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And, may I add one more assumption. You said before in these proceedings today, Mr. Chairman, there is nothing about these problems that can't be solved by cash.
That is true, if you had a qualification, plus good management, from a railroad point of view.
Senator PASTORE. Of course, that goes without saying. Mr. SCHAMUS. I think it ought to be said, because a good deal of our problem comes from the mismanagement of this railroad in the last 20 years, a good deal of it.
Senator PASTORE. Would you say that the trustees have been guilty of bad management ? Mr. SCHAMUS. By them? Senator PASTORE. Yes.
Mr. SCHAMUS. No. I am not talking about that. I am talking about the management preceding, which caused such trouble by no maintenance, that it accumulated and got worse day by day, so that the equipment becomes unusable.
Senator PASTORE. The trustees have been able to do very little about it.
Mr. SCHAMUS. The trustees have done a darn good job, with inadequate working capital, and the limitations of receivership which put them in a straitjacket.
Their job is to protect the creditors, even if it means giving up passenger services.
Senator PASTORE. I agree with you.
Now, the ICC in 1960 and 1961, before the receivership, produced a comprehensive analysis of the causation of the New Haven's declining freight and passenger revenues.
This should be carefully considered by this committee in depth before you come up with a final bill.
Senator PASTORE. Say that again. Mr. SCHAMUS. The causation analysis of the ICC in the 1960 and 1961 report, I think it should be thoroughly studied by your committee before you go to the final draft of your bill.
The freight revenues have declined not merely because of the subsidized competition of the truckers moving over the taxpayer-built super highways of southern New England, they have declined because the freight rates are too high, and, because they are too high, they helped along with the other major causes in driving New England industry to the South.
Mr. Chairman, I say until you reverse this major process, and until you bring back New England industry on a large scale, that there is little hope that the New Haven Railroad will ever assume its place as a solvent, and, indeed, a profitable railroad.
The passenger rates are much too high, particularly the commuter rates.
Over the years it has been very easy for the management of this railroad to keep increasing its commuter fares, each time with a plea to the public authorities involved that the revenues are needed to balance commuter losses.
That was not the solution. Each time as they raised rates more commuters dropped out and resorted to automobiles.
And now the trustees do admit they have reached the end of the line in that direction. And they don't dare raise the rates any further.
They also state that in the Boston area tests show reducing rates are not desirable. That was testified to in Washington.
Of course not, so long as the equipment is incredibly shoddy and the service tolerable at best.
I have been to Philadelphia, where the Pennsylvania Railroad, under a plan worked out with the city of Philadelphia, has put in fine new commuter service equipment, stepped up schedules, and they have sharply reduced rates, and they have shown excellent results, a 65 percent increase in their revenues as a result of that plan.
So it can be done. The New Haven's rescue operations involves more than just a simple revenue bailout, and more than a token purchase by New York and Connecticut of commuter cars, it involves much more than that.
The New Haven was once a fine railroad. It ran a very profitable operation. Its securities were in the portfolios of every Boston trustee.
Do we dare dream it can happen again? I think it can, if it is done right.
You need a short range rescue operation-of course you do-in cooperation with the State governments, who are finally coming over with offers to do their part.
I suggest you redraft the bills now before you, get a new measure together, to give this system a 2-year breathing spell. And, in that time, a real job of railroading can be done.
In my memorandum, which is embodied in the report that you have on Senator Pell's proposal, which was sent to his office and considered with him 2 years ago, I outlined an alternative to his governmental authority approach to the problems of the New Haven.
At his request, I submitted a second memorandum assuming that his authority were adopted as a matter of public policy, and, again outlining what might be done, including my basis premises.
In essence, my proposals call for the creation of a federally chartered enterprise by an act of Congress, which includes authorization for an interstate compact, to assist such an enterprise.
It presupposes that the New Haven will be taken over, lock, stock, and barrel, for a cash purchase price paid to the trustees and under court reorganization, and such price is suggested at $75 million.
This is a realistic figure for the present value as a going railroad of this system, free and clear of all liens.
In November, I spoke to Dr. Nelson about this aspect of his affairs, asked his opinion of the present value of the line, and he came up immediately with the answer of $80 million, which is close enough, on his independent studies.
Now, if you add to the New Haven Railroad the other New England lines, as proposed during the merger proceedings by the managements of, essentially, the Pennsylvania Railroad and others, you have a proposition of regional character.
And, I am aware, also, that studies had been made of these subjects years ago, and they were abandoned by the New England Railroad presidents' conference, because of the mounting passenger deficits of
the New Haven and the Boston & Maine. That was why they gave it up.
Of the 63 main railroads in the United States, other than the Long Island Railroad, which operates under a tax shelter, there was only one, the Chicago & North Western Railway, which showed a profit on its commuter service. Just one railroad shows a profit on thier commuter service.
But that railroad has especially good management, who have pioneered the way to modern commuter equipment and lower fares. And they have come up with a profit. So, again, I say it can be done.
Let's get one thing straight. The New Haven Railroad was badly mismanaged for years, and, now, the New England region is paying the penalty.
Aside from mismanagement, it is unlikely, in our generation, that any major railroad will have a profitable passenger service.
That does not mean, Mr. Chairman, that the Federal Government should take over the passenger service and run it at the expense of the taxpayer. It merely means that we recognize that in modern industrial America, the freight service is profitable enough to carry the passenger service, and it should continue to do so.
In other words, the New Haven freight service should carry the passenger service.
I will remind this committee that the New Haven and its components, innumerable smaller lines acquired over the years, were all enfranchised as passenger lines. To abandon passenger service would be a violation of the franchise, which a given State gives a railroad to serve the public under monopoly or semi-monopoly conditions. There must be facts and circumstances, and so on, which you might take into account before you consider such a proposal. Yet, I think this is sufficient for the present state of the discussion.
The proposed New England railway system would be a great railroad system, given a revival of New England industry.
Therefore, my proposal centers on achieving that goal, starting with a quid pro quo subsidy from the States involved, against each reduction of freight rates, and each reduction of passenger rates, on a Stateby-State basis.
Add to that the Connecticut approach, so far not followed by the other States, the removal of the property taxes State by State.
Then, add to that a requirement in the charter that a proportion of the revenues of such a system be devoted to a subsidiary known as the New England Development Corp., to bringing industry back to New England, and actively encouraging new enterprises.
And, within 5 years, Mr. Chairman, you would have such a revival of freight traffic in this area that the management would have a new type of problem before it.
This, above all, presupposes modernization. It presupposes cooperation of the Federal Government, particularly the passage of the proposals embodied in President Kennedy's 1962 transportation message, and, of course, including such facility for lowering rates to railway management.
On this basis, on these assumptions, of Federal action, my plan has been pronounced financially feasible by resort to normal private investment banking methods, and not by Government subsidy.
I have consulted with leading investment bankers on the feasibility of this plan, and in its development stages that obtain. This is made clear in the report.
I have been told that the approach is realistic, that the job can be done, and in the traditional American way, without crutches from the Federal Treasury.
Now, you have raised the question yourself, Mr. Chairman, what about the approach made posible by the pending merger with the Pennsylvania nad New York Central.
I would call your attention, first, to the fact that in the Norfolk & Western-Wabash merger, as approved by the ICC, two conditions were imposed as a price to giving assent to the merger.
First, that the Pennsylvania Railroad give up its holdings in the Norfolk & Western stock, which involves $450 million. They imposed that as a condition. And the Pennsylvania Railroad accepted it, and proceeded to dispose of their stock, and they are going to sell it within 10 years. The arrangement has been made at the suggestion of Department of Justice.
There is a provision that is pretty close to what you have in mind.
The Erie Railroad is in bad shape. Everybody knows it. It is bordering on the edge of bankruptcy.
If you will recall, the Department of Justice originally wanted to ask the ICC to compel the Norfolk & Western to take it over as a price of merger assent. They didn't do it that drastically. They came pretty close.
They required, in the order, that there be good enough negotiations between management and Norfolk & Western and the Erie Railroad, which commitment has been given. In fact, it was given in advance by the then president, Mr. Saunders. And if, within 5 years, it has not been arranged, they will take over the negotiations themselves and impose conditions.
If it can be done there, it can be done in the Pennsylvania-Central merger. Of course it can be done.
It is within the power of the ICC to take your approach.
Now, we have so far heard of all sorts of things that are going on behind closed doors, as well as things going on in public.
Mr. Pearlman had a press conference in which he announced that the New York Central would be glad to take over the main line freight of the New Haven Railroad.
He is not doing anybody any favor. They will make money doing that, and they will not be hurt.
They will be taking on all the branch line customers of the New England Railroad, and the main line, and it is pretty encouraging that the Pennsylvania will make a lot of money, with no favor involved in their so doing that.
Governor Rockefeller has been trying to get an agreement with Mr. Saunders, and I understand, although unofficially, it has been reached in principle, that they have an agreement between Connecticut and New York, to subsidize the passenger deficit, and then they will be glad to take over the passenger service.
That might be the solution, if you compel it, otherwise they wouldn't do it.
But I would like to call your attention to something. If you have a Pennsylvania-Central merger, which is, by itself, a gigantic enter
prise, and rising faster, and you add to it the New England corridor, and look at it, well, maybe you are creating a very dangerous precedent, unless you have some very persuasive conditions to prevent things from happening.
Another approach that I suggested, which is in this document, I think it is something desirable not to attach New England railroads to the Pennsylvania-New York Central merger, as a matter of policy.
And, another point that you raised this morning, Mr. Chairman, as a matter of policy, the subsidies, as such, the passenger traffic, as I point out in my prepared statement, of the 63 railroads, 62 lost money on passenger service.
Many of them are profitable, some of them are on the edge of bankruptcy.
Today it is the New Haven, tomorrow it is the Erie Railroad. Next year, Governor Rockefeller says the government will take over the Long Island. It is an easy solution, it sounds good—have a public authority who runs it.
You raised a particular question of public ownership of something that can be done by private industry. And it is a major question, and that should be a subject of a major national debate.
It is not necessary, however, to go that far, because you can limit the rescue of the New Haven in 2 years, by a very careful wording of your bill to limit it to the New Haven and not as a precedent of having laws to cast aspersions on it as a monopoly in the New England area as an expense to New England industry.
You want a 2-year rescue operation provided the States cooperate in the financing of the rescue.
If you put that kind of a set of limitations in, you will not be committing this Government in any way to the fatal step toward Government ownership of railroads, which I think would be a tragedy in this country.
Senator PASTORE. Are you talking about the Ribicoff bill now?
Mr. SCHAMUS. The Ribicoff bill, I thing, should be redrafted. I think it is loosely worded. The idea is a good one, but he is saying $100 million for the railroad industry of the United States. I think that goes too far, because it is normal, in the middle of the 20th century, for railroads to have the freight carry the passengers. That is normal.
And it is ridiculous to separate passenger service from freight service as a railroading matter. Your overhead costs go right on. If you only had half a job; namely, the freight job, you don't save it by giving the passengers away to somebody else. All you are doing is taking the easy way out, instead of putting the burden on management, to be forward looking and constructive.
But the trouble in this country has been, in 40 years the state of managements of railroads have left a lot to be desired.
But in recent years, we have had some good ones, in good railroads in the East, which have shown the way, and I think we should pursue it along those lines.
Senator PASTORE. Under the Ribicoff bill, if railroad X was making $40 million a year in the transportation of freight, and losing $10 million a year on the passenger service, don't you think the ICC would have the discretion to say "Petition denied”?