Almanac: At the Capitol

The wailing and gnashing-of-teeth reaction to the Federal Railroad Administration's rejection of a proposed $2.3 billion loan for the DM&E railroad has strangely not come from Powder River Basin coal interests or coal-fired utilities in the nation's midsection, both of whom would have the most to gain had the loan been approved. No, the loudest hue and cry has come from agricultural interests along the route that were sucked into supporting the proposed loan on the premise that the PRB expansion was the only way the DM&E could upgrade its service for them.

The DM&E's request for a zero collateral, low-interest, taxpayer-guaranteed loan is sort of like a baseball team owner asking taxpayers to build him a stadium on the premise that it will generate economic benefits and increase tax revenues. As we have come to learn, the jury is very much out on that argument.

Supporters of the loan have pointed out that massive amounts of state and federal dollars have built this nation's interstate highway system. True. Fortunately, the American people as represented by the state and federal governments have retained ownership in that system. In other words, they have something tangible for their tax dollar investment.

If a bank wants to loan money to a business or a homeowner, it understandably expects collateral in return. That's called good business. The same rules should apply to the government, which represents its investors, the people whom it serves. A government loan, like a bank loan, must make good business sense.

Agricultural interests are notorious for being collectors at the public trough. According to the Environmental Working Group, farm subsides reached $164.7 billion for the period 1995-2005. Of that amount, $5.6 billion went to farmers in South Dakota and $9.5 billion went to farmers in Minnesota — the states that would most benefit from the DM&E loan — over that same period of time. For many farmers and groups that represent farmers, these subsidies have become an entitlement.

It is ironic that all too often those who champion "free market economics" are often the first in line with their hands out looking for government money. One of the arguments that the DM&E put forward for the loan was that it would allow the railroad to "compete" for hauling Powder River Basin coal. Who would they compete against? Two other railroads. Does this mean that in order to set up a level playing field (per stadiums — no pun intended) the government would have to give the other two railroads low-interest, taxpayer-guaranteed loans of $2.3 billion each?

The DM&E has already received one $233 million loan. While it used some of that money to improve its infrastructure and upgrade service to existing rural and agricultural markets, it spent a certain amount on legal fees, public relations and other development costs for the PRB expansion, and towards paying off the purchase of the IC&E railroad, which it had acquired less than a year earlier.

Maybe if the DM&E had put more of the loan it already has toward improving service to Minnesota and South Dakota markets, its second loan application, ten times the size of its first, would have looked better to the FRA.

The DM&E's CEO Kevin Schieffer, like a good baseball manager, has very cleverly used ag interests to carry his water on the proposed $2.3 billion loan issue. One of these days these ag interests are going to wake up and realize they've been manipulated. While they've been thinking all along they're in the lineup, in fact they're not even on the roster. Instead, they've just been a bunch of rabid fans fueled by six-packs, overpriced hot dogs and the thought of winning a pennant.

Thanks to Patrick Dempsey for his input on this article.

The proposed $2.3 billion loan is an absurd taxpayer subsidy, but keeping the railroad on track as a regional shipper should be a priority.

The fact that the $2.3 billion proposed loan to the Dakota, Minnesota & Eastern Railroad is still seriously under consideration defies logic. Not that government has ever been accused of being logical — witness the Iraq war, for example.

This project has been under consideration for nearly a decade, and opposition to it has only grown. In an effort to save it, the DM&E managed to wheedle special legislation that by any system of accounting is no more than taxpayer-subsidized support for this railroad over two other railroads in a competitive market. One would think that Congress or perhaps the executive branch might have the guts to say, "Enough!"

The DM&E's original plan was relatively simple: It saw an opportunity to expand into Wyoming's coal-rich Powder River Basin. It figured that it could run a more direct route than the two routes already in existence, and because it could operate more cheaply than the existing haulers, the Union Pacific and Burlington Northern Santa Fe, it could compete profitably. And it was planning to do this with privately raised capital.

Yet even though the DM&E's basic plan hasn't changed in 10 years, the economic realities surrounding it have, making it essentially obsolete. Only through the blessings of government — an unsecured $2.3 billion low-interest loan — would it continue to be economically viable. And even then with the debt-to-equity and debt-to-revenue ratios that are being predicted, that viability would be tenuous at best with the real possibility of American taxpayers losing their entire investment while DM&E management and its owners profit handsomely.

The DM&E has been successful in linking its continued service to agricultural producers to the Powder River Basin expansion. DM&E CEO Kevin Schieffer has told agricultural interests repeatedly that the railroad's existence is contingent upon it gaining access to the Powder River Basin. In other words, no coal shipping, no railroad. And agriculture has swallowed this message hook, line and sinker.

But what if it weren't true? What if the railroad were viable as is? After all, it has survived and made a modest profit since its inception in 1986. It has even expanded, acquiring the Colony Line from Union Pacific in 1996 and the Iowa, Chicago & Eastern (the old I&M Rail Link) in 2002. If the Federal Railroad Administration turns down the DM&E's request for the loan, will the railroad cease operations?

What is most intriguing about opposition to the proposed $2.3 billion loan is that it has come from such a broad range of players. When you see ranchers, neighborhood groups, environmentalists, taxpayer advocates, cities, counties, chambers of commerce and the largest employer along the route all coming together in opposition, that's a formidable array. And that should give politicians a strong clue.

South Dakota and Minnesota need the DM&E. There is no argument against that. For many communities its lines provide the sole railroad access. What we need to do is divorce the Powder River Basin coal issue from the DM&E's most important function, which is to serve these rural markets.

If the DM&E were asking for a modest, collateralized loan for upgrading its infrastructure, improving its safety record and bringing its employees' wages and benefits up to the level of its competitors, few parties would object. In fact, the railroad might discover hidden support from many current opponents.

If in fact the DM&E withdrew its $2.3 billion loan request and its Wyoming expansion plans, and resubmitted a more reasonable plan that would concentrate on improving its current operations, an amicable settlement would be possible. Let's hope the powers-that-be move toward a compromise in this direction. By doing so, all players in this controversy would come out winners.