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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). 

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