some of these meetings were held without the
presence of Amtrak management. Analysis we performed showed that the
board performed some audit committee functions or oversight. For
example, our review of board minutes for fiscal year 2004 indicated
that the board did hold one independent meeting with the IPA in January
2004, and received periodic status reports on the IPA's audit of
Amtrak's fiscal year 2003 financial statements.[Footnote 119] However,
the board minutes contained no written documentation of the full board
performing other audit committee functions, such as reviewing and
discussing auditor independence or management's code of ethical conduct
and Amtrak's compliance with such a code--important audit and internal
control oversight functions.
Reform Strategies May Contribute to Better Alignment of Accountability
and Performance:
Although the board and its committees have not been fully engaged in
oversight and accountability efforts, in April 2005, Amtrak's board and
management jointly issued a set of reform strategies. These strategies
embodied a new vision for Amtrak, and intercity passenger rail in
general, that called for a number of changes, including reinforcing
management controls, organizing planning and reporting by lines of
business, and cultivating competition and private commercial activity
in passenger rail functions and services. The new vision anticipates
developing activity-based costing capabilities, increasing the
outsourcing of activities, and pricing contracts for services on a unit
cost basis. In addition, the reform strategies envision better aligning
management accountability with performance, both by business line and
by train route. Although it is yet to be seen how these initiatives
will develop, we believe better aligning management accountability with
performance will be an important step in both better facilitating the
oversight of Amtrak and in ensuring better accountability for results.
Oversight of Amtrak's Performance by Some Key Stakeholders Has Been
Limited:
FRA and the Amtrak OIG, as key stakeholders in overseeing various
aspects of the company's operations, have provided limited oversight of
Amtrak's overall performance. Although responsible for providing
billions of federal dollars to Amtrak each year in operating and
capital subsidies, FRA has largely focused its efforts on Amtrak's
compliance with grant agreements (about $1.2 billion in each of fiscal
years 2004 and 2005) and safety regulations. Since fiscal year 2003,
Congress has imposed measures to increase the Secretary of
Transportation's responsibility for providing oversight of and
accountability for the federal funds used for intercity passenger rail
service. Among other things, these measures require that Amtrak
transmit a business plan to the Secretary of Transportation and
Congress, supplemented by monthly reports describing work completed,
changes to the business plan, and reasons for the changes. As we
reported in February 2004, these measures impacted DOT's role with
respect to the expenditure of federal funds provided to
Amtrak.[Footnote 120] However, these measures only apply to specific
years for which they are included in appropriations acts. So far, these
measures have applied to appropriations for fiscal years 2003, 2004,
and 2005. In response to these measures, FRA has entered into grant
agreements with Amtrak, and, according to FRA officials, Amtrak has
provided the requisite business plans and monthly reports.
Although measures are in place to increase FRA's oversight of Amtrak's
operations through grant agreements, FRA officials said they mainly
dedicate their resources to the oversight of Amtrak's implementation of
and funding needs for capital projects and to Amtrak's cash flow needs.
In addition, FRA officials said they have been focused on the
development and implementation of new intercity passenger rail policy.
There has been less emphasis on oversight of operations and operating
budgets. Such oversight has mainly come through the review of budgets
and budget variances. FRA officials said there also has been less
emphasis on oversight of overall corporate performance or on the extent
to which Amtrak is making progress toward meeting goals it establishes.
FRA officials noted that Amtrak has no external baseline for
performance statistics presented, and that better benchmarking of data
to similar industries by line of business is needed. According to FRA
officials, the quality of Amtrak's reporting has been improving. They
said, however, that capital spending data continue to have problems
because of financial system-related problems. FRA said Amtrak is aware
that it needs to start from scratch with its financial system, but
funding such an overhaul has been difficult.
FRA officials said DOT has a seat on Amtrak's board and by virtue of
this position is knowledgeable about Amtrak's operations and goals.
However, according to FRA, historically, the agency has not forced a
particular approach toward running Amtrak or specifically held Amtrak
management accountable for meeting or not meeting particular goals. An
FRA official told us that the agency must be careful about its
involvement with management decisions since, legally, Amtrak is a
private, for-profit corporation. FRA officials said the agency can
withhold funds from Amtrak for grant noncompliance but, to date, no
funds have been withheld. In commenting on a draft of this report, DOT
officials said there are both legal and practical issues associated
with withholding money from Amtrak. According to DOT, legally, FRA can
withhold grant monies if Amtrak violates specific provisions of the
grant agreements. DOT believes its oversight role would be more
effective if it had broader explicit statutory authority to withhold
funds from Amtrak as a means to encourage achievement of Amtrak's
annual business plan, its financial plan, and other performance
measures. Such statutory authority would permit DOT to withhold
discrete specific federal funds, if needed, instead of the current
situation where withholding grant funds would involve large sums and
could have a severe impact on Amtrak's continued operations.
FRA also attributed the lack of resources for its limited, focused
approach to overseeing Amtrak. For example, FRA officials told us that
they have had to rely on Amtrak's procurement department to tell them
if Amtrak is complying with procurement requirements that are in the
grant. According to FRA, there has been no direct verification of this
compliance. As of March 2005, FRA had about six people assigned to
intercity passenger rail policy development and implementation and
Amtrak oversight. Three individuals were mostly full-time with the
others being part-time. This number of staff was expected to increase
through the creation of a new division in March 2005 with a new
division chief and two new hires designated to Amtrak
oversight.[Footnote 121]:
Similar to FRA, the Amtrak OIG also has exercised limited oversight of
Amtrak's corporate performance and accomplishment of goals. The Amtrak
OIG was created by the Inspector General Act Amendments of 1988 to
provide independent audits and investigations; promote economy,
efficiency, and effectiveness; and prevent and detect fraud and abuse
in Amtrak programs and operations. For fiscal year 2004, the Amtrak OIG
had a staff of 88 and a $12.5 million budget. The Amtrak OIG's Office
of Audits is responsible for, among other things, conducting
independent reviews of Amtrak's internal controls, overseeing and
assisting in audits of Amtrak's financial statements, reviewing certain
procurements and materials acquisitions, and monitoring compliance with
laws and regulations. Evaluations include measuring Amtrak's compliance
with corporate policies. However, as we recently reported, much of the
work of this office (47 percent of all audits in fiscal year 2004) was
focused on specific internal matters, such as environmental issues,
inventory, and ticket sales.[Footnote 122] An additional 29 percent of
fiscal year 2004 audits focused on procurement-related matters. In
general, oversight by this office is limited and does not include
broader evaluations of programmatic matters or corporate performance
based on corporate goals and metrics.
Clarifying Amtrak's Role--and Its Key Overseers--Is Critical to
Establishing Accountability:
Clarifying Amtrak's role--and its key overseers--will be critical for
establishing accountability. While stronger oversight performance by
Amtrak's board and refocused efforts by Amtrak's outside overseers can
potentially bring about some oversight and accountability improvements,
Amtrak will continue to have difficulty being more fully accountable if
its role and the range of stakeholders to which it is accountable are
not clarified.
As we reported over a decade ago, Amtrak and the federal government
need to make important decisions about the future of intercity
passenger rail service and the government's commitment to subsidize
such operations.[Footnote 123] We stated, at that time, our belief that
continuing to operate the nationwide passenger rail system would
require significantly increased resources if Amtrak were to offer
quality service. Since our previous report, Amtrak has received more
than $10 billion in federal subsidies (capital and operating).[Footnote
124] Although ridership has increased about 27 percent over the period,
other measures of service, such as on-time performance, has fluctuated
and generally decreased from 79 percent in fiscal year 1999 to about 71
percent in fiscal year 2004. Amtrak's market share has also largely
stabilized at about 0.5 percent of the intercity travel market.
However, Amtrak's need for federal support has not abated. Amtrak
indicated in its April 2005 strategic reform initiative that the
company is spending at a rate of $1.4 billion per year, and that
further increases in the level of capital investment will be required
to minimize the risks of operational breakdown due to years of deferred
maintenance.
Multiple proposals exist for what Amtrak's future should be, not only
in defining what Amtrak should be doing, but in defining to whom Amtrak
should be accountable. In particular, the administration's current
proposal for Amtrak would move much of the focus of accountability to
the regional, state, and local levels. The administration's proposal
would significantly restructure the management and accountability of
intercity passenger rail transportation in the United States. Modeled
after the federal-state-local partnership in the federal transit
program, the proposal would have regional, state, and local entities
making the fundamental decisions about what intercity passenger rail
services are justified and will receive public financial support. It
would also make these entities responsible for planning, managing, and
financing this service. The federal role would be to participate in
making capital investments on a grant basis similar to the federal
transit program, but not to subsidize operation of services that local
entities would not subsidize themselves. The proposal would essentially
split Amtrak's current responsibilities into two separate corporations.
One corporation would transition train operations to a competitive
basis, make Amtrak compete to operate intercity passenger service, and
introduce the competitive forces of the marketplace to provide high-
quality service at reasonable prices. The other corporation would
continue, for a period of 6 years, to provide the dispatching,
maintenance, and infrastructure services provided by Amtrak and carry
out a multiyear infrastructure plan prepared by Amtrak. Title to
Amtrak's assets, including the Northeast Corridor, would be transferred
to the Secretary of Transportation. An interstate compact of eight
states and the District of Columbia would manage all rail operations on
the Northeast Corridor.
Amtrak has proposed a somewhat similar vision that would include a
greater role for states in planning and developing passenger rail
corridors. Its April 2005 strategic reform initiatives states that the
current structure of intercity passenger rail service is unsustainable,
and that a more aggressive approach that includes the introduction and
development of competition is needed. Under both this initiative and
the administration's reform proposal, it is clear that states would
play an increased role in deciding what services are provided, who
would provide them, who would cover operating losses, and who would
oversee the results.
While there is growing agreement that the current model for providing
intercity passenger rail service needs to be reexamined, there is much
less agreement on what should be done. Deciding on a course of action,
however, is critical. In our view, concerns about Amtrak's performance
and accountability will remain unresolved as long as the current
situation goes unchanged. Better resolve on Amtrak's board and
management's part to hold the company accountable is not enough.
Congress has a central role in this issue. It created Amtrak and has
continued to subsidize its operations over time. Amtrak's authorization
expired in September 2002, and Congress is now considering what, if
any, changes are needed in the structure and financing of intercity
passenger rail. As part of this reauthorization, Congress will also
play a role in determining the type of oversight to be provided and the
accountability mechanisms to be used to ensure that desired results and
outcomes are achieved. As we reported in April 2003, the key components
of a framework for evaluating federal infrastructure investments
include (1) establishing clear, nonconflicting goals; (2) establishing
the roles of government and private entities; (3) establishing funding
approaches that focus on and provide incentives for results and
accountability; and (4) ensuring that the strategies developed address
the diverse stakeholder interests and limit unintended consequences.
(See fig. 14.) We continue to believe these components are important in
evaluating and establishing federal policy toward intercity passenger
rail.
Figure 14: Components of a Framework for Evaluating Federal
Investments:
[See PDF for image]
[End of figure]
Conclusions:
It is clear that Amtrak's ability to operate efficiently and
effectively is impacted by problems at several levels. At one level,
Amtrak still has major challenges to overcome in strengthening its
basic business systems, such as financial reporting, cost containment,
and control over acquisitions. Creating effective systems in these
areas is something that Amtrak, like any public or private
organization, needs to address, and this is the case whether Amtrak's
role changes dramatically or whether it continues in its current form
and its current role. On a different level, however, Amtrak faces a
unique set of problems, which is not necessarily of its own making and
which is, to an extent, beyond the company's ability to resolve. These
problems involve the issues that bookend this report--what is Amtrak's
role, and to whom is it accountable?
Since Amtrak's reauthorization expired in September 2002, Congress now
has the opportunity to decide what structure and mechanisms are best
suited for the provision of intercity passenger rail service, what role
intercity passenger rail is expected to play in the nation's
transportation system, and how this structure will make the most
efficient and effective use of federal resources. It was not the focus
of this report to evaluate the merits of various reform proposals or
their particular costs and feasibility. However, it is clear that
Amtrak's ability to articulate its mission, align its various
enterprises, and operate a results-oriented organization would be
enhanced by a clarification of its role.
Part and parcel to the debate over the future of intercity passenger
rail is the issue of adequate oversight and accountability for results
and outcomes. In part, the current situation is the result of how
Amtrak has evolved over time in its governance and accountability--an
evolution that has largely left Amtrak unaccountable to anyone in
particular. These problems have been exacerbated by the limited
oversight exercised by Amtrak's board, and the relatively narrow scope
of review activity by other oversight bodies, such as FRA. These groups
have not filled the void. The reauthorization process offers an
opportunity for Congress to take a new approach in whatever structure
it elects to adopt for intercity passenger rail--an approach that
ensures there is a clear and transparent mechanism for oversight and
accountability, and that there are consequences if desired results and
outcomes are not achieved. Without a clear mechanism and consequences,
an intercity passenger rail provider (whether Amtrak or some other
entity) will have less incentive to ensure achievement of results and
outcomes and ensure that resources made available, whether federal or
nonfederal, are used in the most efficient and effective manner
possible.
Matters for Congressional Consideration:
As part of the deliberation about the future of Amtrak and intercity
passenger rail, we believe Congress may want to consider establishing a
national policy for intercity passenger rail and determining the
appropriate role for Amtrak by ensuring that reauthorization or reform
legislation (1) establishes clear, nonconflicting goals; (2)
establishes the roles of both the federal and state governments as well
as private entities; (3) establishes funding approaches that focus on
and provide incentives for results and accountability; and (4) provides
that the strategies developed address the diverse stakeholder interests
and limit unintended consequences.
Recommendations for Executive Action:
To strengthen the oversight of corporate performance and to increase
the accountability of Amtrak's management for achieving the goals and
objectives it establishes, and to provide the needed transparency among
key internal and external stakeholders, we recommend that the chairman
of Amtrak's board and the board members take the following three
actions:
* develop policies related to the oversight of corporate performance
and the specific procedures to be used to implement these policies;
* identify, in consultation with Amtrak's president and senior
management, the type and frequency of information required to implement
the policies and procedures for oversight; and:
* in conjunction with Amtrak's management, assess the financial and
other resources that will be required to develop the measures and
information required to conduct cost-effective oversight, and prepare
an action plan to implement needed changes in information and data
systems to provide the reports and other documents required to meet the
oversight policies and procedures adopted.
To strengthen DOT and FRA oversight of Amtrak's performance, we
recommend that the Secretary of Transportation direct the Federal
Railroad Administrator to take the following four actions:
* work with Amtrak's board and management to develop measures of
overall corporate performance and related outcomes;
* require Amtrak to report on these measures of corporate performance
and outcomes at least annually;
* identify and make known to Amtrak the range of potential consequences
of not meeting, or making sufficient progress toward, a minimum level
of performance on the corporate measures and outcomes; and:
* report annually to Congress on the results of FRA's oversight of
Amtrak's corporate performance and Amtrak's progress toward meeting
minimum levels of performance and outcomes (this report should identify
any specific actions Congress should consider taking to better
facilitate progress on achieving specific outcomes or to identify
alternative ways the outcome might be achieved).
[End of section]
Appendixes:
Appendix I: Methodology for Selecting Procurement Contract Files for
Review:
In order to assess the National Railroad Passenger Corporation's
(Amtrak) compliance with its acquisition policies and procedures, we
reviewed a nonprobability sample of 61 service contract files[Footnote
125] that covered 75 percent of the total expenditures for fiscal years
2002 and 2003 in the following accounts:[Footnote 126]
* Advertising (Account 553201).
* Sales promotion (Account 553209).
* Professional services (Account 505111).
* Consulting (Account 505115).
We selected the files we reviewed from data identifying expenditures
made under purchase orders during fiscal years 2002 and 2003; the
results of our analysis cannot be projected to the universe. Our
objective was to obtain a mix of contracts with small, medium, and
large dollar expenditures during fiscal years 2002 and 2003. Because
our basis for selection was expenditures, as opposed to actual contract
awards, the contracts selected include those awarded before fiscal year
2002 as well as contracts awarded during fiscal years 2002 and 2003.
Specifically, we selected contracts as follows:
Amtrak provided data on expenditures made under purchase orders during
fiscal years 2002 and 2003. These data were segregated by financial
account and identified specific transactions. These data included
information such as vendors, purchase order numbers, and expenditure
amounts for each transaction. Each purchase order number--also used as
the contract number--indicates whether it is a blanket purchase order
(B), which allows purchases to be made over a period of time, or a
standard purchase order (S), which is used for one-time
purchases.[Footnote 127]
To assess the reliability of the procurement data Amtrak provided, we
compared it with Amtrak audited financial statement data for fiscal
years 2002 and 2003 for the accounts we reviewed. (The expenditure data
came from a different database.) We then asked Amtrak to reconcile
differences that we identified between the two sets of accounts.
Because Amtrak officials said this reconciliation had to be done
manually and would take substantial time, data were reconciled for only
1 account--sales promotion. Consequently, we used the procurement
expenditure data only to select a nonprobability sample of procurement
contracts to review.
For each year and each account, we sorted the expenditure data by
purchase order type and amount. For each account, we selected 2 to 10
purchase orders within each type of order--blanket or standard--in
order to obtain a mix of large, medium, and small dollar expenditures
so that we could assess compliance with acquisition policies and
procedures for contracts with significant dollar values, as well as for
contracts of lesser values.
We also noted that expenditures made under a given purchase order could
be charged to more than one account. We only selected each contract
once. However, for purposes of determining the extent of dollar
coverage resulting from our selections, we included the expenditures
under a given purchase order that were charged to another of the
accounts within our scope (advertising, sales promotion, professional
services, and consulting). According to Amtrak's expenditure data,
total blanket and standard purchase order expenditures for the four
accounts within our scope was $114.3 million. The expenditures for the
purchase orders we selected--according to the same data--totaled $85.3
million in fiscal years 2002 and 2003, or 75 percent of the total
expenditures for these accounts.
When we reviewed the contracts, we determined whether they were awarded
competitively or noncompetitively[Footnote 128] and assessed them for
compliance with policies and procedures in effect at the time of the
contract award, or the guidance in effect when a change to the contract
was processed. For example, if a contract was awarded in 2002, we used
guidance applicable at the time of the award. If a change to the
contract occurred, for example, in 2003 or 2004, we applied the
guidance in effect at that time.
Finally, Amtrak could not locate any documentation for 4 of the
contracts we selected. Instead, they provided printouts from the
acquisition system. These printouts contained minimal information about
the contract, such as the vendor name, amount of the award, and whether
it was a competitive or noncompetitive award. Additionally, for another
contract, one folder--out of three--was missing. We analyzed these
contracts on the basis of the limited information available.
[End of section]
Appendix II: Comments from the National Railroad Passenger Corporation:
AMTRAK:
NATIONAL RAILROAD PASSENGER CORPORATION:
60 Massachusetts Avenue, NE,
Washington, DC 20002
tel 202 906.3960
fax 202 906.2850:
David L. Gunn:
President and Chief Executive Officer:
September 2, 2005:
Ms. JayEtta Z. Hecker:
Director, Physical Infrastructure:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Hecker:
In reference to the GAO's report to Congress titled, Amtrak Management
--Systematic Problems require Action to improve Efficiency,
Effectiveness and Accountability, I would like to provide a few
comments and some observations to this report.
Over the last year and a half, the GAO has conducted this audit of
Amtrak's management and performance procedure and has developed a set
of recommendations for both the corporation and for the Congress. A
considerable degree of effort was put into this report by your staff
and mine, and I am sure you believe that your recommendations set forth
will produce a certain set of results. I am not as convinced, and I
have repeatedly made this point to you and your staff during the course
of this project, including as recently as June 27, 2005. There is no
silver bullet to fixing Amtrak, nor is there a certain "cookie cutter"
approach that can be taken. I, and my team of managers, feel that
steady incremental improvement is best. During the last thirty-six
months, we have focused on maintaining liquidity, cleaning up the
books, rebuilding plant equipment, and building an organization that
can manage the budget and control costs. I think the results speak for
themselves as you will note from the enclosed charts. We did all the
work with less people and still kept our operating needs flat. We have
given you this information, and I believe you have given us some credit
for significant improvement.
Now let me respond directly to the other more specific problems you
have raised in this report, in particular, the areas of Food Service,
Procurement, Strategic Planning, and Financial Controls.
As it relates to food service:
- We are reforming the way that we deliver food service. I refer you to
my comments attached to your report on Amtrak's food and beverage
delivery services released in July 2005. Some initiatives were phased
in quickly, such as the elimination of food and beverage service on
selected short-distance trains, while others are being phased in
gradually, so as not to disrupt the passenger experience which would
surely impact revenue.
- We have provided our Board of Directors with a list of initiatives
and pilot projects that are either already underway or will be
implemented in the next few months. We have outlined these for the GAO
as well over the course of this review.
- We are currently renegotiating the Gate Gourmet contract, which we
expect will increase efficiencies and lower costs. In the near future,
we will issue an RE to identify providers who could offer either
localized or regional service which are intended to drive down costs
even further.
- Your report failed to mention, however, the cost of labor as it
relates to the operation of our food and beverage service. It is by far
the largest cost of the operation, as reported in the chart you
presented to the House Government Reform and Oversight Committee during
a recent hearing.
All of the actions noted above cannot be done overnight and must be
implemented with the passenger in mind.
In the area of procurement management, many of the issues you have
identified are ones that Amtrak has been focused on for a number of
years. It is an area that has been changed greatly over the last few
years to produce greater accountability and efficiency. We are in the
process of completing the implementation of the changes for this area,
many of which coincide with what is in your recommendations. You have
been kept up to date on these changes.
In the area of strategic planning, I believe that we have identified
the problems, as only we can, and have developed an approach that works
best for us and where tangible progress has been made. I refer you to
the attachments that accompany this letter. While the path that we
follow may not be the same as government agencies do, nor the one that
you might recommend, our goals are the same. To me, while process is
important, results are what matter.
During my tenure, Amtrak's financial performance has improved
dramatically. We close our books on time and report monthly results
more quickly than most companies our size. Since FY02, we have reduced
our material weaknesses from 5 to 0 and our reportable conditions from
12 to 1 over the same time period. Our net audit adjustments have also
decreased from $109 million in FY02 to just $7 million in FY04.
According to our independent auditors, KPMG, whom you have interviewed
and shared with you the same results, there has been a strong emphasis
on improving our controls and updating our policies and procedures.
While your criticism of our labor intensive processes are valid, our
lack of the latest technology in this area has not stymied our efforts
to produce the results that many have sought.
I have worked in the rail industry for 4v years and understand this
business. I am not infallible, and Amtrak has a lot of problems to
confront, but it is on a firmer footing today than when I arrived. As I
said before, I believe our overall results largely speak for
themselves. At times the focus of this report seemed to be more
concerned with our process for achieving results rather than with the
actual results.
Finally, in the 39 months that I have been at Amtrak, there have been
at least b GAO audits or reviews of various practices at Amtrak. I
understand that as you finish this one, another one starts on our
relationship with commuter authorities on the NEC. In fact, our staffs
have already met to discuss the scope of this project. We will keep you
apprised of our progress as it relates to the report just completed and
work on the project just getting started.
I have enclosed a summary of more specific edits and comments that I
would encourage you to consider prior to releasing your final report.
Many of the points raised in the preliminary report appear to be
inaccurate or misleading. I am sure you would agree that it is
important that this document be as accurate as possible.
Thank you for your time and assistance during this engagement.
Sincerely,
Signed by:
David L. Gunn:
President and Chief Executive Officer:
Enclosures:
Amtrak Capital Program: Summary of FY06 Production Estimates:
Ongoing Asset Replacement:
[See PDF for image]
[End of table]
Amtrak Capital Program: Summary of FY06 Production Estimates:
Rolling Stock:
[See PDF for image]
[End of table]
The following are GAO's comments on the National Railroad Passenger
Corporation's (Amtrak) letter dated September 2, 2005.
GAO Comments:
1. Amtrak believes that there is no "silver bullet" for fixing its
problems and that making steady incremental improvements is the best
approach. These views do not appear to be consistent with the magnitude
of changes discussed in Amtrak's April 2005 strategic reform
initiatives. This document--which was characterized by Amtrak as a
dramatic departure from business as usual and would substantially
change how Amtrak operates--outlines a number of structural, operating,
and legislative changes that would, among other things, place a new
focus on planning, budgeting, accounting, and reporting of financial
activity and performance along Amtrak's business lines and open to
competition the market for virtually all functions and services of
intercity passenger rail. We believe the strategic reform initiatives
clearly acknowledge the substantial systemic problems facing Amtrak,
including those discussed in this report, as well as the need for
reform in how intercity passenger rail service is delivered. As
previously discussed in this report, we encourage Amtrak's president
and management to work with the board of directors to ensure that the
issues and challenges raised in the strategic reform initiatives are
addressed.
2. Amtrak commented that it has recently taken a number of actions to
better manage its food and beverage service, including reforming the
delivery of food service and renegotiating its contract with Gate
Gourmet (formerly called Dobbs International). Amtrak's comments also
stated that our draft report failed to mention or recognize the cost of
labor associated with the food and beverage service. We agree that
Amtrak has taken actions regarding its food and beverage service, and
we encourage Amtrak to continue to seek ways to improve the management
and controls over this service. Both our June 2005 testimony before the
Subcommittee on Railroads, House Committee on Transportation and
Infrastructure, and our August 2005 report on Amtrak's food and
beverage service made recommendations for improving this
control.[Footnote 129] Both the testimony and report also acknowledge
the labor costs associated with the food and beverage service. We agree
with Amtrak that this is the single largest cost of this service.
Because labor costs associated with the food and beverage service are a
part of Amtrak's overall labor cost structure, it was beyond the scope
of our work in this report to analyze these specific costs. However,
our June 2005 testimony indicated that a recent Amtrak Inspector
General report suggested a way Amtrak could address its food and
beverage labor costs.
3. Amtrak commented that it was in the process of implementing changes
in the procurement area, many of which coincide with our
recommendations. We commend Amtrak for recognizing areas for
improvement in its procurement area and for making changes. However, we
found numerous systemic problems with the procurement function that
still need to be addressed. The recommendations contained in this
report are designed to help Amtrak address these problems.
4. Amtrak commented that it has identified the problems, "as only we
can," and has developed an approach that "works best for us." Amtrak's
president also commented that the strategic planning mechanisms we
recommend or that government agencies adopt may not be in line with
those followed by Amtrak, but the goals are the same. Further, he
states that while the process is important, results are what matter. We
agree results matter, but, overall, results are not improving. Our
report notes that both public and private organizations have long
recognized that sound strategic planning mechanisms or "processes" are
vital to chart a clear direction and mission, develop road maps for
cost-effective operations based on this mission, and be held
accountable for results. We believe the management tools Amtrak has
adopted in recent years, while helpful, are focused too narrowly and
insufficient to stem the operating losses the company is experiencing.
We also believe adopting a systematic and organized strategic approach
is necessary to achieve the results management and the public expect.
5. Amtrak commented that its financial performance has improved
dramatically in recent years and that, among other things, it closes
its books on time and reports monthly results faster than most other
companies of its size. We agree that improvements have been made and
that this is a step in the right direction. Our report recognizes these
improvements. However, our work shows there continues to be substantive
problems related to financial management at Amtrak. These problems
include monthly performance reports that are not as useful as they
could be and that contain financial data that are not reliable, and
inadequate internal controls related to certain expenses. As we
previously discussed, Amtrak will find it difficult to make sound
business decisions and improve its efficiency and cost-effectiveness
without addressing these problems.
6. Amtrak commented that, at times, our draft report seemed to be more
concerned with the process for achieving results, rather than the
actual results. We believe actual results are important and that the
results are not satisfactory. Although improvements have been made,
during the past 3 fiscal years, Amtrak's operating losses have
increased to over $1 billion annually, and such losses are projected to
increase about 40 percent by 2009. In addition, we found systemic
problems in all five areas we reviewed, and we found that Amtrak faces
major challenges in instituting and improving its basic business
systems. Amtrak's recent improvements have likely quelled what would
have been even higher losses, but the situation is still not under
control. The recommendations contained in this report reflect sound and
proven ways adopted by leading organizations to more efficiently and
effectively manage Amtrak's operations. We believe that not recognizing
the value of these approaches and adapting them to Amtrak's environment
will continue to lead to suboptimal results.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
JayEtta Z. Hecker, Director, Physical Infrastructure Issues, (202) 512-
2834, [Hyperlink, heckerj@gao.gov].
Staff Acknowledgments:
Acquisition and Sourcing Management Team:
Carolyn Kirby:
Applied Research and Methods/Center for Design, Methodology, and
Analysis:
SaraAnn Moessbauer:
Financial Management and Assurance Team:
Robert Martin, Director;
Fred Evans;
Irvin McMasters;
Scott McNulty;
Robert Owens:
Office of General Counsel:
Edda Emmanuelli-Perez;
Bert Japikse:
Physical Infrastructure Team:
Randall Williamson, Assistant Director;
Colin Fallon;
Lynn Filla-Clark;
Gregory Hanna;
Richard Jorgenson;
Heather Krause;
Stephanie Purcell:
Strategic Issues Team:
Elizabeth Curda;
Sarah Veale:
(544087):
FOOTNOTES
[1] A "state of good repair" is the outcome expected from the capital
investment needed to restore Amtrak's right-of-way (track, signals, and
auxiliary structures) to a condition that requires only routine
maintenance.
[2] On June 27, 2005, Amtrak management provided GAO with a draft copy
of the internal control report from its IPA, which is based on the
IPA's audit of the fiscal year 2004 financial statements. GAO's
comments on fiscal year 2004 are based solely on the contents of this
draft internal control report. This report was subsequently issued on
August 12, 2005.
[3] GAO, Amtrak: Management and Accountability Issues Contribute to
Unprofitability of Food and Beverage Service, GAO-05-761T (Washington,
D.C.: June 9, 2005); and Amtrak: Improved Management and Controls over
Food and Beverage Service Needed, GAO-05-867 (Washington, D.C.: Aug.
24, 2005).
[4] A "state of good repair" is the outcome expected from the capital
investment needed to restore Amtrak's right-of-way (track, signals, and
auxiliary structures) to a condition that requires only routine
maintenance.
[5] On April 13, 2005, the Secretary of Transportation offered proposed
legislation for restructuring intercity passenger rail, called the
Passenger Rail Investment Reform Act. In general, this proposal would
transition the ownership and management of the Northeast Corridor to an
interstate compact of Northeast Corridor states and the District of
Columbia, reduce (and after 4 years eliminate) operating subsidies for
long-distance train service, and require that train operations be
opened to competition.
[6] This act prohibited Amtrak from using federal funds for operating
expenses, except an amount equal to excess Railroad Retirement Tax Act
payments, after 2002.
[7] For example, Amtrak retained a chief financial officer, a general
counsel, and a chief mechanical officer. The corporation also retained
a board of directors to provide overall governance, a president to
manage the company and establish strategic direction, and a management
committee to set corporate policy.
[8] GAO, Intercity Passenger Rail: Amtrak Will Continue to Have
Difficulty Controlling Its Costs and Meeting Capital Needs, GAO/RCED-
00-138 (Washington, D.C.: May 31, 2000). As we reported, Amtrak missed
its expense targets from 1995 through 1997 by about $355 million.
However, in 1998 and 1999, Amtrak spent less than planned by $205
million. The net was $150 million more than planned.
[9] In 1999, Amtrak employed about 22,500 agreement employees and about
2,700 management employees--about the same total number as in 1994.
Between September 2000 and September 2002, total Amtrak employment
decreased from 24,886 to 21,442.
[10] In nominal dollars; values exclude federal and state capital
payments recognized as revenue.
[11] In fiscal years 2004 and 2005, Amtrak received over $1 billion in
federal subsidies.
[12] GAO, Intercity Passenger Rail: Amtrak Needs to Improve Its
Decisionmaking Process for Its Route and Service Proposals, GAO-02-398
(Washington, D.C.: Apr. 12, 2002).
[13] GAO, Intercity Passenger Rail: Issues for Consideration in
Developing an Intercity Passenger Rail Policy, GAO-03-712T (Washington,
D.C.: Apr. 30, 2003). In April 2005, the Department of Transportation
Inspector General estimated this backlog at about $5 billion.
[14] The calculation of annual funding needs excludes $203 million in
funds that were needed in fiscal year 2005 for working capital and were
also needed to repay a Department of Transportation loan.
[15] GAO, Government Corporations: Profiles of Existing Government
Corporations, GAO/GGD-96-14 (Washington, D.C.: Dec. 13, 1995).
[16] At the end of fiscal year 2004, the federal government continued
to hold preferred stock of Amtrak (approximately 109 million shares,
with a book value of about $10.9 billion), and there were 9.4 million
shares of common stock outstanding (with a book value of about $94
million) held by three railroads and a holding company.
[17] Internal controls are plans of organization, methods, and
procedures adopted by management to ensure that (1) resource use is
consistent with laws, regulations, and policies; (2) resources are
safeguarded against waste, loss, and misuse; and (3) reliable data are
obtained, maintained, and fairly disclosed in reports.
[18] Under the fiscal year 2005 operating grant agreement between
Amtrak and FRA, Amtrak is subject to 49 C.F.R. Part 19, Uniform
Administrative Requirements for Grants and Agreements with Institutions
of Higher Education, Hospitals, and Other Non-Profit Organizations, and
48 C.F.R., Subpart 31.2, Contracts with Commercial Organizations.
[19] Amtrak also told us it was subject to federal environmental laws
(including the Clean Water Act, the Clean Air Act, and the Resource
Conservation and Recovery Act); the Occupational Health and Safety Act;
and regulations of the Food and Drug Administration.
[20] The president of Amtrak is a member of the board but is not a
voting member.
[21] Amtrak continued to receive funds in fiscal years 2003 to 2005
through annual appropriations.
[22] GAO, Activities of the Amtrak Inspector General, GAO-05-306R
(Washington, D.C.: Mar. 4, 2005).
[23] VIA Rail Canada is Canada's intercity passenger rail provider.
[24] Results from nonprobability samples cannot be used to make
inferences about a population, because in a nonprobability sample some
elements of the population being studied have no chance or an unknown
chance of being selected as part of the sample.
[25] GAO, Executive Guide: Leading Practices in Capital Decision-
Making, GAO/AIMD-99-32 (Washington, D.C.: December 1998). In this
executive guide, criteria were developed to select a mixture of private
and public organizations, including, but not limited to, the Mobil
Corporation, General Electric, Washington State, and Minnesota.
[26] GAO, Comptroller General's Forum: Highlights of a GAO Forum on
High-Performing Organizations: Metrics, Means, and Mechanisms for
Achieving High Performance in the 21ST Century Public Management
Environment, GAO-04-343SP (Washington, D.C.: Feb. 13, 2004).
[27] 49 U.S.C. § 24701.
[28] Over the period of October 2003 to June 2004, the board only had
two voting members, exclusive of the Secretary of Transportation or his
designee.
[29] GAO-03-712T.
[30] GAO, Intercity Passenger Rail: Financial and Operating Conditions
Threaten Amtrak's Long-Term Viability, GAO/RCED-95-71 (Washington,
D.C.: Feb. 6, 1995); Northeast Rail Corridor: Information on Users,
Funding Sources, and Expenditures, GAO/RCED-96-144 (Washington, D.C.:
June 27, 1996); and GAO/RCED-00-138.
[31] Amtrak operates six commuter rail services under contract and
provides mechanical and engineering services for third parties.
[32] GAO-04-343SP.
[33] According to the Office of Management and Budget, a "target" is
defined as a quantifiable or otherwise measurable characteristic that
tells how well a program must accomplish a performance measure.
[34] The injury ratio is determined by the number of injuries per
200,000 work-hours, which is an industry standard in reporting employee
injury rates.
[35] In fiscal year 2003, the engineering department's target for
reducing the number of delay minutes caused by capital work was 111,212
delay minutes. Amtrak's chief engineer noted that fiscal year 2003 was
the first time an effort had been made to set a goal for delay minutes
due to capital investment activities. He stated that the fiscal year
2003 capital program was a major increase in capital activities over
the prior years and foreseeing the combined impact of these activities
was beyond the department's capabilities in fiscal year 2003. However,
he stated, in fiscal year 2005, these delays are being forecasted and
measured and thoughtful goals are being established.
[36] GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G
(Washington, D.C.: August 2001).
[37] In our December 2004 report, we found that Amtrak did not develop
an implementation plan for addressing the key challenges related to the
settlement between Amtrak and the Consortium of Bombardier and Alstom.
We also reported in February 2004 that Amtrak's lack of comprehensive
project management for the Northeast High-Speed Rail Improvement
Project contributed to its inability to achieve project goals.
[38] This vision for an intercity passenger rail system is outlined
through four objectives: (1) development of passenger rail corridors
based on a federal-state capital matching program, with states serving
as the developers and "purchasers" of competitively bid corridor
services; (2) return of the Northeast Corridor infrastructure to a
state of good repair and operational reliability, with all users
gradually assuming financial responsibility for their proportionate
share of operating and capital needs; (3) continuation and possible
addition/elimination of certain national long-distance routes based on
established performance thresholds; and (4) emergence of markets for
competition and private commercial participation in all passenger rail
functions and services.
[39] Amtrak Strategic Reform Initiatives and FY06 Grant Request, April
2005.
[40] Two of these addenda were for fiscal year 2002, and the third was
for fiscal year 2003. The year-end addendum for fiscal year 2004 was
not available at the time of our analysis.
[41] Testimony of David M. Laney, Esq., chairman of Amtrak's board of
directors, before the Subcommittee on Surface Transportation and
Merchant Marine, Senate Committee on Commerce, Science, and
Transportation, on Tuesday, April 19, 2005.
[42] In its technical comments on a draft of this report, Amtrak told
us that releasing unaudited data on a monthly basis and then releasing
final audited data after sign-off by independent auditors is the norm
for all corporations. We agree; however, because of the magnitude of
the misstatements in Amtrak's unaudited monthly data and the time
required after the end of the year before the information is corrected,
the information used for decision making during the year is not
reliable and, therefore, is not useful.
[43] Amtrak officials told us that at the start of fiscal year 2004,
Amtrak began documenting some of the changes to allocation rules. This
effort could be a positive change in controls. However, our limited
review of certain supporting documentation generated from this practice
identified inconsistencies in the amount and nature of the support. In
addition, we could not ensure that all changes to the allocation rules
were documented.
[44] Statement of Federal Financial Accounting Standards, Number 4.
[45] We conducted our review using the principles underlying GAO's
Standards for Internal Control in the Federal Government. We applied
these principles as our standard because of the significance of the
federal role in Amtrak's operations and the importance of Amtrak's
responsibility to account for its stewardship of the billions of
dollars of government resources provided to it. These principles are
consistent with the internal control principles established by the
American Institute of Certified Public Accountants and are used in
audits of nongovernmental entities.
[46] The cash basis method of accounting reflects revenues when
received and expenses when paid rather than at the time the revenue is
earned or the expense is incurred, which applies to accrual accounting.
[47] These methods are governed by applicable law and related
regulations issued by the Surface Transportation Board (STB). The STB
developed a standardized costing model for the freight railroads that
is used for, among other things, developing variable expenses the STB
needs to evaluate the reasonableness of maximum shipping rates during
dispute proceedings. We recognize that Amtrak is not required to comply
with requirements imposed on the freight railroads, but the practices
of the freight railroads offer an interesting illustrative comparison
to those of Amtrak. Class I railroads are the nation's largest
railroads.
[48] Amtrak's board passed a resolution in September 1999 approving the
implementation of a SERP. The board also accepted management's proposal
that, "contingent on Amtrak meeting its annual Corporate Plan targets
and subject to board approvals, the SERP would provide an additional
contribution of up to 10 percent of management committee members' pay
into individual non-qualified deferred compensation accounts that will
be 100 percent vested at the time contribution is made.
[49] For the January 2004 awards, the board's resolution stated the
reasons for the awards were that "Amtrak achieved significant
reductions in spending and managed to complete the year under budget,
meeting its financial goals for FY03." However, it is not clear what
aspects of the budget the board was referring to in its resolution.
Amtrak's management could not tell us whether the board's reference to
the budget meant revenue, expenses, net income, or some or all of
these. The board did not expressly approve in advance the financial
targets that would serve as performance measures for any subsequent
SERP awards.
[50] In January 1999, Amtrak entered into a contract with Dobbs
International (now called Gate Gourmet International (Gate Gourmet)).
This contract expires on September 30, 2006. Under the terms of the
contract, Gate Gourmet supplies substantially all food and beverage
service items for on-board sales by Amtrak employees. The contract
includes one 5-year extension option.
[51] Amtrak owns 11 commissaries nationwide. Gate Gourmet operates
these commissaries for Amtrak.
[52] Total purchases by the contractor for Amtrak exceeded $90 million
for the 2-year period, roughly 13 times the amount of purchases the
contractor reported as being subject to discounts and rebates.
[53] Data mining applies a search process to a data set, analyzing for
trends, relationships, and interesting associations. For instance, data
mining can be used to efficiently query transaction data for
characteristics that may indicate potentially improper activity.
[54] In our June 2005 testimony on Amtrak's food and beverage service
(GAO-05-761T), we stated that in 2002 Amtrak purchased Heineken beer,
in 12-ounce bottles, at a price as high as $3.93 per bottle. This
information was based on the documents provided to us by Amtrak.
However, based on additional documents that Amtrak provided us on June
29, 2005, it appears that this purchase was for 10 half-kegs of beer,
not 10 cases as indicated on the documents Amtrak previously provided.
[55] As of June 27, 2005, Amtrak's IPA had not issued its report on the
audit of Amtrak's financial statements for the fiscal year ending
September 30, 2004--approximately 9 months earlier; however, on this
same day, Amtrak management provided us with a copy of the internal
control report from the IPA based on its work on the audit of the
fiscal year 2004 financial statements. Our comments on fiscal year 2004
are based solely on the contents of this internal control report.
[56] Amtrak's IPA reported one material weakness in this internal
control report. A material weakness, under standards established by the
American Institute of Certified Public Accountants, is a reportable
condition in which the design or operation of one or more internal
control components does not reduce to a relatively low level the risk
that errors or fraud in amounts that would be material in relation to
the financial statements may occur and be detected within a timely
period by employees in the normal course of performing their assigned
functions. Reportable conditions are matters coming to the IPA's
attention that, in its judgment, relate to significant deficiencies in
the design or operation of internal control and could adversely affect
the organization's ability to record, process, summarize, and report
financial data consistent with the assertions of management in the
financial statements.
[57] We discussed with Amtrak's IPA the approach Amtrak had taken.
Representatives of the IPA told us their work did not extend to
considering the appropriateness of the strategy Amtrak employed or
whether the approach would be sufficient for interim financial
reporting, such as the preparation of monthly reports that are to be
provided to management and external stakeholders.
[58] 48 C.F.R. Parts 140 and 646 and 48 C.F.R. Part 31.
[59] GAO, Amtrak: Improved Management and Controls over Food and
Beverage Service Needed, GAO-05-867 (Washington, D.C.: Aug. 24, 2005).
[60] All dollar figures in this chapter are adjusted to constant 2004
dollars, unless otherwise noted.
[61] Amtrak's federal subsidy--separated as operating and capital
subsidies--is distributed as a grant from FRA. Operating subsidies
generally support Amtrak's day-to-day operations, including operating
and maintaining rolling stock (locomotives and passenger or other
cars), tracks, and stations. Amtrak's capital subsidy is designed for
the acquisition or improvement of the railroad's rolling stock and
infrastructure.
[62] The amount for Amtrak's operating support in fiscal year 2002 does
not include the following: $230 million in capital for maintenance,
which, according to Amtrak officials, Amtrak considers an operating
expense; $105 million appropriated for various security and life safety
improvements; or FRA's fiscal year 2002 $100 million emergency loan to
Amtrak.
[63] As shown in chapter 1, Amtrak's total federal subsidy since 1971
has been variable--ranging from about $9 million in fiscal year 1973 to
over $1.7 billion in fiscal year 1999.
[64] For this report, we focused on Amtrak's expenditures, rather than
revenues.
[65] Amtrak's interest expenses (net of interest income) averaged over
$140 million between fiscal years 2002 and 2004 (in constant 2004
dollars).
[66] Amtrak's senior vice president of operations recently stated that
Amtrak is losing over $1 million each week the Acela trainsets are out
of service. According to Amtrak's May 2005 monthly performance report,
between April 15 and May 31, 2005, Amtrak lost $17.5 million in revenue
as a result of the Acela trainsets being out of service.
[67] Fiscal year 2004 total expenses include depreciation and net
interest expenses but do not include a one-time special charge of $82.4
million in noncash expenses Amtrak took as a result of termination of
its mail and express business.
[68] Part of the revenue decrease between fiscal years 2003 and 2004
can also be attributed to a one-time $30 million sale of assets in
fiscal year 2003.
[69] Amtrak operated MBTA's trains and maintained their equipment and
infrastructure under a contract that ended on June 30, 2003.
[70] In the three agreements signed, employees are ultimately expected
to contribute $75 per month toward their health insurance premiums.
[71] GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June
1996).
[72] A "spend analysis" is a tool that provides companies with
knowledge about how goods and services are being acquired, about the
amount spent, and about who is doing the buying and supplying.
Conducting a spend analysis also provides opportunities to leverage
buying power and reduce costs for commonly purchased goods and
services.
[73] "Strategic sourcing" is a process used by leading commercial
companies and a small number of federal agencies to establish an
organizationwide approach to leveraging the organization's buying power
and fostering new ways of doing business.
[74] GAO, Best Practices: Using Spend Analysis to Help Agencies Take a
More Strategic Approach to Procurement, GAO-04-870 (Washington, D.C.:
Sept. 16, 2004); Best Practices: Improved Knowledge of DOD Service
Contracts Could Reveal Significant Savings, GAO-03-661 (Washington,
D.C.: June 9, 2003); and Best Practices: Taking a Strategic Approach
Could Improve DOD's Acquisition of Services, GAO-02-230 (Washington,
D.C.: Jan. 18, 2002).
[75] GAO-04-870, pp. 5-9.
[76] GAO-02-230, p. 10.
[77] GAO-02-230, GAO-03-661, and GAO-04-870.
[78] As discussed in chapter 1, Amtrak's five management tools include
the following: clear goals and objectives, defined organization charts,
zero-based operating budget, capital program, and monthly performance
reports.
[79] GAO/GGD-96-118.
[80] GAO/RCED-00-138.
[81] "Core revenues and operating expenses" refer to those revenues and
expenses for Amtrak intercity passenger rail train operations. They do
not include commuter rail service.
[82] An effective knowledge and information system is an enterprisewide
system that integrates financial and operating data to support both
management decision making and external reporting requirements.
[83] GAO, Transportation Security Administration: High-Level Attention
Needed to Strengthen Acquisition Function, GAO-04-544 (Washington,
D.C.: May 28, 2004).
[84] A fourth factor identified in GAO-04-544 concerns human capital
issues, which we do not address in this report.
[85] GAO, Homeland Security: Successes and Challenges in DHS's Efforts
to Create an Effective Acquisition Organization, GAO-05-179
(Washington, D.C.: Mar. 29, 2005).
[86] Currently, the procurement department is responsible for the
acquisition of goods and services throughout Amtrak, with the exception
of acquiring outside legal services, labor arbitration agreements,
executive recruitment search services, electric propulsion agreements,
and audit and investigative services.
[87] Amtrak increased the maximum threshold for payment requests from
$2,000 to $5,000 in November 2004.
[88] GAO-02-230.
[89] Strategic sourcing is a process used by leading commercial
companies and a small number of federal agencies to establish an
organizationwide approach to leveraging the organizations' buying power
and fostering new ways of doing business.
[90] GAO-05-179.
[91] GAO-04-544.
[92] GAO-04-544.
[93] Results from nonprobability samples cannot be used to make
inferences about a population, because in a nonprobablity sample some
elements of the population being studied have no chance or an unknown
chance of being selected as part of the sample. See appendix I for the
file selection methodology that we used in conducting this review. We
focused on fiscal years 2002 and 2003 because they were the most recent
years for which audited financial statements were available for the
purpose of assessing the reliability of expenditure data.
[94] Of the 61 contracts we reviewed, Amtrak could locate no
documentation for 4. They provided printouts of information from their
acquisition system for these 4 contracts. These printouts contained
minimal information, which allowed minimal analysis. For another
contract, Amtrak was missing one of the three folders of documents
prepared during the course of the contract. We analyzed this contract
to the extent allowed by the available documentation.
[95] We define noncompetitive awards as those that Amtrak considered as
either sole or single source. We obtained information regarding whether
a contract was a sole or single source award by reviewing documentation
in the contract file and, if necessary, discussing them with
procurement department officials.
[96] GAO-03-661 and GAO-02-230.
[97] In February 2004, this threshold was reduced to $25,000.
[98] Procurement department officials provided two other examples of
denials from earlier in fiscal years 2003 and 2004. However, we found,
during the course of our contract file reviews, that one of these
denials was ultimately approved.
[99] Although the contracts we reviewed were awarded in fiscal years
2002 and 2003 or earlier, we reviewed all contract changes that had
occurred through our review in fiscal year 2005.
[100] The $5,000 threshold has been in effect since November 2004.
Previously, the threshold was $2,000.
[101] The other four services acquired independently of the procurement
department are electrical power for the Northeast Corridor, labor
arbitration agreements, audit and investigative services, and the use
of executive recruitment firms.
[102] In commenting on a draft of this report, Amtrak noted that its
legal costs compare favorably with Class I railroads. Since our purpose
was to evaluate how Amtrak acquires legal services and related internal
controls over such acquisitions, we did not compare Amtrak's costs for
legal services with other railroads'.
[103] Spend analysis is discussed more fully in chapter 4.
[104] Amtrak, Amtrak Guidelines for Outside Counsel (March 1998).
[105] For invoices less than $10,000, the deputy counsel of the
practice group managing the matter is responsible for approving the
invoices, while the Amtrak general counsel approves invoices for
amounts of $10,000 or more.
[106] Due to significant weaknesses in the design of controls over the
review, approval, payment, and monitoring of amounts for outside legal
services and the results of our walk-through of the process, including
inspection of a nonprobability sample of 10 invoices, we did not
statistically sample payments for outside legal services to estimate
what portion of the population of payments were appropriately reviewed
and approved or to estimate if the payments represented a valid use of
Amtrak's funds.
[107] We also discuss these efforts in more detail in GAO-04-870. See
also GAO-02-230 and GAO-03-661.
[108] The eTrax system that we previously discussed is a user-friendly
interface that feeds into AAMPS. The system is used, for example, to
process purchase requisitions and payment requests.
[109] This discussion is not meant to imply that Amtrak's stock should
be publicly traded. Rather, it is to indicate that Amtrak is not
subject to the same oversight and accountability mechanisms to which a
publicly traded private business might be subject.
[110] The common stock is held by four entities: American Premier
Underwriters, BNSF Railway Company, Canadian National Railway Company,
and Canadian Pacific Railway Company. In general, these entities
received stock at the time that Amtrak was created in exchange for
equipment and services provided to allow Amtrak to begin operations.
The Amtrak Reform and Accountability Act of 1997 required Amtrak to
redeem the common stock by October 2002. However, as of May 2005, this
stock had not been redeemed.
[111] As of March 31, 2005, Amtrak's credit rating with Standard &
Poor's was BBB/Negative. This meant that Amtrak obligations had
adequate protection but adverse economic conditions or changing
circumstances could lead to weakened capacity to meet financial
commitments. As of February 8, 2005, Amtrak's credit rating with
Moody's Investor Service was A3. This meant that Amtrak's bonds had
favorable investment attributes and were considered upper-medium-
grade. However, elements may be present that could suggest impairment
at some point in the future.
[112] This amount includes both long-term debt and capital lease
obligations (about $3.7 billion) plus the current maturities of long-
term debt and capital lease obligations (about $129 million).
[113] The 10-K report is an annual report filed with SEC that provides
a comprehensive overview of a company's business and financial
condition and includes audited financial statements. The 8-K is a
report that companies file with SEC to announce major events that
shareholders should know about. These events include completion of the
acquisition or disposition of assets as well as changes in corporate
governance and management, among other things.
[114] This discussion is not intended to imply that Amtrak should be
made a federal agency or necessarily brought under federal laws and
requirements. This is also not a discussion of federal railroad safety
laws that do apply to Amtrak. Rather, this discussion is to illustrate
the unique environment surrounding oversight and accountability of
Amtrak's performance.
[115] GAO, Millennium Challenge Corporation: Progress Made on Key
Challenges in First Year of Operations, GAO-05-625T (Washington, D.C.:
Apr. 27, 2005).
[116] The strategic plan identified these improvements as operating
efficiencies and benefits from capital investments.
[117] Amtrak's board has the following committees: Audit, Compensation
and Personnel, Corporate Affairs, Finance, and Legal Affairs.
[118] Prior to March 2002, Amtrak's board had the following committees:
Corporate Strategy; Ad Hoc Committee on Legislative Matters; Finance,
Audit, and Administration; Budget and Management Ad Hoc Committee;
Legal Affairs Ad Hoc Committee; Safety, Service, and Quality; and Ad
Hoc Committee on Safety. One Amtrak official noted that prior to March
2002, most of Amtrak's board committees were inactive, and that the
board put little emphasis on board committees.
[119] We did not review the fiscal years 2002 and 2003 board minutes
for specific audit committee functions because the audit committee held
meetings during this time period. In its comments on a draft of this
report, Amtrak noted that the board committees held regularly scheduled
meetings until September 2003 when there was an insufficient number of
board members to fulfill the committee functions. As previously
discussed, from October 2003 to June 2004, the board only had two
voting members, exclusive of the Secretary of Transportation or his
designee. During this time period, the audit committee did not hold any
meetings.
[120] GAO, Intercity Passenger Rail: Amtrak's Management of Northeast
Corridor Improvements Demonstrates Need for Applying Best Practices,
GAO-04-94 (Washington, D.C.: Feb. 27, 2004).
[121] According to FRA, as of June 2005, responsibility for intercity
passenger rail policy analysis, board of director issues, and oversight
had been consolidated into the existing program development division.
According to FRA, the final staffing level of this division is being
developed. The division currently has two full-time staff, with a third
position being recruited. The division also has access, on a part-time
basis, to staff of other divisions in FRA's Office of Railroad
Development.
[122] GAO-05-306R.
[123] GAO/RCED-95-71.
[124] This amount excludes federal loan guarantees.
[125] Results from nonprobability samples cannot be used to make
inferences about a population, because in a nonprobability sample some
elements of the population being studied have no chance or an unknown
chance of being selected as part of the sample.
[126] We initially selected 2 additional contracts but subsequently
excluded them from our analysis. One of these was a contract that had
been originally awarded in 1994 and, according to a procurement
department official, was to provide personnel in support of the
engineering department. Work under this contract had started and
stopped over the years and assessing it for compliance with Amtrak
policies and procedures was not possible. The second contract we
excluded from our analysis was a contract for maintenance on the Acela
trainset. In this case, the consortium that had built the Acela had
formed a corporation for the purposes of performing maintenance, and a
purchase order had been created solely for the purposes of tracking
payments to the consortium.
[127] The expenditure data also included construction purchase orders,
which we excluded because construction contracts were outside of the
scope of our review.
[128] We define noncompetitive awards as those that Amtrak considered
as either sole or single source. We obtained information as to whether
a contract was a sole or single source award by review of documentation
in the contract file and, if necessary, discussion with procurement
department officials.
[129] GAO, Amtrak: Management and Accountability Issues Contribute to
Unprofitability of Food and Beverage Service, GAO-05-761T (Washington,
D.C.: June 9, 2005); and Amtrak: Improved Management and Controls over
Food and Beverage Service Needed, GAO-05-867 (Washington, D.C.: Aug.
24, 2005).
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
