I believe the action we took last year to reduce the tax burden on Americans was best in the short and in the long term. A large majority of my colleagues agreed, as did Chairman Greenspan and other students of fiscal policy.

Tomorrow, I believe that we are going to receive yet more evidence that the recession was shallow, perhaps the shallowest in history. I don't know whether you, Mr. Walker, have commented on it in your remarks. I did not get a chance to read them. But it seems pretty obvious that the recession is going to be rather shallow.

In fact, many economists expect that we grew at about a positive 1 percent rate in the fourth quarter. This means that we only had one quarter of negative growth and the overall growth rate during the recession was about zero rather than being negative. That is good. That is good news for future Social Security recipients, too. In my view, one of the key reasons the recession was as shallow as it was was because the tax cut came in just at the right time. We were out there saying we needed to reduce taxes, which was an important issue, and at the same time it seems like the first cut came in right when the recession might have bottomed, along with Alan Greenspan's and his Federal Reserve reduction in interest rates I think kept this economy from going into deeper recession. Last year, I was concerned that we were on track, reducing our debts very rapidly, and then the rapidity with which we began to reduce our national debt caused me some concern. I don't have to repeat that concern now because obviously we don't have staring us in the face the huge surplus that concerned this Senator and others with reference to what would that money be used for.

I agree with the Director of the Congressional Budget Office who is fond of saying, and I quote, "It is not the size of the trust fund that matters, but the size of the economy." I would like to repeat that: "It is not the size of the trust fund that matters, but the size of the economy."

Finally, Mr. Walker, at this time last year, GAO issued an extensive series of reports on the high-risk areas of the Federal Government. Those reports as well as the work that Director Daniels and the OMB staff are doing will be extremely helpful in terms of the short-run focus of policymakers. I commend you for those reports. I think they are very good.

There is inefficiency in this Government that must be addressed, and we can never let up. We have to take a shot at that regularly as policymakers, or inefficiency will grow and will be much bigger than anybody assumes. Maybe you can help us determine where the American people are not receiving their money's worth. I think you are uniquely equipped to do that.

Now I wonder if the Chairman wants to proceed or does he want to wait. Does anyone know? [Pause.]

Senator DOMENICI. OK, Senator, you are in charge.

Senator CORZINE. Not with you around, Senator Domenici, I assure you.

I didn't prepare a formal statement, but let me just say for the record that I think nothing is more important than sorting out this balance between those short-term realities that we must face as public officials and the needs of the economy and our long-term fis

cal stability, which will be upon us soon. The topic of this demographic bubble and its implications for medical care for Americans, not only the seniors but for all of Americans, along with the Social Security program is one that I think is as close to an honest dilemma that we face in our political life. And so resolving that and solutions to that, Mr. Walker, are ones that I am anxious to hear your thoughts about because we need to truly acknowledge that we are running into a Box Canyon on our fiscal affairs in this Nation. And I think we have a structure that doesn't provide solution for those.

I appreciate your commentary on it. It will be interesting to see how we can both finance Medicare, Medicaid, and our Social Security obligations and still perform the other functions of Government. And my fear is that we have prescribed a fiscal situation that reduces the role that Government plays to a level that is not acceptable to the American people on a whole host of other areas, including education and transportation infrastructure, et cetera.

I will stop here. The Chairman will be returning, but I look forward to your comments. I appreciate your straightforwardness and integrity on a whole host of issues in the reports that you have published in history.

Thank you.

Mr. WALKER. Thank you, Senator. [Pause.]

Senator CORZINE. Being a freshman Senator, I am learning how this works. Go ahead, Mr. Walker, and start your testimony. I think the Chairman should be here in a very few minutes.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES

Mr. WALKER. Thank you, Senator. I am pleased to return this year to present GAO's perspective on the long-range fiscal policy challenges facing the Congress and our Nation.

Thank you, Mr. Chairman. I am just on the second sentence, so your timing is impeccable.

We meet today in a situation that seems very different from that of last February. Today the challenges of combating terrorism and ensuring our homeland security have come to the fore as urgent claims on our attention and on the Federal budget. While there are indications that the economic recovery is underway, the recession that began last spring, according to the National Bureau of Economic Research, has had real consequences for the budget.

These are important changes in the past year. At the same time, the known fiscal pressures created by the retirement of the babyboom generation and rising health care costs remain the same this year as they have been for a number of years.

Absent substantive reform of entitlement programs, the rapid escalation of Federal spending for Social Security, Medicare, and Medicaid beginning less than 10 years from now is virtually certain to overwhelm the rest of the Federal budget. Indeed, the slowing economy and tax and spending decisions that were made during the past year, including increased spending levels necessary to respond to the new security challenges that we face, have increased these pressures on the budget. Correspondingly, the ultimate task

of addressing these needs without unduly exacerbating the longrange fiscal challenge has become more difficult.

In summary, I would like to make the following points, and I have a few charts to illustrate a few of these points.

The surpluses that this committee and many others worked to achieve, with the help of the economy, not only strengthened the economy for the longer term and helped us in our fiscal posture for the longer term, but also put us in a stronger position to respond to the events of September 11th and to the economic slowdown than otherwise would have been the case.

Going forward, the Nation's commitment to surpluses will be severely tested. A return to surplus will require sustained discipline and very difficult choices.

Because the longer-term outlook is driven in large part by known demographic trends, in some ways we can be surer about the outlook 20 years from now than about the forecast for the next few

years.

The message of GAO's updated simulations remains the same as last year: absent structural changes in entitlement programs for the elderly, in the long term persistent deficits and escalating debt will overwhelm the Federal budget.

Both longer-term pressures and new commitments undertaken after September 11th sharpen the need to look at competing claims and new priorities. A fundamental review, reassessment, and reprioritization of existing programs and activities is necessary both to increase fiscal flexibility and to make today's Federal Government fit the modern world. Stated differently, there is a need to engage in a fundamental reassessment of what is the proper role for the Federal Government in the 21st century and how should the Government do business in the 21st century.

This committee in the past-in particular, I know, Senator Domenici among others-has been very interested in trying to understand what works and what doesn't work within the base of Government. It is critically important that we get back to that. The fact of the matter is the numbers do not add up. We are not going to be able to sustain all the programs abd activities that we have now under current tax levels and projected tax levels; we would not be able to do it with huge increases in taxation-which I don't think would be acceptable or desirable-unless we end up dealing with some of these structural problems. That means we need to look at what exists today and ask whether or not it is still relevant in the 21st century; and if it is relevant in the 21st century, at what level of priority? Because there are new claims and competing needs before us. Look just at the health care area, where we already have a huge imbalance. There is increasing interest in having a prescription drug benefit, but at the same time we already have trillions of unfunded promises associated just Part A of Medicare alone, and prescription drugs represents the fastest-growing cost in health care.

The fiscal benchmarks and rules that moved us from deficit to surplus expire this year. Any successor system should facilitate both a debate about reprioritization of today's programs and spending and a better understanding of the long-term implications of current actions. Simply stated, there are many things that we may

able routes. It has not used its Reform Act authority to contract out elements of its operations to achieve cost savings.6 • Until February 7, 2002, the day the Council submitted its restructuring plan to Congress, Amtrak resisted all requests that it separate the financial statements for the Northeast Corridor Rail infrastructure that it owns and maintains from the financial statements of its train operations. The preliminary information provided by Amtrak to the Council raises important issues that need to be resolved before the information can be used for analysis.

• Amtrak lacks a strong policy to improve the intermodal connections of its system. A case in point is that Greyhound, which serves about 3,500 cities, has secured access to only 55 of Amtrak's 500 stations in the 30 years that Amtrak has been in business, and at only 35 of those 55 stations do all Greyhound buses serving that city come to the train station.

These flaws make it clear that Amtrak will not achieve operational self-sufficiency because, as an institution, it has not been able to use the past four years to get its house in order by better managing revenues, costs, and productivity. The events of September 11 are simply irrelevant to the reasons why Amtrak's financial situation has not improved over this period, and why Amtrak will fail to pass the operational self-sufficiency test.

B. ROOT CAUSES OF THESE PROBLEMS

Amtrak's poor performance is the result of institutional flaws:

Direct susceptibility to political pressures on major and minor management decisions, which provides strong incentives to make decisions that are politically expedient in the short run, but financially crippling in the long run.

• A monopoly structure, that exhibits inherent resistance to innovation and lacks motivation to improve efficiency.

• Lack of transparency and accountability in Amtrak's management structure, accounting system, and financial reporting

• Lack of effective program administration and oversight.

• A business model based on the faulty premises of large-scale cross-subsidization and the availability of Federal funding as needed.

Lack of Congressional confidence in Amtrak as an institution, making it virtually impossible for Amtrak to secure stable and adequate funding.

Both historically and currently, the administration and oversight of the passenger rail program are ineffective. Without reform, there will be continued reliance on deficit financing with no incentives for efficiency in the conduct of operations or the use of capital. These practices will continue to fuel the debate about the efficacy of the institution, making it difficult if not impossible to secure adequate funding. Inadequate funding will continue the cycle of deterioration of assets, both equipment and infrastructure. This particularly will be true for the passenger equipment on the long-haul trains and for the NEC infrastructure. The operational reliability of the NEC will continue to degrade, introducing further train delays that will if unchecked act as a drag on the competitiveness of the regional economy of the Northeastern US (New England and Middle Atlantic). Impediments to the ability of states outside the NEC to develop their emerging high-speed rail corridors will continue. Improvement will not come without institutional reform.

II. REFORM CONCEPTS ENDORSED BY THE COUNCIL

The Amtrak Reform Council's action plan is based on three principal concepts for reform.

a) A New Business Model for Amtrak. Amtrak's primary mission is the transportation of people. Today's Amtrak also establishes and administers governmental policy on rail passenger issues and is effectively the sole Federal oversight body responsible for monitoring its own business plans and operations. Amtrak also owns and maintains much of the Northeast Corridor (NEC) rail infrastructure, an asset shared with commuter authorities and freight carriers and having an economic significance that transcends Amtrak's operations. To correct these institutional failings, the Council recommends:

6 The Reform Act eliminated previous statutory prohibitions concerning contracting out work where the loss of a job would result, and made contracting out a collective bargaining issue. Amtrak and its unions have been in collective bargaining on the issue of contracting out since June 2000.

• Restructuring the National Railroad Passenger Corporation (NRPC) as a small Federal program agency to administer and oversee the intercity passenger rail program. In the absence of competition, a monopoly operator such as Amtrak needs government oversight. While audits of Amtrak's financial performance are regularly performed by at least three agencies, analysis and reporting functions are not a substitute for effective, hands-on oversight. Amtrak's current train operating and infrastructure functions, under the Council's plan, would be strong companies with independent boards. The NRPC would actively oversee the new train operating and infrastructure companies with respect to budget matters and approval of business plans. The NRPC would also be responsible for administering the Federal program for development of high-speed rail corridors and would have the authority, at its discretion, to introduce competition for some or all Amtrak markets.

• Organizing Amtrak's responsibilities for train operations and infrastructure as separate companies. This would allow Amtrak to focus on its mission of running trains and free it from the burden of ownership for the portions of the NEC that it owns. A separate infrastructure company would ensure that funds earmarked for infrastructure improvements will be used for the intended purpose, and will better represent and balance the needs of all Corridor users and stakeholders. The NRPC would insulate both new companies from political interference. Separation also would highlight the NEC's 20-year capital needs, estimated by Amtrak to be nearly $28 billion.

b) The Option of Introducing Competition. The Council's plan permits, after a transition period, the introduction of competition through the franchising of train service and NEC maintenance through a competitive bidding process. The Council believes that, as is the case throughout our free-market economy, competition would drive down costs and improve service quality and customer satisfaction.

Competition would help minimize losses, but in all likelihood would not eliminate the need for operating subsidies. Some Amtrak services-specifically Amtrak's longdistance trains would need to be offered on a negative bid basis, i.e., the bidder requiring the least subsidy would be awarded the franchise.

The Council has taken a strong position in favor of protecting the rights of rail labor in any franchise arrangement. Congress, of course, would be the ultimate arbiter of the specific labor-protective conditions that would be imposed by law.

c) Adequate and Secure Sources of Funding. The Council believes that adequate and secure long-term sources of funding are needed to meet the needs of the intercity passenger rail program.

III. The Councils's Restructuring Proposal

At its first working session to consider reform options, there was a consensus among the Council members that train operations and the Northeast Corridor infrastructure should be organized as separate companies and that any reform plan should include more effective government policy and program oversight. The Council then evaluated four distinct approaches for train operations: (1) national or regional operating monopolies; (2) competition for long-haul markets only; (3) competition for all markets; and (4) a regionally-managed, operationally self-sufficient rail passenger network.

The Council considers all of the options meritorious, but specifically endorses option 3, with respect to train operations. The most significant amendment makes the introduction of competition permissive rather than mandatory.7

THE COUNCIL'S PROPOSAL THUS HAS THREE ELEMENTS:

1. Federal Program Management and Oversight. The Council recommends that the administration and oversight of the national passenger rail program be conducted by the National Rail Passenger Corporation (NRPC), which would be restructured as a small government corporation. The NRPC would operate at arm's length from Amtrak's current train operations and infrastructure, which would be organized as companies with independent boards of directors. While it may be more appropriate for these companies initially to be subsidiaries of the NRPC, over the long term they would function more appropriately as separate companies. The

7A matrix summarizing the major elements of each of the proposals may be found at the end of Chapter IV.

8 The name National Rail Passenger Corporation is retained to make clear that it is intended to be the legal successor to the existing NRPC. Under existing law, the NRPC holds Amtrak's statutory right to operate over the lines of the freight railroads at incremental cost and with operating priority, and such rights would be retained by the restructured NRPC.