The  Madison Connection


  Despite cost to taxpayers, railroad carries little traffic...

Madison officials insist that line lures industry, jobs

By DAVID McGINTRY
The Courier-Journal

Madison, Ind. - As railroads go, the publicly owned Madison Railroad doesn't go far - only about 26 miles from this lovely Ohio River community to North Vernon, where it connects with a major rail line run by CSX Corp.
    But those 26 miles, say Madison officials, are vital to the city's efforts to lure and keep major businesses.
    That short stretch is also something else - a multimillion-dollar drain on the public purses.
    The railroad, which is lightly used for transporting goods and has been operated as a public line for 19 years, has never broken even.  Every year it loses money, and every year it is kept alive by contributions and grants from local, state and federal governments.
    The railroad has become a public issue in Madison, where William Helton, a former railroad official who is now a consultant on short-line railroads, has circulated a petition calling for removal of the railroad's management and board of directors because of the money the line has lost.
    In the last year, two of the railroad's five employees have quit.  One of them, Jeff Lockridge, said he and other employees had begun to doubt the usefulness of the railroad.
    For Years we've wondered, "why are we still here?"
    Madison officials defend the management of the railroad.
    Mayor Al Huntington, who appoints the nine members of the board that oversees the railroad, said he has confidence in the operation.  "I think they do a good job," he said.
    During the last 10 years, the city of Madison has pumped about $450,000 into the railroad.  Since 1993, the government of Jefferson County has kicked in another $56,000, and North Vernon, in neighboring Jennings County, has given about $48,000.
    In 1995, the last year for which financial statements are available, the railroad received $569,000 in grants from the federal government and the state of Indiana.  That money, used to rehabilitate deteriorating bridges and rail, was obtained even though the railroad may not have met the eligibility requirements for grants.
    Without these contributions and subsidies, the railroad would be in dire straits, if not defunct.  State audits from 1986 through 1995 show the expenses of running the railroad exceeded the money it made from operations by more than $2 million.
    Yes the subsidies support a rail line that is little used, especially by madison businesses.  At the moment the line has only two customers, Meese Orbitron Dunne, which makes plastic products in Madison, and Sonoco Plastics in North Vernon.  According to the railroad's figures, since 1990 it has handled from 209 to 321 carloads a year - an average of roughly four to six cars a week.
    IN A YEAR, only about 20 of those carloads actually travel between Madison and North Vernon.  The remaining carloads, more than 90 percent of the line's annual traffic, travel only the mile and a half of track in North Vernon that connects Sonoco to the CSX line.
    The citizens of Madison and Jefferson County have contributed between $40,000 and $70,000 annually to a rail line that, on average, transports less than one car every two weeks in their county.
    Why?
    Because, Madison officials say, the line helps keep jobs in or brings jobs to the city.  Although they have done no studies to verify the railroad's economic value to the community, officials say that in the last 10 years several businesses have located in town that would not have come had there not been railroad service.
    The most recent, Century Tube, which makes steel tubing, will bring about 100 jobs to Madison and invest $10 million in a local plant, said Jan Vetrhus, executive director of the city-county industrial development corporation.
    "When they were doing their search (for possible locations), they had to have rail, and they had to have barge."  Huntington said.  "Had we not had rail, we would not even have been considered."
    Century Tube will not use the railroad initially, but its presence "was certainly a major factor in our considerations," said Gary Reynolds, Century Tube's vice president for operations.
    Huntington and others say companies want rail lines nearby because the lines give them added leverage when negotiating rates with other haulers.
    "It gives companies a bartering chip, if you will, in dealing with trucking haulers," said David Koenig, executive director of economic development for Jennings County.
    Thanks to the railroad, Jennings County and North Vernon have two major companies, Sonoco and Lowe's, Koenig said.
    Sonoco, a manufacturer of plastic products that employs about 230, is the track's best customer.
    Lowe's a major retailer of building materials, built a distribution center in North Vernon in 1983 that employs about 600.  It does not use the track but would not have located in North Vernon if it had not had rail access, according to company spokesman David Oliver. 
   James Papke, an economic-development expert at Purdue University, said there are methods for determining the economic value of a rail line to a community, but he does not find the arguments made for the Madison Railroad persuasive. "So much of it is based on subjective judgment," Papke said.  "The business says, 'I have to have it,' and then the municipally says they have to have it in order to get more business, but nobody really knows. You have to find some objective measure." 
    The best measure of whether a railroad is important to a company, Papke said, is simple --- does the company use it?  "It's the height of absurdity to say, "We don't use the railroad, but we located here because it was there.' " he said. "That's specious reasoning, at best, and has no merit."
   The rail line used to belong to Penn Central, which was going to shut it down when, in 1978, Madison leased it to keep it going.  In 1984 the city acquired the line by condemnation, and has owned it since. 
    IN A SIMILAR CASE,  Perry and Spencer counties united several years ago to take over a rail line between Cannelton and Lincoln City that was going to be abandoned.  That railroad, which owns 20 miles of track and leases another 23, provides a link between a riverport in Tell City and the Norfolk Southern rail system.
     The line has 10 customers and expects to add more business soon, said Dick Haywood, strategic planning director for the Perry County Development Corp., which provides marketing and consulting services to the rail line.
    The railroad began operating in 1995 and carried only eight carloads that year.  But last year it carried 207, and this year it expects to carry between 650 and 700 carloads. Thanks to this growth, the railroad expects to break even in the near future, Haywood said.  The ultimate objective, he said, is that it "not only meets its operating costs but makes a healthy profit."
    The Madison Railroad has said its goal was to become a break-even, non-subsidized operation , but it has not come close to achieving that goal in recent years.
    It apparently has not always been an economic asset, either.  In 1988 Robert Eads, then president of the city's economic-development corporation, said in a letter to the railroad that three industries had taken Madison off their list of potential sites because of the rail line's poor condition.
    By 1994 the rail line's condition was deteriorating, and it faced the possibility of closing down.
    That was the year it applied for more than $500,000 in federal and state grants to rehabilitate several bridges and some track, presenting a dire picture of what would occur if the work were not done.
    The railroad had recently imposed an embargo on all traffic south of Vernon -- that is, on most of the line -- while it made emergency repairs to a bridge.
    In its grant application, the railroad said that without the rehabilitation, "there would be substantial safety concerns" about its bridges, and the embargo might be a preview of a dismal future -- "within one to two years, discontinuance of service, and ultimately abandonment."
    WHEN IT APPLIED for the grants, the railroad had a problem.  One eligibility requirement was that it had to have carried at least 400 carloads in the last year.  The railroad had not come within 100 carloads of meeting that requirement.
    That stipulation could be waived, however, if the railroad had contractual guarantees that its business would improve dramatically if it rehabilitated the track.
    Cathy Hale, general manager of the railroad, said the grant application is "not for public consumption," and she could not recall whether the railroad said its traffic would increase if it got the grant and rehabilitated the track.
    "You're asking me to remember something from three or four years ago," she said.
    A copy of the application on file with the Indiana Department of Transportation shows that the Madison Railroad, in fact, made projections of increased business that apparently were unsubstantiated and that proved to be significantly erroneous.
    If it got the grant and made the improvements, according to the application, the railroad's business could increase to 878 carloads in 1995 and to 1,598 in 1996.  By this year, the track hoped to carry 1,668 carloads a year.
    It has not come near those projections. In 1995 it carried 321 carloads, a modest increase of 27 from the previous year.  In 1996 it carried only 287 --- about the same amount of traffic it was carrying before the grant-financed improvements.
    The railroad's projections said increased traffic would come mostly from the new business it expected from Indiana Kentucky Electric, the utility in Madison, and from Lowe's distribution center in North Vernon.  None of that business materialized, and the railroad apparently never had any guarantees that it would.
    According to the grant application, Lowe's, which was then building the distribution center, would provide 76 percent of the new business --- 360 carloads in 1995 and 980 carloads annually thereafter.  These figures, the railroad said, were "per Lowe's projections."
    LOWE'S corporate headquarters in North Wilkesboro, N.C., said it is not sure what the railroad was talking about. Lowe's did talk with North Vernon economic-development officials about the possibility of using rail but decided not to, said Oliver, the company's spokesman.
    It has no record of having made any commitment to use the railroad, he said. "We don't even have a railroad spur to our site."
    Oliver was puzzled by the application's carload projections for Lowe's.  The amount of business from Lowe's that is projected in the grant application "is just a tremendous volume," and the company would have put a commitment of that size in writing, especially if a grant application were involved, he said.
    The North Vernon project was significant for Lowe's because it was the company's first fully automated center, he said.
    "That was a memorable experience for us, and the guys who were involved on the front end are still here." he said.  "And those officials remember nothing about any kind of commitment for railroad."
    The new Indiana Kentucky Electric business, the grant application said, would come from hauling fly ash, a byproduct the utility would sell as a result of conversion to low-sulfur coal.  The railroad projected 125 carloads in 1995, increasing to 250 by this year.
    Ray Wilson, manager of the utility's Madison plant, said it made it clear that it could not promise the railroad new business, because whether or not to use the railroad would be up to the buyers of the fly ash.
    "We  would certainly encourage people to travel by rail, but we could not demand that," he said.
    As it happened, the buyers the utility has found for its fly ash have chosen to haul the ash by truck, Wilson said.
 
THE RAILROAD'S apparent failure to obtain guarantees of enough new business may mean it obtained grant money for which it was not eligible.  Indiana Department of Transportation officials have refused to provide documents that might clear up the matter, and Federal Railroad Administration officials are still considering a Courier-Journal request to examine the documents. 
It is not certain whether the railroad would have to return any grant money for which it did not quality. 
    Railroad officials have said they would need two to three times their current business to break even. Whether they have any expectation of reaching that goal is a mystery.   According to an article last Oct. 25 in the Madison Courier, Hale said she was confident the railroad would be self-sufficient within a year. 
    Hale no longer says that.  She said she can't remember what she told the Madison Courier and, when asked whether she thought the railroad had a chance of breaking even in the near future, declined to answer.
    "I deal with confidential things, and I can't go into that," she said.  "I'm really not going to respond anymore to that."
    Purdue's Papke said a strong argument could be made that the railroad should set its rates so that the customers pay the cost of operating the railroad.  Otherwise, he said, "the municipality is paying for it out of higher taxes, which means the company "using the railroad" is being subsidized.  Why should taxpayers support a company?"
    Hale said it is not possible to charge such rates. "We structure our rates to cover the costs that we incur to operate a train," she said.  "I can't structure it to cover the cost of every overhead that I have, because of the low volume of traffic.
    "Take 280 cars and divide it by our operating expenses, and see if somebody can pay that fee.  I think the answer is obvious."
    HOWEVER, Indiana Kentucky Electric makes substantial contributions to the railroad every year to help ensure its availability.
    The utility is not a regular customer, but it uses the railroad once every few years to haul major pieces of equipment.  In recent years it has contributed from $21,000 to $38,000 a year to the railroad, and in 1992 it paid $100,000 to rehabilitate track along a steep incline so it could haul a transformer to its plant.
    "We don't use it often," Wilson said, "but when we need it, we need it."

This article appeared June 30, 1997 in The Courier-Journal and is reprinted here with their permission.
Copyright 1997. All rights reserved.