Amtrak: Federal Financial Assistance

Stephen J Thompson
Economics Division

Updated January 10, 1997

95-1199 E

Walter Eubanks, Jane G. Gravelle, Donald W. Kiefer, Linda Levine, Dennis W. Snook, Jack H. Taylor, and Philip D. Winters made suggestions during the preparation of this report.

CONTENTS:

AN OVERVIEW OF FEDERAL FINANCIAL ASSISTANCE TO AMTRAK
SOME POLICY ASPECTS OF COMPONENTS OF THAT ASSISTANCE
Railroad Unemployment Insurance
Railroad Retirement Contributions

SUMMARY

During FY1995 that ended September 30, 1995, federal government outlays for intercity rail passenger service came to over $800 million. Since Amtrak began operations in 1971, federal outlays for intercity rail passenger service have been about $18 billion.

Legislation appropriating funds to Amtrak for FY1996 has been enacted, although Amtrak authorization for appropriations ended on September 30, 1994. Amtrak authorizing legislation is being actively considered by Congress. The possibility of significant reductions, or even a complete cutoff, of federal financial assistance to Amtrak during the next decade is raised by current efforts in Congress to reduce the federal budget deficit over the next seven years. Specific bills to reduce or eliminate Amtrak funding over the next few years have been introduced during the 104th Congress. As a result of the current congressional interest in reducing federal budget deficits, Amtrak funding could receive considerable congressional attention beyond 1995, as it has during many of the 25 years since Amtrak began operating in 1971.

The major components of federal financial assistance to Amtrak other than operating and capital grants have been railroad unemployment insurance and railroad retirement benefits. Since 1992, Amtrak contributions to the industry- wide unemployment insurance program generally have not been considered a significant public policy issue because they became experience-based.

In contrast, Amtrak contributions toward the rail- industry-wide retirement plan continue to be a public policy issue. Amtrak claims that because it has been in existence for only 25 years, its employees are generally younger than the average rail worker. Amtrak's somewhat younger workforce is paying for retirement benefits received by some who never worked for Amtrak. Amtrak's position is that the contributions inflate the size of its appropriation without increasing its ability to provide intercity rail passenger service. In response, Congress is considering paying the Amtrak assessment for past service credits directly from U.S. Department of Transportation appropriations. Some point out that regardless of whether these payments are passed through Amtrak or paid directly to the railroad retirement fund, general tax revenues are being used in support of retirement benefits for retirees of a specific industry. Others point out that the Railroad Retirement System is an artifact of rail history that finances past service credits. Possible alternatives to the current system would seem to include one or more of the following: (1) increase the financial burden on rail freight employers and employees; (2) reduce the benefits received by retired rail workers; (3) substitute some other method of federal financial assistance to retired workers to replace the current payment by Amtrak from its annual federal appropriation of funds; and/or (4) transition to a policy position commensurate with that toward other industries.

AMTRAK: FEDERAL FINANCIAL ASSISTANCE

Federal financial assistance to Amtrak (See Endnote 1.) has been provided each year since Amtrak began operations in 1971. This report describes federal financial assistance to Amtrak since its inception, and divides the annual numbers into various components, e.g., funds to compensate for operating losses and funds for new rail passenger equipment. (See Endnote 2.) The report discusses some public policy issues associated with those federal outlays.

During FY1995 that ended September 30, 1995, federal government outlays for intercity rail passenger service came to over $800 million. Since Amtrak began operations in 1971, it has been about $18 billion, as can be seen from the table in the appendix.

Legislation appropriating funds to Amtrak for FY1996 has been enacted, although Amtrak authorization for appropriations ended on September 30, 1994. Amtrak authorizing legislation is being actively considered by Congress. The possibility of significant reductions, or even a complete cutoff, of federal financial assistance to Amtrak during the next decade is raised by current efforts in Congress to reduce the federal budget deficit. Specific bills to reduce or eliminate Amtrak funding over the next few years have been introduced during the 104th Congress. As a result of the current congressional interest in reducing federal budget deficits, Amtrak funding could receive considerable congres- sional attention during 1996 and beyond, as it has during many of the 25 years since Amtrak began operating in 1971.

AN OVERVIEW OF FEDERAL FINANCIAL ASSISTANCE TO AMTRAK

Federal outlays for Amtrak have ranged from a low of $24 million in 1971 (See Endnote 3.) to a high of over $2 billion in 1984, as can be seen from the numbers in the table in the appendix. In most years, operating grants have been the largest component of federal financial assistance to Amtrak, ranging from a low of $9.1 million in 1973 to a high of $729 million in 1981. (See Endnote 4.) Capital grants have ranged from none in some years to a high of $230 million in 1995. Operating grants through 1995 total $11.2 billion; capital grants total $2.2 billion; and, other funds for intercity rail passenger service total $5.4 billion.

Altogether then, federal outlays for financial assistance to intercity rail passenger service have been about $18 billion since Amtrak began operating in 1971.

The composition of such assistance has varied from no categories designated by Congress in the appropriations legislation in 1971 and 1972 to five in 1995. These categories, and some public policy issues associated with them, are discussed next.

SOME POLICY ASPECTS OF COMPONENTS OF THAT ASSISTANCE

The major components of federal financial assistance to intercity rail passenger service other than operating and capital grants to Amtrak have been mandatory passenger rail service payments. In the federal budget for 1995, "mandatory passenger rail service payments" are described as "... funds to offset assessments beyond those required to cover Amtrak's own workers, from the Railroad Retirement Fund and the Railroad Unemployment Insurance Fund." (See Endnote 5.) Thus, mandatory passenger rail service payments are comprised of railroad unemployment insurance and railroad retirement benefit payments that are appropriated by Congress to Amtrak, but then passed through by Amtrak into these two funds for the benefit of all rail workers who qualify, current employees in the case of unemployment insurance, and former employees in the case of retirement benefits. Further, these payments are for the benefit of freight rail workers, not passenger workers.

The amounts for "mandatory passenger rail service payments" were first specified in 1991, but the amount for 1995 was not specified. According to the Budget of the U.S. Government, these payments totalled $583.2 million from 1991 through 1994.

RAILROAD UNEMPLOYMENT INSURANCE

As in the unemployment insurance system outside the rail industry, most contributions to the Railroad Unemployment Insurance Fund are paid out to unemployed railroad workers rather than being invested for payout to those who make the contributions, in the event they become unemployed. (See Endnote 6.)

Before 1992, contributions to the Railroad Unemployment Insurance Fund were levied at the same rate for all railroads, including Amtrak. (See Endnote 7.) Since 1992, as is done for unemployment insurance outside the rail industry, contributions have been "experienced based," that is, levied on the basis of actual unemployment experience by each company, rather than being generalized over the entire industry. (See Endnote 8.) Consequently, Amtrak contributions for unemployment insurance are no longer generally considered to be a significant public policy issue, because the premiums no longer cross-subsidize the benefits received by freight rail employees.

RAILROAD RETIREMENT CONTRIBUTIONS

Most tax revenues to the Railroad Retirement Fund, like most tax revenues to social security, are paid to current beneficiaries rather than being invested for payment later to current contributors. Railroad retirement benefits are a combination of an industry-specific pension and social security benefits. The railroad retirement payroll tax to finance the industry pension is split between workers and their railroad employers on wages up to $46,500 in 1996, 16.1% on employers, and 4.9% on employees. (See Endnote 9.)

The tax rate is not dependent upon the number of retirees from any particular railroad, i.e., it is not "experienced based" for individual railroads, such as Amtrak. In contrast, the main competitors to Amtrak, airlines and intercity bus lines, and the main comp etitors to freight railroads, truckload truckers, do not pay premiums into a retirement fund administered and underwritten by the federal government; instead, their pension programs are company-based and must be advance funded.

Because the ratio of retired rail employees to currently employed rail employees has increased steadily since the early 1950s, the payroll tax rate necessary to fund railroad retirement has risen so that adequate funds are available to pay retirement benefits. Because Amtrak has a younger workforce with fewer years of railroad service than is typical in the rest of the rail industry (although a substantial portion of Amtrak workers are former freight railroad workers who transferred to Amtrak from other railroads), the mandatory passenger rail service payment from the federal government to Amtrak has been used "to offset assessments on Amtrak beyond those required to cover Amtrak's own workers" to use the language in the Budget of the U.S. Government (cited in footnote 5).

Since 1992, most of those funds probably have paid for railroad retirement benefits, rather than for railroad unemployment compensation. The reason is that, as previously noted, the unemployment compensation tax rate became "experience based" starting in 1992. The amounts for income protection shown in the table in the appendix for the years 1992 through 1994 varied from a low of $137 million to a high of $150 million. Thus, if Amtrak had operated its own retirement program rather than being part of an industry-wide plan, the annual cost of operating Amtrak since 1992 would have been about $130 million to $150 million less.

If Amtrak were to operate its own retirement program, the reduced cost to Amtrak would result in a higher cost to other railroads and their employees who would have to make up the $130 million to $150 million shortfall. Similarly, if Amtrak were to go out of existence, other railroads and their employees would have to make up the shortfall unless the government were to fund the shortfall. Amtrak also takes the position that the federal financial assistance to Amtrak that is passed on as mandatory rail passenger payments does not increase the amount of intercity rail passenger service provided by Amtrak. Further, the current railroad employee retirement program could adversely affect Amtrak's ability to compete with airlines and intercity buses in providing intercity passenger service by raising the cost of providing intercity rail passenger service.

Amtrak succeeded in getting Congress to reduce its contribution to rail unemployment to a level based on its lower unemployment experience, rather than continuing to pay a uniform industry-wide tax rate for unemployment insurance. (See Endnote 10.) Analogously, Amtrak has taken the position with regard to pensions that a uniform contribution rate for railroad retirement is too high as it relates to Amtrak because it has a more favorable ratio of current employees to retirees compared to the railroad industry as a whole. This rationale suggests that the portion of the annual federal financial assistance to Amtrak that goes for the "mandatory passenger rail service payment," has not benefitted intercity rail passengers or Amtrak. (See Endnote 11.) Most railroads could make a somewhat similar claim, i.e., that the taxes to support the benefit program are disproportionate to the current relationship between railroads, their employees, and their paying customers. But, Amtrak's claim is somewhat distinct, since it has been in existence for only 25 years so that its employees have less years of service in the rail industry, and its employees are younger than the average rail worker, while Amtrak and its employees are paying taxes that provide retirement benefits to some freight rail employees who never worked for Amtrak.

The current financial burden on railroads and their employees to pay the retirement benefits might not have arisen if the railroad retirement program had been funded on an actuarial basis rather than on a current cash flow basis. However, the rail industry is by no means unique regarding a retirement program that is based on a current cash flow basis. A current cash flow basis has been used in other industries and now is used for social security. Cash-flow systems do not assure that funds will be available to pay future benefits to those who contributed to these funds.

Encouraging pension programs in the private sector to be fully funded on an actuarial basis is current federal policy toward most industries, but such a policy exacerbates the financial difficulties of companies and employees in a declining industry. Such a policy also contrasts with current federal practice regarding social security and current State practice regarding unemployment insurance.

Industry-wide financing of benefit programs is inevitably problematic when an industry is in decline (See Endnote 12.) and those benefits are based on a cash-flow system. (See Endnote 13.) Removing Amtrak from the industry's pension plan would decrease benefits to retired rail workers or increase the burden on the remaining railroads. The increased burden would result from the lower number of current employees over whom the cost of pension benefits are spread. The increased burden would be larger than otherwise because the ratio of current employees to retirees is greater in the freight rail industry compared to Amtrak. Removing Amtrak from the industry's pension plan could hasten the point at which some in the rail freight industry might turn to the federal government to fund a program from general revenues that they view as a federal entitlement, although a federal retirement program does not exist for other industries, including their competitors in the trucking industry.

For these reasons, Amtrak contributions toward the industry-wide retirement plan continue to be a public policy issue. As stated above, Amtrak claims that because it has been in existence for only 25 years, its employees are generally younger than the average rail worker. Amtrak's somewhat younger workforce is paying for retirement benefits received by some who never worked for Amtrak. Amtrak's position is that the contributions inflate the size of its appropriation without increasing its ability to provide intercity rail passenger service. In response, Congress is considering paying the Amtrak assessment for past service credits directly from U.S. Department of Transportation appropriations.

Some point out that regardless of whether these payments are passed through Amtrak or paid directly to the railroad retirement fund, general tax revenues are being used in support of retirement benefits for retirees of a specific industry. Others point out that the Railroad Retirement System is an artifact of rail history that finances past service credits. (See Endnote 14.) Possible alternatives to the current system would seem to include one or more of the following: (1) increase the financial burden on rail freight employers and employees; (2) reduce the benefits received by retired rail workers; (3) substitute some other method of federal financial assistance to retired workers to replace the current payment by Amtrak from its annual federal appropria tion of funds; and/or (4) transition to a policy position commensurate with that toward other industries.

ENDNOTES

(1) Amtrak is the popular, and now perhaps the official, name of what began as the National Railroad Passenger Corpora- tion. The law that recodified Amtrak legislation, P.L. 103- 272, enacted July 5, 1994, 108 Stat. 745, replaces references to the National Railroad Passenger Corporation with references to Amtrak. See, for example, 108 Stat. 899, where the "Public convenience and necessity require that Amtrak ..." (not the National Railroad Passenger Corporation), and 108 Stat. 900- 901, containing definitions that refer to Amtrak but contain- ing no definition of, or reference to, the National Railroad Passenger Corporation or "the Corporation" that appear, for example, in the earlier codification at 45 U.S.C. Section 502 (1987).

(2) Other CRS products on Amtrak include: U.S. Library of Congress. Congressional Research Service. Amtrak and the 104th Congress. CRS Issue Brief 95081, by Stephen J Thompson. Washington. (Updated regularly) A CRS issue brief that discusses some labor protections as they affect rail passenger workers is: U.S. Library of Congress. Congressional Research Service. Selected Labor Protections Regarding Transit, Amtrak, and Freight Railroads. CRS Issue Brief 95097, by Stephen J Thompson. Washington. (Updated regularly) A CRS report discussing rail passenger systems abroad is U.S. Library of Congress. Congressional Research Service. Background Information on the Railroads of Western Europe and Japan. CRS Report 79-73 E, by John W. Fischer. Washington, March 12, 1979. 22 p.

(3) All years are fiscal years unless stated otherwise.

(4) 1971 and 1972 are excluded because assistance was not apportioned in legislation among operating grants, capital grants, and other funds for rail passenger service for those years.

(5) U.S. Office of Management and Budget. Budget of the United States Government, Fiscal Year 1995. U.S. Government Printing Office, Washington, 1994. 1066 p., at p. 667.

(6) Contributions to the Railroad Unemployment Insurance Fund are specified in 45 U.S.C. Section 358(a) (1994). Further, contributions called a "repayment tax" associated with the Railroad Unemployment Insurance Fund are specified in 26 U.S.C. Section 3321 (1994) and are intended to compensate for under-funding in prior years based on past contributions by each railroad, including Amtrak.

(7) 45 U.S.C. Section 358(1) (1994).

(8) 45 U.S.C. Section 358(1) (1994).

(9) 26 U.S.C. Section 3221 (1994).

(10) Amtrak's unemployment rate could be significantly and adversely affected by the business plan it announced on December 14, 1994, because the plan could eventually result in large cutbacks in employment. See U.S. National Railroad Passenger Corporation. Strategic and Business Plan; Towards a New Amtrak. News briefing handouts at a press conference on December 14, 1994, in Washington, DC, no page numbers.

(11) As noted above, the amount of such contribution has not been identified in the Budget of the United States Government for most years. Those amounts that have been identified, from 1991 through 1994, total $583.2 million. Subtracting $583.2 million from the $17.9 billion total shown in the appendix for federal financial support to intercity rail passenger service yields a total of $17.3 billion. The reduction would be greater if "mandatory passenger rail service payments" could be identified for other years.

(12) After decades of declining employment, railroads are currently hiring workers. But, such an upturn is not likely to be sufficiently strong to bring rail employment back to its levels in past decades.

(13) From early in the century, railroad labor used retirement as a means to encourage older workers to leave declining jobs to younger workers. Retirement costs were distributed through some form of payroll tax, first as ad hoc collections and then as more formal assessments against worker pay, a device that assigns relatively equal shares of the cost to each job. Past service liabilities of the railroad retirement system account for roughly two-thirds of the payroll tax and are the legacy of generations of financing retirement out of current industry revenues. The Railroad Retirement Acts of 1935 and 1937 brought the financing under federal administration, and made the distribution of the various benefits and costs a matter of federal law. Bargaining determines the shares distributed among labor sub-categories, such as permanently and temporarily laid-off workers, younger and older workers, retirees and remaining workers. Each receive a share of the productivity increases that occur when jobs are eliminated.

Labor relations in the railroad industry involves distribution of the benefits resulting from productivity increases that occur as a result of eliminating superfluous jobs among various current employees. For decades, the industry has struggled with the problem of controlled job losses, i.e., jobs eliminated through bargaining with the labor cost reductions distributed among the various industry interests. Jobs in the passenger segment of the rail industry were more difficult to eliminate than jobs in the freight segment because federal law required railroads to continue to provide intercity rail passenger service for decades after it became unprofitable, coupled with the labor-intensive nature passenger service compared to freight service. Passenger service survives because of support from the public through federal financial assistance, rather than through farebox revenues alone.

Amtrak's position links current appropriations to current operations, i.e., Amtrak states that it pays for retirement benefits for workers who never worked for Amtrak. Yet, the current railroad retirement program exists partly because of the inability of the industry to adequately manage the past service liabilities that developed through several decades. Some of that liability is for workers in passenger service that preceded Amtrak.

(14) Other industries go through acute periods of retrenchment, or long periods of decline, but without federal financial assistance for benefits to their retirees like the Amtrak payment to the industry-wide retirement program. But the rail situation is unique at least to the extent that expectations have been created by the current rail retirement program that the retirement program will be federally administered.