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present in the event there are questions which the committee has on which our counsel could be helpful.
We are keenly interested in the bills which are before this committee and the considerations which we think the committee should bring to bear on the problems of the passenger carrying railroads in the eastern district. Needless to say, as trustees, we are most concerned about the Railroad whose operations are entrusted to us. However, the problems of conducting passenger service in the eastern district, and particularly commuter service, are not unique to the New Haven.
I know that many members of the committee, and particularly your chairman, are well acquainted with the New Haven and some of its problems. In the interest of a complete record, however, it seems to me that it might be desirable if I covered ground which, although familiar, is basic to an understanding of the New Haven's problems.
The New Haven furnishes passenger service in a territory represented by the States of Connecticut, Rhode Island, and Massachusetts, and by Westchester County and New Haven serves all of these areas, as well as other areas of New York State, with freight service.
Based on the 1960 census, the area served by the New Haven with freight and passenger service had a population in excess of 17,000,000. Yet, this territory represents only approximately one-half of 1 percent of the total land area of the United States. Within this territory, there are 12 cities with a population in excess of 100,000. The New Haven serves 10 of these cities directly. These are New York City, Boston, Providence, Worcester, Hartford, New Haven, Bridgeport, Springfield, Waterbury, and New Bedford. Within its territory, the New Haven directly serves 43 communities having a population in excess of 40,000 each.
The New Haven service area is dotted with military posts and camps served directly by the New Haven, as well as others served through connection with other carriers. Among the better known of these defense establishments are the Boston Army Base, the Boston Naval Shipyard, the Naval Submarine Base at New London, Conn., the Marine Barracks at Newport, R.I., Otis Air Force Base, U.S. Coast Guard Academy, the Coast Guard Training Station, the U.S. Naval Air Station at Quonset Point, R.I., the U.S. Naval Air Station at South Weymouth, Mass., Westover Air Force Base, and the U.S. Naval Base at NewPort, R.I.
A large number of industries in New Haven territory is engaged in work important to national defense. I understand that in fiscal 1962 over 10 percent of all prime military contracts were awarded to industries in Massachusetts and Connecticut alone. Among the very large companies so engaged which are served directly by the New Haven are United Aircraft, Bridgeport Brass, General Electric, and General Dynamics.
As well as serving military posts and camps, the New Haven serves a variety of Government agencies and departments, including the General Services Administration, Veterans' Administration facilities, and the Post Office Department.
The New Haven is the largest railroad in New England in terms of its traffic. It carries more passengers than any other railroad in New England, and is re sponsible for about one-third of all rail freight traffic in New England. In national terms, the New Haven is approximately 30th in size among all class I railroads. It is 10th in size in freight revenues in the eastern district, and is 4th in the Nation among the passenger-carrying railroads, being exceeded only by the Pennsylvania Railroad, the New York Central Railroad, and the Long Island Railroad. Among the large passenger-carrying railroads of the Nation, the New Haven carries its commuter passengers a longer average distance than all but one other railroad, and is also second in terms of volume of commuter revenues.
The New Haven has connections with some nine other class I railroads. It connects with the Pennsylvania Railroad and the New York Central Railroad at several points. It connects with the Erie-Lackawanna Railroad at Mavbronk, N.Y. It connects via the Lehigh & Hudson River Railroad at Maybrook, N.Y., and via New York Harbor float, with the Lehigh Valley Railroad and Central Railroad of New Jersey. It connects with the Boston & Maine Railroad at several points in Massachusetts and with the Central Vermont Railway at several points in Connecticut.
Except for the line of the Central Vermont Railway, which runs to the sea at New London. Conn., no other class I railroad serves the Stato of Connonticut. The New Haven is the only class I railroad serving the State of Rhode Island. In Massachusetts, the New Haven, together with the New York Central and Boston & Maine Railroads, serves many points in common, including such cities as Boston, Springfield, and Worcester. The New Haven alone serves southeastern Massachusetts.
As the incumbent president of the Federal Reserve Bank of Boston testified in proceedings before the ICC in 1957, New England “is a deficit area in terms of the major industrial commodities, fuels and food stuffs * * * [and] makes its living largely by manufacture and export of products made from imported material * * *
It is estimated that 90 percent of the value created by manufacturing in New England is dependent on material brought into the region to be manufactured * * * [and] marketed largely outside the area ***. Substantial transportation is involved both before and after the manufacturing process.”
Because of this requirement for "substantial transportation," competitive transportation costs and availability of all modes of transportation are of basic importance to the New England economy. It is vital to New England that transportation costs be as low as possible to insure the general welfare of its people in their costs for such essentials as fuels and food stuffs. It is equally clear that the livelihood of New England's people depends upon the economic welfare of its industry. New England's industry is not only vitally concerned with the cost of transportation but also is subject to a two-way transportation move in its competition with industry elsewhere in the country not having a similar transportation requirement.
Whenever a railroad like the New Haven goes into bankruptcy, there is an impact upon the economy of the region which it serves. This inevitably takes the form of causing industries then located in the region to refrain from expansion and to deter new industries from locating in the region. This dual effect is bound to stultify the economy of any region, if it is permitted to continue. In justice to the public interest, therefore, it must be recognized there may be severe adverse consequences to a region from periodic bankruptcies of a railroad serying that region. In the case of the New Haven, such factors as the lack of adequate freight earnings, the passenger losses, and periodic inability to meet fixed charges have resulted in two bankruptcies in a period of about 25 years.
In the view of the trustees, accordingly, it is essential that the present reorganization of the New Haven must be on a basis which will insure, so far as we can foresee, a future for the New Haven in which it will not be required to continue to bear burdens which twice have substantially contributed to its bankruptcy. Either the present reorganization must terminate the intolerable burden of passenger losses, or the New Haven's freight service must inevitably be terminated to the detriment of persons numbered in the millions.
In recent months a combination of events has forced upon the trustees a difficult and unwelcome policy decision. We applied in January 1965 to the reorganization court for authority to incur the expenses involved in initiating and carrying through proceedings before the Interstate Commerce Commission and, if necessary, before other regulatory agencies, first to curtail our commuter service into New York City and then to discontinue all passenger service. That decision was taken by the trustees because of sharply increased costs, particularly increased wages which have not been offset by increased revenues, which have created a new financial crisis for the railroad to which Mr. Kirk will testify.
I pointed out to the reorganization court at the public hearing on our petition that some 312 years have elapsed since the trustees were appointed to administer the New Haven estate under the direction of the court. At about the time of our appointment, the trustees and the public had the benefit of a comprehensive study of the New Haven's financial condition which was made by the Interstate Commerce Commission. The Commission concluded that the chief cause of the road's financial collapse was the containing loss produced by operation of passenger service. Our review of the New Haven's circumstances confirmed to us the soundness of the Commission's finding.
Our first report to the reorganization court covered the initial 6 months of our trusteeship. I have a copy of that report with me for the committee's files if the committee so desires. In that report, we stated that the underwriting of unprofitable passenger service by governmental authorities was a major premise for a workable reorganization plan. We said then that unless public authorities came forward with a concrete plan for discharging their responsibilities in this area, we would not be justified in continuing the passenger service.
Meanwhile, because of the public interest in the continuance of the New Haven's passenger operations, and because, at that time, we were able temporarily to meet the financial demands of railroad operations by a program of stringent internal economies and deferral of obligations ordinarily payable currently, the trustees determined that they should do everything possible to give public authorities a reasonable time in which to develop a concrete program for the public underwriting of the service which the public might desire.
We felt that allowing this period of grace, if it might possibly protect a substantial public interest, was entirely consistent with our responsibilities as trustees under section 77 of the National Bankruptcy Act. We believed then, and we still believe, that the creditors of the New Haven can best be served by disposing of the railroad as a going concern. On the other hand, it was then, and still is, our position that it is not for us, as trustees, to dictate or in any way presume to determine the type of service which the public should have, or the type of participation which should be adopted by the public authorities for such service as they determine to be in the public interest.
Accordingly, we undertook to hold the fort, so to speak, while the public authorities explored the possibilities of a public underwriting of service which they deemed essential or desirable.
A few months after our appointment as trustees in July 1961, we met with the Governors of the four States concerned. We also met with various representatives of the Federal Government. We undertook, at that early date, to demonstrate to them that public underwriting of passenger service losses on a concrete, sufficient, and continuous basis was essential to save the passenger service on the New Haven. At that time, it was agreed that the authorities should have a sufficient period, that is, until the convening of the State legislatures in January 1962, to complete their studies and to map out among themselves a workable program for the needed underwriting.
The proposals that came out of the year 1962 proved abortive. Instead of being based upon undertakings to share losses and providing the services which the public authorities insisted should be continued by the New Haven, the public authorities worked along the idea of assisting the New Haven to finance, at its own ultimate expense, the acquisition of new commuter equipment.
In 1963, the only State that made an approach to a comprehensive handling of the passenger crisis was Connecticut. It created a transportation authority with broad powers and with authorization to expend several million dollars. However, because of the interstate nature of the commuter service, Connecticut could not act alone and did not receive necessary assistance from New York. Connecticut has given the railroad tax relief for many years. In addition, Connecticut has assumed the cost of maintenance of railroad-highway crossings to the extent of some $500,000 a year. This is the kind of direct ad hoc assistance that is needed, but it is far from being enough to assure continuance of passenger service.
During the first 4 months of our trusteeship, the Federal Government guaranteed the payment of $8 million of certificates sold at that time by the trustees to provide essential operating cash, and also guaranteed an additional $4,500,000 of certificates which the trustees will issue this week. We managed to keep the railroad going on a cash basis without additional borrowings between December 1961 and March 1965. Without the Government guaranteed loans, the trustees could not, of course, have continued to operate the railroad. However, as vital as these guaranteed loans have been, they have only given us temporary respite. In addition, it must be appreciated that these loans constitute a prior lien on the trust estate ahead of all other creditors, and in no sense can be considered other than a credit aid which will be repaid.
The Federal Government also assisted railroads generally by the repeal in November 1962 of the 10-percent excise tax on passenger fares other than commuter tickets. With repeal of the tax, we concurrently increased our fares by a similar amount. We expected that, since the passenger would not be paying any additional total amount, the railroad would increase revenues by about $2,500,000. However, the steady attrition in our passenger service has more than offset the expected benefit of the excise tax repeal. Total passenger revenues in 1964 were actually $380,000 less than they had been in 1962 when the excise tax was in effect for some 11 months.
In 1964, we resumed negotiations with representatives of New York in an attempt to finance commuter service cars. These efforts failed ultimately when the county of Westchester was not even willing to make a contribution to the service of $400,000 a year for a period of 2 years. Recently the States of New York and Connecticut have revived this proposal, revised to the extent that they now propose that the cost of the cars would be paid half by the Federal Gov. ernment and one-quarter each by these two States, and that the cars would be leased to the railroad at a nominal rental. This proposal, however, still contemplates contributions of no more than $800,000 a year toward a service, the continuance of which by the New Haven would require several million annually.
We proceeded in good faith last year to negotiate on such plans as I have described, since we expected that the temporary help from such plans would be followed in 1965, when all the State legislatures would be in session, by a plan for permanent underwriting. Instead, we have thus far been offered at best an insufficient, temporary program, and there is still tacking any comprehensive or effective plan for absorbing our passenger service operating losses.
In the 342 years in which we have awaited a public program, we have petitioned State commissions and the Interstate Commerce Commission for curtailment of various lightly patronized or high loss passenger service in Connecticut, Rhode Island, and Massachusetts. To date, only a relatively insignificant number of trains has been discontinued. Currently there is pending before the Interstate Commerce Commission a proposed discontinuance of all suburban service on three of our five Greater Boston commuter lines. Mr. Kirk will have occasion to refer to the Boston suburban passenger service in his testimony in connection with this case.
On February 15, 1965, Judge Anderson entered an order permitting us to proceed with passenger discontinuance cases as sought by our petition to the court. I have with me a copy of Judge Anderson's opinion which I will be glad to furnish to the committee if it desires.
We, as trustees, think it is important to note 'whát Judge' Anderson has said with respect to the position which he expects us, as officers of the court, to occupy vis-a-vis public authority. The court said :
“The court expects the trustees to continue to cooperate with any interested public authority in seeking passenger service solutions, but the court will not charge them with the duty of formulating plans which can only properly be devised as an exercise of executive and legislative judgment."
Mr. Kirk's testimony will deal in detail with the significance of the New Haven's freight service to the economy and welfare of southern New England.. This concept has been always present in the trustees' minds.
Even in the report on the first 6 months of the trusteeship, which I have made available to the committee, we stressed the need for finding a way for the New Haven's freight service to become a part of a trunkline system.
We have had occasion to comment again in this regard in our subsequent reports to the court. I have with me, if the committee desires them, copies of our reports for the years 1962 and 1963. We expect that our report for the year 1964 will be ready in a few weeks. If the committee would like it, we will instruct our counsel to furnish a copy to the committee as soon as it becomes available.
The problem of the New Haven's freight service and its importance to the region which it serves became a matter of great concern to us early in 1962 as. the result of an event beyond our control.
At that time, the Pennsylvania and New York Central Railroads filed a petition with the Interstate Commerce Commission for the merger of those two roads. After study of the impact on the New Haven of the proposed merger, we sought leave from the reorganization court, which we received, to seek inclusion in the proposed merger as provided in section 5(2) of the Interstate Commerce Act.
The theory of our petition to the Interstate Commerce Commission in this regard was that, although we did not oppose the merger as such, if the merger were approved, the public interest required that the New Haven's freight operations be protected.
We knew of no way in which such protection could be achieved short of physically including the New Haven's freight operations within the proposed merged system.
At the same time, our studies showed that such inclusion would produce substantial savings in operating costs of the New Haven's freight service and would, by virtue of creating single-line service from the Mississippi River and the Virginia-Maryland gateways to Boston through New Haven territory, permit industry in southern New England to have the benefits of potentially reduced transportation costs, availability of modern freight equipment, and of an improved rail freight service.
Our views on the concept and approach to merger parallel those of the Doyle Report to this committee in 1961. We believe the case of the New Haven in a most urgent and concrete way presents the issue of consolidation, as the Doyle Report Viewed it; namely, as the best if not the only way open to insure the survival of a privately owned railroad in southern New England that would be "able to exploit to the fullest the inherent advantages of railroad transportation set about as it is with growing competition with other modes of transportation.”
In the proceedings before the Interstate Commerce Commission, we took the position, consistent with the facts, that it was our freight service which would be adversely affected, and accordingly it was the freight service which had to be protected. In this regard, Judge Anderson has said the following in his opinion of February 15, 1965 :
“At the hearing on their petition, the trustees testified that they should have preferred the merger issues to have arisen at a time when the New Haven was further along with its problems, especially the matter of public support of passenger service. The Pennsylvania and the New York Central railroads are not in competition with the New Haven for passenger service, however, the trustees' case for inclusion, as presented both to this court and the Interstate Commerce Commission, rests upon the impact which a merger would have on their freight operations. Their request for inclusion seeks to preserve the freight operations of the road which are so closely linked to the economy of southern New England. Inclusion in a trunkline system is not a harbor of refuge for each and every problem which contributed to the economic collapse of this railroad. It appears to the court that the trustees have acted prudently in this regard. To have risked the denial of their petition in the merger proceedings by seeking the inclusion of passenger service would have been to jeopardize the future of freight service so vital to the economic health of this region."
The Interstate Commerce Commission examiners have not as yet issued their report in the Pennsylvania-New York Central merger proceedings. However, beginning approximately in June of 1964 we commenced negotiations with executives of the Pennsylvania and New York Central railroads.
Because of the very difficult problems entailed in a matter of this kind, the negotiations have necessarily been very time consuming. However, they have proceeded in a most satisfactory manner and substantial agreements in principle have been reached.
We believe, if the Pennsylvania-Central merger is approved by the Interstate Commerce Commission, that a satisfactory basis for inclusion in the merged system of the New Haven's principal freight operations will have been achieved.
On February 18, 1965, we filed with the Interstate Commerce Commission the first step in the passenger plans which we referred to in our petition which Judge Anderson approved on February 15.
This first step is an emergency step which involves a revision of our commuter service between Stamford, Conn., and Grand Central Station. It is necessary because of the physical condition of some 90 obsolete multiple-unit cars used in that service, which are of an age that not only requires expensive maintenance but endangers our ability to operate the entire service on satisfactory schedules.
Under this first step, we will terminate service entirely at the four stations of New Rochelle, Mt. Vernon, Pelham, and Columbus Avenue, all of which are within some 17 miles of Grand Central Terminal.
By this means, we can continue temporarily to serve the bulk of the remaining passengers
the line with the remaining available passenger equipment which would be operated under the plan at full capacity.
While the plan will also entail some reduction of service at off-peak hours, it has been engineered to serve commuter traffic, as it now exists on the bal. ance of the line, essentially as at present.
The plan, when put into effect, will discontinue service for approximately 6,000 riders per day at the four stations which I mentioned. We would continue to carry 14,000 riders per day in this service.
We now have our staff, as well as outside experts, working on the preparation of a plan for the entire discontinuance of passenger service on the railroad. Necessarily, preparation of this nature will require several months.
In the interests of the New Haven Railroad and the persons and industry which it serves, as well as of the committee, I have necessarily testified at considerable length. The detail behind my testimony and that of Mr. Kirk is voluminous and would literally require days before this committee. We would be glad, however, to cooperate in any further way that the committee deems appropriate and I can assure you it need only call upon us.