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Short Lines, Big Problems

Short Lines, Big Problems

Minnesota's small railroads are in a perilous state, putting the businesses and small towns that rely on them in jeopardy.

Editor’s Note: The conclusion of the 2017 legislative session had a material impact on the railroads in this story. The legislature allocated $1.5 million in bonding money to repair Minnesota Commercial’s Hugo Line. It also forgave the Minnesota Valley Railroad Authority’s remaining debt for a loan to upgrade the eastern portion of the Minnesota Prairie Line. Finally, the Legislature took the Governor’s recommendation and began a short-line improvement fund seeded with a modest $1 million.

Morton, Minnesota, is a railroad town.

It has been since 1884, when the Minneapolis & St. Louis Railway crossed the Minnesota River on a mile-long timber trestle on its way to South Dakota. Morton was founded because of the railroad, and has thrived and struggled alongside it for well over a century.

Morton was a railroad town in 1960, when the Chicago & North Western swallowed up the M&StL, and it was still a railroad town—moving corn and soybeans from area farms—when the North Western discarded the line in 1983, part of a wave of abandonments of Midwestern agricultural lines as more and more commerce was taken up by the rapid expansion of the nation’s over-the-road trucking industry. A succession of owners followed, and the line’s condition became so bad the trains stopped in 2000.

Morton exists because the railroad stopped there and the line’s decline both mirrored and accelerated Morton’s, which has lost half its population since the C&NW left town. Because small towns rely on agriculture, and ag needs rail to ship profitably, letting the line die was not an acceptable solution. In 2002, the rural southern Minnesota counties that were home to the line came together to buy it and start it up again as the Minnesota Prairie Line. Much of the track remains in tough shape.

On a sunny spring day in Morton, dozens of garter snakes sun themselves on the rails. There will be no train this day, but if there were, the snakes would have plenty of warning: The top speed is 7 miles per hour because of the line’s condition. Some of the rails have inch-long gaps; all are stamped 1912 or 1913, the year they were forged in Midwestern steel mills.

And every year when the state inspects that mile-long timber trestle across the Minnesota at Morton, county and railroad officials hold their breath. They fear the day is coming when Morton ceases to be a railroad town for good.

Tipping point

While Morton may be far from the minds of most Minnesotans, the potential loss of rail freight is a concern faced by dozens of communities and hundreds of businesses throughout the state. It’s a mode of transportation vital to their economies, but in some places it’s fighting for its life.

To put Minnesota’s short lines in a state of adequate repair, they are asking for $62 million from taxpayers, with an additional $55 million over the next half-decade, according to Merrill Busch, government relations advisor to the Minnesota Commercial Railway. A failure to invest, the railroads insist, puts jobs and communities at risk.

Short Line Railroad Statewide Economic Impact

Direct short line spending: $41.26 million
Direct short line jobs: 277
Direct short line wages: $18.6 million
2013-14 estimates, from MVRRA/TC&W Economic Impact Studies

Indirect economic activity: $4.70 billion
Indirect jobs reliant on short line rail: 11,403
Indirect wages reliant on short line rail: $553 million
2014 estimates, MVRRA/TC&W studies

On the Minnesota Commercial’s Hugo branch line between White Bear Lake and Hugo, the ties are so rotted that the railbed is uneven, and trains are in danger of literally tipping over, says owner John Gohmann. Without a fix this year, a host of businesses in Hugo and White Bear, representing hundreds of jobs, are at risk.

On the Prairie Line between Winthrop and Hanley Falls, hundred-year-old rails are so brittle they will snap if freight cars operate with standard loads. The total investment needed for new rails and bridges comes to $60 million. The alternative is a gradual atrophying as shippers give up hope of better service, says Mark Wegner—president/CEO of the Twin Cities & Western Railroad, which operates the Prairie Line for its county owners.

“It’s not a pretty picture when a rural town loses its railroad,” explains Michael Beard, manager of government affairs for the Minnesota Valley Regional Rail Authority (MVRRA), the consortium of counties that own the Prairie Line. “Fulda, Seaforth, Vesta—the story is the same. The elevator closes. The farmer does his banking, shopping and eating out where the elevator is. So Main Street dries up. The school closes because families move away because jobs are gone. With the elevator gone, the tax base is spread over a dwindling number of homeowners, and the town can’t afford to repair the sewer plant. . . .”

Deferred Maintenance

When people think of a railroad, most think of the BNSF or Union Pacific, national behemoths, speeding 125-car trains on smooth welded rails to or from coastal ports, conveying grain to Asia or consumer goods to Amazon or Target.

After World War II, “the rise of the interstate highway system and heavy federal regulation caused railroads to lose money,” explains Wegner. “Their response was to prioritize investment. Maintenance was focused on main lines.”

But the main lines are only part of the story.

Short Line Railroads

Minnesota has 13 short line railroads.

They operate 1,016 miles of track.

$117 million is needed to upgrade rails to adequate repair (railroad estimate).

$551.7 million is needed to upgrade rails to federal Class II standard (MnDOT estimate).

Source: 2010 state rail plan

Since deregulation in 1980, America’s railroads have been on a rigorous, some would say ruthless, pruning to shed the remnants of earlier economic eras, when they delivered boxcar-loads of seed or road salt or lumber to small towns and businesses. It was a slow-moving, low-margin, labor-intensive business. As lines were pruned, their railroads were obligated to offer them to anyone willing to operate them, by lease or sale.

These small, newly emancipated “short line” railroads were freed by regulators to operate with two-man train crews (rather than five); they leased used engines and turned off expensive signaling systems in favor of two-way radios. Most are very small businesses, albeit using very heavy equipment.

As a consequence of their frugality, many short lines found themselves able to create positive cash flow on lines that Burlington Northern and the Rock Island could not. But the terms that formed the lines were less than ideal. “They were ‘as is’ transactions,” explains Gohmann, “with no provision for upkeep.”

Most lines had received little maintenance for decades, as the railroads that built them struggled against their unfavorable economics. “The Milwaukee Road and Rock Island went bankrupt trying to keep up with the maintenance on these lines,” explains Richard Kedzior, the freight railroad program manager for Wisconsin DOT. Tracks and ties and bridges, mostly built before 1920, showed their age.

Traditional debt financing was out of the question. “Banks will not lend because the growth curve is too long,” explains Dave Fellon, owner and president of Progressive Rail Inc., a short line with operations in six states.

So the short lines muddled along. Some thrived, some failed, but what they had in common was an inability to generate the capital to return their lines to a state of good repair. “The revenue we generate pays our operating costs,” says the Prairie Line’s Beard, “but it can’t pay our capital costs.”

The Minnesota Commercial’s endangered line from St. Paul to Hugo is typical (see “Tied Up in Hugo.” page 21). According to Gohmann, last year the line generated barely $10,500 in income for the Minnesota Commercial on revenue of $779,000, a paltry 1.3 percent return. Were it to take advantage of a 10-year no-interest loan from the state of Minnesota, borrowing $1.3 million to bring the line to a state of good repair would require annual payments of $130,000. The economics don’t pencil out.

So at the Capitol this spring, the short lines are engineer’s cap in hand, saying their physical plant is worn out and they are nearing the end of the line.

One track

The obvious question is why the state should consider a taxpayer investment in railroad infrastructure when other shipping modes exist. The simple answer is certain types of businesses can only ship by rail—and adjacent states are making investments to preserve their rail network and woo businesses (see bottom).

“Businesses don’t ship by rail because they like it,” says Wegner. “They do it because it’s the only economical alternative.”

Most of the industries served by short line rails use skilled labor and pay generous wages with good benefits. “We can have better jobs with rail,” says Fellon. “These are not service industry salaries.”

Extrapolating data from economic impact studies of the Minnesota Prairie Line and TC&W conducted in 2013-14, short line railroads provide essential transportation for businesses that generate $4.70 billion in annual state commerce—11,403 jobs and $553 million in wages. The railroads’ direct economic impact comes to $41.26 million annually; they employ roughly 275 people and pay annual wages of roughly $19 million.

Still—despite this economic motivation and an absence of opposition—there has been little action. Individual short-line railroads and communities have been petitioning the legislature for decades, and a consortium of short lines has showed up at the Capitol for the last three legislative sessions, but no program or fund has been established. “Minnesota is fairly anti-rail in my opinion,” says Fellon. “I look at their actions, not their words, and I don’t see the activity or the interest.”

State of indifference

Though one-time bonding funds and occasional federal tax-credit programs have given short lines and shippers help, the state’s primary assistance vehicle is the Minnesota Rail Service Improvement program (MRSI), which dates to 1976 and provides low- or no- interest loans for shippers and railroads. The program has been little used, railroads say, because of a variety of strictures that railroads, shippers or communities cannot meet.

MVRRA’s Julie Rath is dismissive, noting MRSI’s capital improvement fund’s limits are comically low. “Today, all $200,000 buys you is a switch.” Mark Wegner says using tax credits would require 28 years to get the TC&W mainline to a good state of repair.

Wegner’s line needs $17 million over the next five years to replace 60-year-old tracks. “I probably can’t borrow $17 million,” Wegner notes, “but if I did, what if then there are two or three drought years? My revenues crater and I can’t cover my debt service.” The state’s willingness to fund the more urgent needs of the Prairie Line and Hugo Line will be a harbinger of TC&W’s chances of state assistance.

Minnesota has a rail plan defining the rail network and identifying needs and goals to meet the state’s economic interest. It speaks covetously of a dedicated funding source for rail improvement. Neighboring states have put their money where their policy is. Wisconsin, Iowa and South Dakota were devastated by railroad abandonments in the late 1970s and early ’80s. The situation was so dire that they took ownership of hundreds of miles of track and funded the renewal of hundreds more.

Since 1980 Wisconsin has acquired 977 miles of railway, issued $275 million in grants and $130 million in loans. The state currently funds $10 million to $15 million annually in rail investments, and the program has been self-sustaining since 2007. The state’s goal is to get 95 percent of state railroad track to Class II status, meaning 25 mph track.

“The original grant program was $2 million per year, but by the late 1980s we realized that it was putting Band-Aids on,” says Wisconsin’s freight railroad program manager Richard Kedzior. “We had to experience many years of failures to learn we needed to put real money into it.

“I wish Minnesota had Wisconsin’s vision back when the Milwaukee Road started talking about abandoning all its lines in southern Minnesota,” says MVRRA’s Beard, who at the time was in the Minnesota Legislature.

Iowa began funding short-line rail in 1974, fueling $140 million in improvements via $41 million in appropriations and loan repayments, while retaining or creating 2,000 jobs. Iowa’s annual appropriations average $2 million a year and allow for low-interest loans or grants, which require job creation/retention and have to meet wage thresholds. The program receives some funding from gambling revenues. (Lottery revenues in Minnesota are solely dedicated to environmental causes in the state.)

Minnesota short lines have proposed that the state fund a program of annual grants like Wisconsin’s and Iowa’s to preserve rail infrastructure and the jobs that come with it. An initial proposal from Rep. Matt Dean (R-Dellwood), whose district includes the Hugo line, was for $4 million per biennium. “From a policy standpoint, the economic viability of rural Minnesota is a big deal,” says Dean. “It’s not a great deal of cost to maintain rails already in place.”

“There is a public-private interest,” agrees Sen. Roger Chamberlain (R-Lino Lakes), who also represents Hugo. “We should try to fix it. The difficulty is finding a way to finance.”

Despite this, and the apparent bipartisan support for the goal, attempts to create funding streams like Iowa’s or Wisconsin’s have repeatedly been caught up in legislative politics and gridlock. A contributing factor may be Gov. Mark Dayton’s level of interest. His office has mostly prioritized grade crossing and oil train safety measures and is currently only proposing a one-time $2 million short line allocation, even though MnDOT’s state rail plan estimates the cost to bring state short lines to modern standards is over half a billion dollars.

The railroads themselves are asking for far less than that, and say only some of the funds are urgent. “Understand, though,” says Wegner, “what we’re asking for would not bring the [Minnesota Prairie Line] to a good state of repair, just closer.”

That the need is in mostly GOP districts would seem to enhance the short lines’ chances this session, but it also runs into the inherent conservatism of the GOP caucus. “Anything that is new spending is a big deal,” notes Dean, who has announced his candidacy for Governor in 2018. “If we’re going to decide to do it, it’s because we believe there is no private sector solution.”

Public or private good?

Rail advocates are quick to point out that the state and feds subsidize other modes. “We pay to maintain our trackage and pay property taxes on it,” says Gohmann. “But who maintains the roads [for trucks] and waterways [for barges]? Taxpayers do.”

Even supporters are skeptics, though. “Railroads are still private businesses,” says Chamberlain, “and they are looking for the cheapest way out, just like the state.”

As a result, the issue risks getting muddled into the larger debate about infrastructure and who will pay.

“Freight levels are set to double, according to the GAO,” says Progressive Rail’s Fellon. “If we can’t resolve this now, how will we ever handle it?”

 

Tied Up in Hugo

Rotting ties could drive major employers to relocate out of town.

The Minnesota Commercial is what’s known as a “terminal short-line,” providing connections between railroads in a major metro area. Its line from St. Paul to Hugo is a remnant of the Northern Pacific’s old main line to Duluth, now a bike trail north of Hugo. According to owner John Gohmann, the bridges and abutments on the line are 100 years old, while the ties predate his railroad’s lease of the line in 1990 and are beyond their usable life.

Unlike the Minnesota Prairie Line [see “A Railroad Town,”], which owns its track, Gohmann leases the Hugo line from BNSF, which does not believe it can economically operate it. The Commercial is forbidden by lease to borrow against the line, says Gohmann. This means state or federal loan/tax credit programs are no help.

Bad ties south of Hugo along the MN Commercial

Because Gohmann is eager to be transparent in his quest for public funding, he explains the Hugo Line generated barely $10,500 in income for the Commercial last year on revenue of $779,000, a paltry 1.3 percent return. Even if the railroad could borrow against the line, it’s not clear that any bank would make the million-plus loan, or that the railroad could pay it back out of income, he says.

“This is our last year of operations to Hugo unless these ties are replaced,” says railroad COO Wayne Hall. Yet the line serves an industrial park there whose tenants were attracted with an inducement of rail access, according to city manager Bryan Bear.

“We are in agreement,” says Bear, “that trains could tip over due to the state of the railbed. I’m actually surprised their ‘ask’ is as modest as it is. A million is doing this very economically.”

Conversely, loss of the line will have devastating effects for employers along it, they say:

In Oakdale, Polar Plastics Inc. produces plastic sheeting and wrap from pellets shipped in from the Gulf Coast. It pays employees more than $15 an hour, has 30 employees with more than 25 years of seniority, provides health insurance and paid vacation.

Owner Andy Ave’Lallemant lacks a direct rail spur and has to truck plastic pellets a mile or so through the suburbs from the Commercial. If the Hugo Line went away and Polar had to truck its pellets from a distant railhead, it would be unprofitable.

“Raw materials are 73 percent of my overhead,” Ave’Lallemant explains. “I take 6 to 8 cents a pound penalty shipping by truck. That shipping penalty is my margin.”

He sees few options. “I can’t relocate locally. It’s too costly.”

In Hugo, JL Schwieters Building Supply Inc. sells and engineers building materials for large construction projects. It is one of the 10 largest employers in the county, employs 500 workers, pays north of $15 an hour and some senior factory employees earn more than $60,000 a year. It brings its raw materials into Hugo by rail and came to its industrial park in 1999.

“If we lose rail we incur a million extra per year in shipping cost,” explains owner John Schwieters. “It is hard to find locations on rail. We went all the way to Rochester looking for viable sites before we came here.”

Loadmaster Lubricants LLC manufactures specialty lubricants that are shipped all over the world. It employs 30 in Hugo, and is growing by double-digit percentages. Owner Rick Stewart anticipates 24/7 shifts of 75 to 100 employees with current growth plans. The blunt Alabaman notes he has paid “millions in local taxes” over the past decade.

Stewart says he is “waiting to add onto our building until rail issue is settled. . . . We can do this anywhere. We’re here because of rail access. Without it freight costs increase by a factor of five. Freight is [already] a double-digit percentage of overhead.” Without rail, “we would relocate the business wherever it best suited us.” He scoffs at the suggestion of a state loan program that requires him to contribute to the railroad’s repairs. “Why would I invest in something I don’t own or control?” he asks.

Gohmann fears a loss of rail service would send some of the Hugo Line’s shippers into St. Croix County, Wisconsin, where the Union Pacific is soliciting business.

The salient contrast with rural short lines is that most of the Hugo line’s shippers are located for logistical convenience. It’s a marriage that is easily disrupted. “If they were to relocate they might go to Hudson,” notes state Rep. Matt Dean (R-Dellwood). “They can move. But a grain elevator in Rock County can’t move.”

As for Hugo, it watches and waits. “We don’t fully understand the consequences of abandonment,” says Bear, “but we know it entails the risk of business relocation. We’ve verified the need. The uncomfortable question is public policy.”

A Railroad Town

Morton, Minnesota’s economy sits in suspended animation, awaiting its railroad’s fate.

Morton sits on a vein of rock, and the town is adorned with an abundance of granite signage, while older buildings boast outsized granite architectural details and trim. Today Morton is home to several small industrial businesses, a bar, and a couple retail and service businesses. Its downtown feels forlorn, its beautiful art moderne school abandoned and vandalized.

A disused elevator in North Redwood Falls

In the 1970s, when the Chicago & North Western was still operating its line going to the Twin Cities, Morton had 800 residents. “We had a hotel, Main Street was full,” says city clerk/administrator Shirley Dove. “Since then we’ve seen the schools consolidate, farms consolidate—the county has probably lost half its farms.” Morton has lost half its population.

Morton was lucky to retain its grain elevator, which stopped shipping by rail when the track fell into disuse between 2000 and 2002. Though the trains have returned in the form of the county-owned Minnesota Prairie Line, the elevator must be redesigned to use them, and owner Harvest Land Co-op will not make the investment until the railroad’s future is stabilized.

Though the railroad was upgraded east of roughly its midpoint at Winthrop, the western portion remains in dire shape. “The bridge [at Morton] was built in 1912. It needs a $15 million rebuild. It’s so expensive because it’s a mile long,” says Julie Rath, administrator for the Minnesota Valley Regional Railway Authority.

“It can’t take [conventional] 286,000-pound railcars, so we are shipping cars not full,” Rath continues. “We ship at night because it’s less likely the rails will have expanded.”

The start of the mile-long Morton trestle

There is a bill before the Legislature to forgive over $4 million in state loans dating to the counties’ takeover of the railroad in 2002, because it cannot generate sufficient revenue to pay them back. “Revenue streams were hoped to be sufficient to pay back loans in 15 years,” says Mark Wegner, president/CEO of the Twin Cities & Western Railroad, which operates the Prairie Line under contract to the county rail authority, “but they are not.”

The state has been its own worst enemy. Last year the Legislature, at the behest of utility companies, changed a law that required utilities to pay rent to railroads for crossing their track. The rent was replaced by a one-time $1,200 payment. “$1,200 used to be our application fee,” Rath notes. She says the rail authority received $160,000 in annual rent from utilities. “It’s our operating budget.”

So a difficult situation on the railroad is now acute, which is why the Legislature is considering forgiving its loan, says Rep. Paul Thorkelson (R-Hanska), who represents Morton and chairs the House transportation finance committee.

Small businesses, critical mass
The University of Minnesota has been following the Minnesota Prairie Line since it was purchased by the counties. Its most recent economic impact study covers 2014. It suggests that though Morton is home to a limited number of jobs and employers, when the entire line is factored in, the railroad is a robust economic engine, generating $448 million in annual activity, including 960 jobs and $65 million in wages. The railroad itself created $3.4 million in economic activity, including 25 jobs and $1.4 million in salaries.

The Morton elevator complex

And the investment the state made in upgrading the line to 25 mph welded rail from Winthrop to Norwood has paid off. “There’s been investment in business along the line,” Wegner says. “[Heartland Corn’s] ethanol plant in Winthrop tripled in size,” while Dairy Farmers of America has substantially increased its frozen butter business.

Harvest Land Co-op in Morton could make a similar investment, it says, should the western portion of the line be stabilized. Harvest Land’s Morton elevator serves 300 farms. It employs 150 total, three in Morton.

“We took over the elevator in the early 1980s and it got to the point we couldn’t operate because the tracks weren’t good enough,” says grain operations manager Roger Vaske. “So we had to convert to truck. For us to make an investment in Morton we need to know this track will be improved. We’re trying to stop an exodus of grain going by our door. This elevator is extremely important to this community.”

On a given afternoon, there are more people gathered at Morton’s elevator than any place in town. It is the economic hub of the community, even though the trains don’t load there.

As Vaske explains the economics, any grain shipment over 60 miles should be by rail for the farmer to maximize return. That is why Harvest Land trucks crops 24 miles from Morton to the Canadian Pacific at Springfield rather than trucking to its destination.

“When a farmer puts an acre of corn in and he’s paying more to transport it to a shipper, it can cost 10 cents a bushel,” explains MVRRA lobbyist Michael Beard. “That’s $20 an acre that doesn’t stay in Morton. That’s $20,000 per farm family that leaves.” The common wisdom is one agricultural railcar takes three to four trucks off the road.

Morton’s biggest employer that uses rail is Step-Saver Inc., which is relocating operations from Redwood Falls to take advantage of rail access and available commercial space. Step-Saver delivers salt to regional businesses via a customized system that moves it from truck directly to water softener. It imports salt by rail from Utah.

From Morton, Step-Saver serves an area from South Dakota to Iowa to Alexandria, with a diverse customer base that includes Jennie-O, Target, Thompson Reuters and Michael Foods. Co-owner Chuck Steffl says good rail service is essential to his viability; trucking it in would create a cost penalty that would render his business uncompetitive. “If I had to truck my salt in, we wouldn’t be here,” he says. “Theoretically I don’t have to be in Minnesota. I could be in South Dakota or Iowa.”

The risk to Morton is obvious. Failure to improve the western end of the railroad will result in either a catastrophic derailment, regulatory embargo or merely a decision by Wegner that his railroad can’t generate a long-term return operating half-full cars at 7 mph. Without prospect of rehabilitation, the elevator’s continued presence is in jeopardy and Steffl moves out.

“Morton will suffer and continue to decline if we lose the railroad,” says Rath. And each year the repairs cost more. “In 2003 all the work was estimated at $25 million,” says Rath. “Today we’ve spent $30 million and need another $60 million. Inflation kills you.”