In addition, Connecticut has contributed each year up to $500,000 for the New Haven's improvements made on railroad crossings (about $1 million then for 2 years) and has authorized $3 million to help defray some of the New Haven's operating expenses and capital expenditures.

Adding these figures together, we have a total of $18,621,824 which conceivably the New Haven could quality for under the first-year formula.

The years 1960 and 1961 were used, rather than 1962 and 1963, in the example because of a desire to derive as high an estimate as possible for setting a maximum. In 1962 and 1963, expenses dropped off to a total of $12,691,620. For the subsequent 4 years, the Federal Government would match the State and local contributions, 80 to 20 the second year; and 70-30, 60-40 and 50-50 the third, fourth and fifth years.

The Commission would have some authority to provide less than these percentages, should the State and local contributions run high, for example, in relation to the funds needed by a railroad for operating and modernization expenditures.

Section 605. This provides that whenever the Commission considers a proposed discontinuance or reduction in passenger services, it give "appropriate weight" to the "present and future public convenience and necessity" representations made by a carrier in its application for funds.

The Commission is also to give appropriate weight" to whatever assistance is being given to a carrier by States and communities.

Sections 606 and 607 are standard administrative provisions, relating to help for the ICC from other departments and agencies and to administrative expenses of the Commission.

Section 608. This section appropriates $75 million to carry out the provisions of the bill.

The final figure would have to be worked out by experts because at present I do not think there is any idea of exactly what would be needed for a nationwide, 5-year program of this kind.

The New Haven problem is the most acute, and I have allowed for approximately $40 to $50 million for it.

Senator PASTORE. While some of these bills would provide aid to passenger railroads throughout the Nation, the committee is aware that the proposed legislation was motivated by the plight of the New Haven passenger service.

We scheduled these hearings immediately in order that the Governors of the States, the trustees of the railroad, interested Federal officials and representatives of the commuter and passenger associations could meet with us to help to resolve the problem.

Time is short. On February 15, 1965, United States Circuit Judge Robert P. Anderson, who presides over the reorganization of the railroad, gave the trustees permission to apply to the Interstate Commerce Commission to end commuter service to New York and, ultimately, to discontinue all railroad passenger service in New York, Connecticut, Rhode Island, and Massachusetts.

In this memorandum of decision Judge Anderson clearly defines the problem confronting the New Haven. In my personal opinion, having read it very carefully, it is a masterpiece.

I would ask that a copy of the decision be printed at this point in the record. And, also, that the agency comments be inserted in the record at this point.

(The decision follows:)

UNITED STATES DISTRICT COURT

DISTRICT OF CONNECTICUT

(No. 30226)

In Proceedings for the Reorganization of a Railroad

In the Matter of

THE NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, DEBTOR

MEMORANDUM OF DECISION RE PETITION FOR ORDER NO. 287

The issue before the court is a narrow one. It is not called upon to decide on the merits of whether or not passenger service should, in fact, be discontinued. But in the course of giving recognition to the fact that it is faced with an extremely grave situation with regard to the debtor in reorganization, it is necessary that the court give thought to the contribution of the passenger service to the large operating losses of the Railroad and that the question of passenger service discontinuance be considered. Whether evidence will show that such discontinuance is necessary is a matter for decision by the appropriate commissions and agencies, primarily the Interstate Commerce Commission. The Trustees, who are better informed than anyone else on the subject, have considered and weighed all of the economic, social and legal aspects of the problem and have concluded that such a determination by the authorized commissions and agencies is, under the present circumstances, imperative and that they should apply for it forthwith.1 The only question now before this court is whether the best interests of the bankruptcy estate warrant the expenditures required for the purpose of making such application. The evidence in support of the petition is devastating and overwhelming. It stands completely uncontradicted. As the service is a losing one and as no reasonable prospects exist for arresting the losses, the Trustees should be allowed to proceed. Cf. In re Fonda, Johnstown & Gloversville R. Co., 95 F.2d 397 (2d Cir. 1938). There is no doubt that the petition should be granted and it is so ordered.

While ordinarily this brief ruling would suffice, in view of the position taken at the hearing by the States of New York, Connecticut, Rhode Island and Massachusetts, the court will discuss the broader aspects of the problem.

The day of the hearing on this petition was the first time, during the more than three and one-half years of these court proceedings, that the states appeared and actively participated in the case. The primary thrust of their arguments was that all consideration of the discontinuance of the passenger service by any tribunal should be deferred. None of the states questioned the facts set forth in the petition, but it was suggested variously that the passenger problem was in the course of solution, that time was needed for legislative action, and that the Trustees had not come forward with proposals for them to consider. The New York, New Haven and Hartford Railroad is historically the combination of the lines of about eighteen railroads some of which had, themselves, been combinations of still smaller lines. It grew up in response to economic demands of farms, mills, factories and other industries and of the travelling public at the end of the 19th century and the beginning of the 20th. At its peak in 1922-23 its main lines and branches had 2,300 miles of track and its operation required over 38,000 employees. It was built from the savings and investment capital of hundreds of individuals and institutions and its earnings were such as to assure a reasonable return on the money put into it. At the present time the New Haven operates approximately 1,600 miles of track and has less than 10,000 employees. It would be virtually impossible, for the purpose of operating it as a separate, independent railroad, to attract the investment of a single dollar of fresh capital for the obvious reason that there is no prospect of any return on the investment.

1 In its extensive investigation of the New Haven's affairs the Interstate Commerce Commission specifically found that the New Haven's "passenger deficit is the primary cause of its current financial difficulties." 313 I.C.C. 411, 426, aff'd 314 I.C.C. 377 (1961).

Although much has been said and many charges have been made about mismanagement, and although there are evidences in the years prior to the petition in bankruptcy that there had been, at least, serious errors of judgment, nevertheless, it is the opinion of the court that the major causes of the present plight of the New Haven Railroad lie in the operation of economic forces-principally competition. Many of the large textile mills and kinds of industries for which freight branches were built have closed down or moved away. In their places are industries with less demand for moving materials or merchandise in large bulk, so that other means of transportation are used. The New Haven's ratio of passenger service to freight is among the highest in the country. Like nearly all other railroads, millions of dollars have for many years been lost on passenger service operation—a loss customarily made up out of freight profits. This was true of the New Haven up to 1959. Thereafter the losses have been a burden falling solely on the creditors of the Railroad. A few months after the opening of the Connecticut Turnpike the New Haven began to show a serious loss in its freight revenues and it has never had an operating profit since. A train proceeding from New York to Boston has truck competition on one side, sea borne competition on the other and air competition over head. All of these other forms of transportation directly or indirectly are subsidized by governmental assistance. Meanwhile the Railroad has to maintain its tracks, roadbed and other facilities and is heavily taxed in addition. The New Haven also suffers from the fact that it is a terminal railroad, that is, it ends at Boston, and its freight haul is very short. While the high per diem charge imposed upon the New Haven, for every day the cars of another railroad are on its tracks, its profit on nearly half the freight cars bringing loads into the area are realized only on the incoming trip because nearly half go back empty. Thus the huge losses of the passenger services are uncompensated by profit on freight; there is no present prospect that it will be, and the necessity for a determination of the advisability of stopping the passenger service is immediate and acute. Moreover, as a railroad the New Haven has not been free to compete; it has been and still is shackled with statutory provisions, rules and regulations originally designed to curb railroads when they were too powerful monopolies and when such governmental restraint was required. Though the necessity for such curbs has been greatly reducedparticularly in the case of the New Haven-the laws and regulations remain substantially unchanged.

Although the demand for the freight and passenger services of the New Haven have declined, it has far from disappeared. Last year it carried 25,750,000 passengers and 19,300,000 tons, consisting of 583,411 carloadings of freight. So important is the freight service that the record of the case is replete with statistics and expert opinion that fully support the Trustees' conclusion that it is absolutely vital to the economy of southern New England; and it takes little imagination to envisage the inconvenience posed by the absence of passenger service, particularly in the case of the approximately 25,000 commuters who are daily carried into and out of New York City.

The New Haven is, therefore, a transportation enterprise created in an economic climate when the demand for its services assured a return for the investment capital which established and sustained it. That climate no longer exists. The demand is only a part of what it was; but it is still sufficiently substantial to be of major importance to the economy and to the welfare of thousands. The transportation plant has been shrunk measurably since its 1922-23 peak. There has been, since the petition in bankruptcy was filed, strenuous belt-tightening, but the enormous increases in cost of operation far outstrip the savings which the rigid economies have achieved. It has to a great extent outlived the period when the high degree of its usefulness made it self-supporting, in spite of burdensome rules and regulations, and in spite of its terminal and short haul characteristics, but it is still so useful and necessary that the rest of the economy cannot afford to let it disappear, even though it cannot support itself. It, therefore, has become a problem for the governmental bodies to decide whether or not it is in the public interest to keep the New Haven going to meet present demands and to supply the continuous transfusion of financial blood to make up for operating losses, particularly in the passenger service, in the event that the freight service problem can be solved through merger with a trunk line, and to supply the fresh capital for the replacement of what has become obsolete.

In the evidence submitted at the hearing the following table of statistics was submitted, which shows with particularity much of what has been generally stated above:

1 Includes small amounts of unassigned expenses. (Figures for 1964 are based on estimates, pending the compilation of final tabulations.)

() Deficit.

As my be noted from this table, since these reorganization proceedings began, both the freight and passenger operations have continued to be unprofitable; the passenger service in particular has produced very substantial deficits. It has been possible for the Trustees to continue these services only by resorting to temporary expedients. Stringent internal economies made by the Trustees have not been enough and have had to be implemented by deferral of taxes and other current expenses, as well as postponement of considerable maintenance. In the face of declining revenues, however, these measures could not stem the tide indefinitely. Increased costs as the result of recent national labor awards and the need for maintenance which cannot be deferred threaten an imminent return to the substantial cash attrition which confronted the Trustees at the outset of their administration. Net wage increases, including fringe benefits, are estimated at $3,200,000 in 1964 and contributed to an estimated cash decrease of $2,500,000 during 1964. There remain cash obligations of an additional $1,700,000 on wage increases owed for 1964. Present estimates, assuming no other changes, are that the additional wage increases for 1965 and 1966 will total $4,800,000 and $6,000,000, respectively, for an aggregate, in the three years beginning January 1, 1964, of $14,000,000. Moreover, additional labor settlements announced last week indicate that there will be further increases in wages and that the Trustees' ability to reduce the labor force further will be seriously curtailed. These pay scales were agreed to by the railroads and the unions on a national level; they did not arise out of a locally made agreement. The New Haven is subject to them. It is not feasible to attempt to operate for a sustained period of time with substandard wages, but the New Haven cannot pay at the increased rate and also bear the heavy losses incurred in the passenger service without suffering a frightening acceleration in the loss of cash. This is not to say that the wage increases, although they have wiped out the gains made in the administration of the bankruptcy estate, are the sole cause of the crisis in the affairs of the New Haven. They have simply made it more immediately acute. The crisis preceded and brought about the bankruptcy. The major contributing factor of passenger loss has existed throughout and at no time have the Trustees taken the position that there was any hope of reorganizing the New Haven Railroad as long as the passenger losses continued.

From their first report to this court and in subsequent reports, the Trustees have stressed both the necessity for a governmental underwriting of such passenger service as the public decides it wants, and the vital necessity of preserving adequate freight service for southern New England. They have, with this court's authorization, and through an enormous expenditure of time and effort, proceeded, and continue to press, by every available means to achieve the objective of merging the freight service in a trunk line system.

The figures showing passenger service losses were not questioned. They properly reflect a full allocation of costs, for to consider that these unprofitable op

erations can be continued on an out-of-pocket system of accounting is to ignore the basic premise that the law cannot indefinitely endure the confiscation of property without compensation. Those to whom is granted a public monopoly, compensatory in the main, can reasonably be expected to absorb the burdens of certain incidents of the monopoly. But no construction of due process will permit this court to require that the creditors of this estate witness the continuing erosion of their security without the slightest prospect of relief. It is important to underscore by quoting again what Judge Frank said in enunciating the law of this circuit in 1952:

"As the debtor is a public utility, the judge properly took into account the factor of the public interest in the debtor's continued operations. That, however, is but one factor; it must not be allowed to outweigh all others. There are strict limits to the extent to which, in reorganization proceedings, the interests of creditors (or of a particular class of creditors) may be sacrificed to the public interest; to exceed those limits is (to say the least) to come dangerously close to the edge of unconstitutional taking of property, a line from which courts should keep away if possible."

In re Third Ave. Transit Corp., 198 F.2d 703, 707 (2d Cir. 1952).

Confronted with such uncontested evidence of losses, this court would be justified in requiring further delay on the part of the Trustees only if there were such prospect of relief from official sources, charged with protecting the public interest, that the proposed expenditure of the estate's funds appeared unnecessary. At the hearing, representatives of the four states served by the New Haven urged that the court defer granting the relief sought by the Trustees because the passenger service was so affected with a public interest that public authorities should be afforded more time to devise a solution which would permit the service to be continued.

Were this the first occasion at which the problem was defined, a plea for delay in measuring the prospects for relief would evoke different reactions. For three and a half years, however, the published reports of the Trustees and the repeated views of this court have stressed the urgency of the problem. This could have surprised only those who, for reasons best known to themselves, refused to hear.

The record shows that the public interest has been thus far supported by the creditors of this estate with no substantial participation from the states. Further, it has been stated on numerous occasions that the operation of unprofitable passenger service, however essential, at the expense of the creditors could only be temporary, as a matter of due process.

This court noted the problem in a Memorandum of Decision in October, 1961, in passing upon the application of the Trustees to issue further certificates. At that time, the question was presented whether the creditors' security should be impressed with a prior lien to secure the borrowings needed to continue the road in operation. In granting the application the court stated that— "The present reorganization is concerned not only with safeguarding the rights of [creditors] . . ., but it is also vitally concerned with the public interest in preserving a transportation plant of major importance to the region in which it lies."

Filed in the record of that proceeding is an interim report of the Interstate Staff Committee addressed to its appointing authorities, the Governors of the States of New York, Connecticut, Massachusetts and Rhode Island, the County Executive of Westchester County, and the Mayor of the City of New York. That report took stock of economic realities in reminding the executives to whom it was made that a bankruptcy court might have to initiate steps for a "drastic curtailment in passenger service, particularly in commuter areas." On that occasion, the public interest in maintaining a going concern was allowed to prevail. It was noted, however, that the court could not permit continuation of unprofitable operations beyond "a reasonable period for fact finding and judgment." In seeking to devise a workable plan of reorganization, it would ultimately be necessary that the Trustees move to "eliminate or exclude some services which the public may find necessary or desirable. If the states or local governmental bodies decide that such services should be continued then, they, directly or through an appropriate authority or agency, will contract with the Trustees for the requested operations and pay to the Railroad the full cost of them."

46-135-65—— 3