Testimony of David L. Gunn, President and Chief Executive Officer of Amtrak before the U.S. Senate Committee on Commerce, Science and Transportation, Tuesday, April 29, 2003 -- Chairman McCain, Ranking Member Hollings, and members of the committee, I thank you for the opportunity to appear today to discuss the future of Amtrak, the company's FY04 funding request and the broad strokes of our five-year capital plan. When I arrived at Amtrak on May 15 of last year , the corporation was in serious trouble. Amtrak faced insolvency. Sometime in July, we would miss our payroll. The physical plant had been allowed to deteriorate. Heavy maintenance of cars and infrastructure had ceased several years ago -- over 100 cars were wrecked or damaged and out of service. Fiscal controls were inadequate. We would be unable to close our books for FY01 until September of the following year. There was no regular reporting of financial results. The organization was poorly defined and did not lend itself to effective decision-making. Amtrak's management was top heavy -- 84 people had "vice president" on their title. The budget process was ineffective, and there was no control over staffing. Our credibility as an organization was in tatters. Our immediate goal in June and July 2002 was to secure funding to allow us to survive into FY03. However, at the same time, we had to lay a prefoundation for the future. The Board of Directors and I set a goal to have in place by October 1 a functional railroad organization, a zero-based budgeting process, and public reporting of financial and physical results. We also began focusing on controlling expenses. We were successful -- we secured a loan from DOT and a supplemental appropriation from Congress that allowed us to make it through the end of the year and avert a transportation crisis. We entered FY03 with an appropriation from Congress which was essentially zero based and which focused available resources on beginning the rebuilding process, as well as controlling expenses. Highlights of the events of the past ten months are contained in the exhibits you have before you. Expenses at the railroad are dropping as the result of many actions, while maintenance activity is increasing. We have redirected resources into basic maintenance and restored vital programs. We are rebuilding wrecked, out-of-service cars and should have 15 cars back in service by May. To bring our passenger equipment to a higher state of reliability and utility, we have restored the overhauls of cars simultaneous with their four-year inspections. On the infrastructure front, our track-laying system train will be back in service in May after sitting idle for a number of years, and it will be removing aged wooden ties and replacing them with concrete ties which creates greater road bed stability and better ride quality. In addition, concrete ties last about 3 times longer than wooden ones and so you immediately cut recurring maintenance costs with each concrete tie you put in. With a thousand fewer people now versus 12 months ago, we are doing all this with a smaller budget, and we are doing it effectively. We have a long way to go, but it is a start. We have closed our FY02 books, six months earlier than last year and I will make them available to you very soon. Our Board receives complete GAAP financials, three weeks after the end of each month - which you receive as well. Barring forces beyond my control -- we plan to make our budget for FY03, although our cash situation will be perilous. In any event, we must restore our working capital - a necessary requirement for any business. Earlier this year we sent to Congress our Board approved FY04 funding request for $1.812 billion of which $1.044 billion would be spent on capital investment and $768 million for operating support. Earlier this month I testified before the House Appropriations Subcommittee on Transportation, Treasury to this effect. The capital investment would be used to continue the restoration of our fleet to improve reliability, service and revenue, fulfill our statutory mandates, and make critically needed infrastructure investments to the existing national system and the Northeast Corridor -- which we own. There is no new borrowing assumed in this budget, nor any expansion of service. We have seen a reduction in our total costs from FY01 to FY02, and we expect the trend to continue from FY02 to FY03. Regarding the future, I realize that many are unhappy with Amtrak, and usually every discussion ends with the call for reform. Unfortunately, there is little agreement on the nature of reform. What is needed, no matter how we define this reform, is a detailed plan which deals with the legal, financial, and physical realities of Amtrak. The progress we are making so far is the result of a plan -- many small steps that already and will ultimately continue to improve our service and financial results. It will not make us profitable; it will make us better. There is no single, simple solution to the Amtrak problem. One cannot be developed overnight - it will take time and thought. I guarantee you though, the problem will be a lot easier to deal with if my approach is successful and the railroad is in a state of good repair. The only way to bring discipline to large organizations like Amtrak is to build a tight structure, hire and retain competent managers, and institute a strict budget process. My philosophy for managing includes five basic tools: * an organization with minimum layers, individual accountability for specific functional areas, organization charts documenting the chain of command and all authorized positions; * clear goals and objectives; * an operating budget based on monthly staffing levels; * a detailed multi-year capital budget; and * a monthly financial reporting and performance reporting for specific responsibility centers and projects. With these five tools in place, you can manage. They also keep you honest. For too long Amtrak did not have a process that created internal accountability, and the annual funding provided by Congress has always left it close to the edge. So it is no wonder why the problems we have had are both significant and recurring. Even with tighter management and better financial accounting, there are still big risks. However, through better management, we will be able to avoid these recurring financial crises, which divert attention from the real problems and decisions which need to be made. Clearly, over the next few years, we must define the reform we want and develop a detailed plan to achieve it. We have already instituted several reforms but in considering reform, I would ask you to bear in mind the following myths that are prevalent in some circles: Myth #1 - Amtrak can be profitable. * No national rail passenger system in the world is profitable. Without public subsidy, there will be no passenger rail transportation systems in the United States. Myth #2 - The private sector is dying to take over our services. * Remember why we were formed. We are what is left of a once privately run enterprise. Myth #3 - Long-distance trains are the problem. * This is perhaps one of the biggest myths. If on a fully allocated basis you might start to save significant amounts of money after a number of years. Focusing on this problem is not going to save Amtrak. This approach is a red herring. Myth #4 - Amtrak is a featherbed for labor. * Our wage rates are about 90% of the freight industry and are even lower when compared to transit. Wages are not the problem; generating a higher level of productivity, that is the challenge. It is management's duty to seek such improvement. Myth #5 - The Northeast Corridor (NEC) is profitable. * The NEC may cover most of its above-the-rail costs, but it is an extremely costly piece of railroad to maintain. Railroads, both passenger and freight are extremely capital intensive. The NEC is not profitable and never will be. Sure, private groups might be interested in having it, but they would take it only with the promise of massive capital infusions. Myth #6 - There is a quick fix -- reform. * The word reform is like catnip to those interested in a quick fix to Amtrak. If the answer were quick and easy, we would have solved the problem long ago. What needs to be done is to tightly manage the company and its finances and begin to make incremental but critical improvements to plant and equipment. As I stated before - there is no silver bullet. At some point, Congress will turn its attention to the reauthorization of Amtrak, and it will be in this venue that the future of rail passenger service will be decided. In the year that I have been here, I have been struck by the amount of attention that Amtrak generates without real progress occurring in addressing the long-term funding problems that everyone knows exist. I realize that Amtrak is partly to blame for this paralysis of action; recurring crises distract us from the central issues that should be discussed. I know that Amtrak for too long had been engaged in the charade of pleasing its detractors by endorsing the concept of self-sufficiency. Let me be clear, however, that despite the best management that could be brought to this railroad, without support for a realistic investment over the next few years, we will always remain on the edge and the problem will grow worse, risking a real disaster either physically and/or financially. The lack of a detailed policy will soon produce unwanted consequences. You have before you Amtrak's five-year strategic plan. I believe it is both a practical and pragmatic plan that shows what needs to be done and what can be accomplished with a consistent level of funding from FY04 through FY08. We will stabilize Amtrak and bring the railroad up to a state of good repair. If fully executed, our equipment will be in good condition - and on regular maintenance cycles which means improved reliability and utilization, and the backlog of critical needs to our Amtrak infrastructure will be significantly reduced. Regardless of what policymakers decide is the future for Amtrak or rail passenger service in the United States, I would argue that the steps outlined in the five-year plan are essential and would have to be done in any case. The first down payment on that plan would be in FY04. Our plan also represents the least expensive and least disruptive course of action for the Congress. Unfortunately, in the past few years, a troubling pattern has emerged of creating new oversight responsibilities as a substitute for a real discussion on the issue. This is a "mugs game," a distraction with no real benefit to anyone unless the goal is to interfere with this company reaching fiscal stability and a state-of-good-repair. Repairing and improving this railroad is the Board's and my immediate goal and is in everyone's interest. We have a five-year plan that will accomplish this, and I am asking for your support and leadership as we move forward. I would urge you to consider this plan in the broader context of Amtrak's reauthorization where it really should be done and end this stutter-step practice of reforming Amtrak through the annual appropriations process. Whatever you ultimately decide to do, I would argue that what is proposed in the plan will have to be done in any event and it will be the least costly option. The railroad must be stabilized and the asset improved -- regardless. Taking these steps will provide clear guidance, goals and objectives that will help all of us to avoid these regular and recurring crises that have become so tiresome. If we fail to take these steps now and address these issues, the results could be disastrous.