Sunday, July 23, 2006

When you don't know what you don't know, you don't know nuttin'

Interesting interview with David Gunn, former head of Amtrak on the Philadelphia Inquirer website.

CAPE BRETON, Nova Scotia - Even now, David Gunn isn't sure who in the Bush White House wanted to kill Amtrak. What he does know is that Amtrak's opponents came very close to getting their wish.

As the Bush administration threatened to cut off funding last year, Gunn, then Amtrak's president, and other Amtrak managers feared that the beleaguered national rail line would collapse financially or that passenger safety might be jeopardized.

Gunn was fired Nov. 9 in a dispute with the Amtrak board over how to modernize the rail line. He said in an interview on his Nova Scotia farm that he warned the Bush administration that its threats to force Amtrak into bankruptcy could prompt suppliers to demand cash and creditors to seize assets, effectively shutting the rail line down.


The way the Bush administration managed Amtrak "is almost a microcosm for the whole bloody administration, because it is what they have done everywhere," said Gunn, a Republican. "It has gotten them in trouble with FEMA; it has gotten them in trouble with Iraq. They just don't trust their own management."

How to do that has become a huge issue. Arguing that Amtrak was an outmoded relic, administration officials last year threatened to withhold money to force the rail line's restructuring.

But Gunn said the strategy came close to backfiring. Vendors began demanding cash, an insurer resisted renewing vital liability coverage for Amtrak officers, and directors and Amtrak auditors declined to certify its financial statements.

The standoff caused Moody's Investors Service to downgrade Amtrak's debt rating, and threatened to prevent needed repairs to failing track switches, overhead power lines, bridges, and other critical infrastructure, Gunn said.

After decades of deferred maintenance, some track switches had become so unreliable that Amtrak had to assign staff to monitor them 24 hours a day. Gunn said Amtrak eventually made the necessary repairs.

"What we said was, 'Look, we have trains running at 150 miles an hour - you have human beings riding that stuff,' " Gunn said.

Throughout his conflict with the administration, Gunn said senior transportation officials repeatedly suggested that Amtrak could revitalize itself by filing for Chapter 11 bankruptcy protection - like a bankrupt airline, it could void its labor contracts.

"Oh, I think they felt... somehow, out of the wreckage, would come a new company," Gunn said.

But he said that bankruptcy for Amtrak could have caused a service shutdown - in a way it never would for an airline - because of the nature of the passenger rail business, which is mostly unprofitable and lacks competition.

Amtrak was formed from the remains of several bankrupt private passenger lines in 1970. It is responsible for service in the heavily traveled Northeast Corridor between Washington and Boston, as well as on 16 long-distance lines traversing much of the country.

Amtrak also provides service on shorter-range lines in Pennsylvania, New York, Michigan, California and other states, which share the costs.

It has never turned a profit, and requires billions of dollars in government subsidies.

And that is the problem, Gunn said. Because no other company has Amtrak's experience running a national passenger rail service, Gunn said it was highly improbable that any other rail line could have stepped in had Amtrak gone out of business. The airline industry offers no comparison, he said, because its losses are smaller and another airline is always available to take over the business of companies that fail.

Gunn took over as head of Amtrak on May 15, 2002, and quickly moved to cut costs, establishing a new bookkeeping system that gave managers a clearer idea of how much money they had and how much various Amtrak operations cost. Before he arrived, Gunn said, the rail line was charging as much as $200 million a year of day-to-day operational costs to accounts set aside for replacing bridges, rail and other infrastructure.

Among financial auditors, the practice is considered a transgression roughly comparable to a homeowner's taking out a second mortgage to pay for food and clothing.

For a time, Amtrak stabilized. Gunn reduced staffing, and began repairing aging bridges and neglected track. But his relationship with the administration abruptly changed when the White House budget cut Amtrak's federal funding from $1.2 billion to zero.

Amtrak's vendors - companies that furnished fuel oil, food and other supplies, debt holders, and rating agencies - were startled.

Its auditor, KPMG, declined for months to sign off on its financial statements or to certify that Amtrak would make it through another year. That meant Amtrak risked being in default of its loan agreements, raising the prospect that creditors could seize assets such as the high-speed Acela train, Gunn said.

But he maintained that the Bush administration never took the possibility of collapse seriously, although its officials seemed to take every opportunity to make matters worse.

After the administration released its budget, the Amtrak board of directors barred Gunn and other rail managers from asking Congress for money, as they had in the past.

In May, in another move that Gunn interpreted as a tightening of the financial vise, Mineta wrote Gunn to inform him that the Transportation Department would withhold about $60 million in cash reserves until the department was sure Amtrak would survive. Gunn and the Transportation Department agree that Congress required Mineta to inform Gunn that the money would be withheld to pay for shutdown costs if the rail line failed.

But Gunn said Mineta greatly complicated matters by releasing the letter to the public. Vendors deluged the rail line, demanding cash. Particularly concerned, Gunn said, were the credit card companies that Amtrak customers used to purchase their tickets.

He said Amtrak managers worried that those companies might demand faster payment or, worse, require Amtrak to post as much as $100 million in reserves to insure payment if Amtrak went bankrupt. Gunn said the credit card companies never forced the issue, but if they had, Amtrak would have been bankrupted.
"We managed our way through; it wasn't them [the Bush administration]," Gunn said. "They didn't do anything to help us. They did a lot to hurt us."

When you have to remind someone there are human beings riding passenger trains, it seems like there is not much basis for hope. Maybe the administration will get its wish soon and bankrupt Amtrak. When the Northeast corridor comes to a halt and the already overloaded roads and highways in the region are even more jammed (and many people just cannot get to work at all) I'm sure it will enhance their reputation as competent administrators of the public good.

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