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The trustees of the New Haven have supplied this committee with figures on the railroad's perilous financial condition. Any elaboration of this dismal financial picture would no doubt be redundant. However, it is important that the Congress and the general public understand clearly the relationship between the bills under consideration and the Commission's responsibility in connection with applications to discontinue passenger and commuter services widely regarded as indispensable.
On February 18, 1965, the trustees of the New Haven, with the permission of the U.S. district court in Connecticut, filed an application with our Commission to discontinue, effective March 29, 1965, all passenger service at four important stations in Westchester County, N.Y., and to curtail service at certain other New York and Connecticut stations. The Commission will set this matter for hearing. Under the provisions of section 13a (1) of the Interstate Commerce Act, the Commission must decide within 4 months following March 29, 1965, whether to permit the proposed discontinuance of service. The trustees have announced that as soon as the necessary papers can be prepared, they will seek to discontinue the remaining passenger service of the New Haven.
The aid proposed by S. 325 would not be limited, of course, to the New Haven Railroad. Other important rail carriers of passengers are experiencing financial difficulty. For example, the Erie Lackawanna has indicated that it will be forced to seek authority to discontinue its commuter service within the next few months unless
program initiated to reduce the $8 million annual losses for such service.
Senator PASTORE. S. 325 is the so-called Ribicoff bill.
Senator PASTORE. That authorizes $100 million to be dispersed by the ICC provided it is matched by the public authorities in the various States, is that correct?
Mr. WEBB. Yes; the bulk of the aid available would be on a matching basis.
Senator PASTORE. On a matching basis. Now, a question has arisen here as for what purposes that money can be used. Can it be used for operating deficits?
Mr. WEBB. Yes; under the terms of that bill, the aid is of such a limited nature that it would be required to be used for those purposes,
Senator PASTORE. In other words, could, let's assume if the State authority did take over commutation service in Connecticut and New York and it met with a deficit, let's say, operating deficit of $2 or $3 million a year, that it could use this money for that purpose? The money wouldn't have to be used for maintenance or modernization or purchase of new equipment? In other words, that question arose yesterday and I would like to get an answer on that, whether or not this is in some way a deviation from the present limitations or authority under the Urban Mass Transportation Act whereby certain moneys were given out?
Mr. WEBB. This money would be available under the terms of a bill to a carrier which applied. Now if the authority actually operated a railroad, I would assume that it would not be applicable under the terms of the Ribicoff bill. If the New Haven entered into a contract with an authority, presumably, some of its losses would be reduced,
but the provisions of the bill would nevertheless apply as I understand it.
Senator PASTORE. Say that again, Mr. Webb?
Mr. WEBB. I believe in general that the Ribicoff bill would make aid available to carriers subject to part I; yes.
Senator PASTORE. Money that might be used to pick up the operating deficit
Mr. WEBB. Yes; that is correct. I might add that at this point, Mr. Chairman, I believe that if the committee is interested or should pursue this subject, that it would be possible to combine in a single bill the best features of all four bills now before you. Basically, as I understand both Senator Ribicoff's and Senator Dodd's, they were not drafted with any thought that an authority would be in existence in the near future.
Senator PASTORE. Let me ask you this question, Mr. Webb.
You have heard, of course, whether officially or not, you have heard of this proposal on the part of Governor Dempsey, of Connecticut, and Governor Rockefeller, of New York, to set up either a bi-State authority or to enter into an agreement with New Haven or New York Central to run the commuter service west of New Haven into New York. Now the question that I raise at this point, if no Federal moneys are involved is this a matter that would have to fall under the jurisdiction of the ICC?
Mr. WEBB. We have recommended in our comments on Senator Javits' bill that it shall be made definitely clear to what extent the operations of the authority are intended to be subject to our jurisdiction and to what extent they are not so intended. Obviously the Congress would want the operations of the authority to be subject to all of the safety laws and regulations. On the other hand, as to the provisions in that bill relating to the issuance of securities guaranteed by the Federal Government, I should not think that there would be any useful purpose served in having the I.C.C. approve that under the provisions of section 20A. That should be no great problem, but we think it should be made definitely clear both in the Pell bill and in the Javits bill to what extent these operations and activities of the authority should or should not be subject to I.C.C. jurisdiction.
Senator PASTORE. I would hope this, Mr. Webb, that when we get to the point of drafting the bill, if that happens to be the conclusion or the
decision of the committee, that we could have your staff sit down with our staff to make sure that the bill is technically and legally drawn and covers in precise language exactly what the committee intends it should do.
Mr. WEBB. Yes; we would be happy to do that. We don't foresee any difficulties along that line at this time.
In our 1961 investigation of the New Haven Railroad, we found that its freight service was economically viable, but we found that its passenger service was not. We found that both services could not be continued unless the passenger service received some governmental assistance. Although our reports in the New Haven investigation case recognized the extreme hardship that would be inflicted upon thousands of commuters if passenger operations were discontinued, we also found that the New Haven's freight service was absolutely vital to the whole New England economy. Any action that would threaten to transform New England into a new Appalachia seems unthinkable.
However, as required by the Administrative Procedure Act, the Commission will decide the pending and prospective discontinuance cases on the record made in those cases, and not on the basis of a record made more than 4 years ago.
Without prejudging in any way the Commission's decision on the pending and prospective applications of the New Haven, I am obliged to say that in the absence of prompt and substantial assistance, cessation of all passenger operations by the New Haven Railroad in 1965 is a distinct possibility. However, the Commission will give the fullest possible consideration to the efforts of the Congress and of State and local governments to provide emergency aid and to develop long-term programs for the preservation of essential passenger train services.
Senator PASTORE. May I ask you a question?
Let’s assume that you decided as a matter of public interest that this passenger service should not be discontinued.
Mr. WEBB. Yes?
Senator PASTORE. Would the court under the Bankruptcy Act, 77(b) find that it does prejudice the rights of creditors and for that reason their right supersedes the national interest and order discontinuance of the passenger service!
Mr. WEBB. I believe, Mr. Chairman, that the court would be bound by our order ordering the continuance of the service. However
Senator PASTORE. Whether they had the money or not? Mr. WEBB. I was coming to that. However, the legality, the validity of such action would have to be tested in the light of the fact that you just mentioned that a reviewing court might find that we were ordering the railroad to spend money that it did not have and to perform service that it was physically unable to render.
Senator PASTORE. That is why you used the words “distinct possibility.”
Mr. WEBB. That is correct.
The Ribicoff bill, S. 325, although not specifically so designated, is apparently intended to provide interim relief pending the formulation of long-range programs for the preservation of essential passenger train services. In our opinion S. 325 should be amended to provide that the program shall terminate 5 years after the effective date of the act.
As you know, Senator Dodd's bill does contain such a provision.
The only other substantive change that we would recommend is the deletion of section 605, authorizing and directing the Commission to consider applications for financial aid in the acquisition and modernization of passenger train equipment.
Senator PASTORE. May I ask a question at this point, because it occurs to me now, you will recall that Mr. Smith, one of the trustees who was just testifying, and I am asking the question now because Mr. Smith is in this room, he suggested that the Dodd bill would help the New Haven but that the Ribicoff bill would not help.
You have already said that this $100 million, which the Ribicoff bill provides for, as against only $75 million that the Dodd bill provides for, would give you up to $20 million the first year and the railroad could use it for operating deficits.
You have said that you think that the Ribicoff bill would provide that the $100 million could be used for operating deficits.
Now that brings me to the question, Why does Mr. Smith feel that the Ribicoff bill dose not help him as much as the Dodd bill?
Now I am asking you the question, but I am hoping that Mr. Smith will answer it for me later on.
Mr. WEBB. The Dodd bill provides, particularly in the first year, provides very much more than the Ríbicoff bill would, according to Mr. Paolo's calculations. The Dodd bill would make available to the New Haven in the first year approximately $13.5 million.
Senator PASTORE. Even if the New Haven deficit was only, let's say, $5 million?
Mr. WEBB. Yes, sir; this would be regardless of the deficit of the carrier and I would assume that the purpose Senator Dodd has in mind is to provide enough money so that the carrier may begin a program of rehabilitation and modernization of its plant.
In regard to the passenger train equipment, we don't think it is practicable to determine the amount of aid for that purpose based on the selected operating expenses. New passenger train equipment can be acquired with the guarantee of a State or other public authority; by joint Federal-State action under the provisions of the Mass Transit Act; and even by conventional financing, assuming that adequate provision is made for a substantial curtailment of losses resulting from passenger train operations.
In a purely interim or emergency relief situation, we don't believe it is necessary to provide specifically for the acquisition of new equipment.
As previously mentioned, S. 325 and S. 1289, Senator Dodd's bill, are in general accord with the legislation recommended by the Commission in 1961 in its final report in the New Haven investigation case.
The meaning of the railroad accounting terminology in the bill may not be clear to the average reader. With
a few technical amendments, however, the language would be clear to applicants and to the Commission.
Section 604 of Senator Ribicoff's bill provides that the amount of assistance a carrrier may receive under paragraph (3) is limited by the amount of aid extended by State and local authorities.
Thus, if a carrier receives no aid from a State or political subdivision, it would not be entitled to any grant by reason of common expenses apportioned to passenger service.
In a situation where the State grants no aid to the carrier, the Federal aid would be limited to amounts incurred by the applicant for solely related passenger maintenance of way and structure expenses.
The accounting formula for determining the maximum amount of aid available serves several important purposes. It encourages State tax relief and other assistance by providing Federal aid primarily on a matching basis but without totally excluding carriers receiving no State or local assistance.
Thus paragraph (1) of section 604 would be helpful in preserving in all parts of the United States some marginal passenger train operations that would otherwise be discontinued under the provisions of sections 13a (1) and 13a (2) of the Interstate Commerce Act.
In addition, the accounting formula in the Ribicoff bill would not dull managerial incentives, since the amount of aid is not geared to the carrier's operating losses.
Programs to preserve the essential passenger and commuter services of financially distressed railroads should provide for three things: assistance in the acquisition and modernization of the equipment, substantially increased tax relief, and monetary grants.
The provisions of modern equipment may not be effective, in and of itself, to insure the continuation of vitally needed services.
In the case of the New Haven, for example, the provision of new and modernized equipment would not curtail its operating losses in 1965 and would reduce thein in 1966 only to the extent of lower equipment maintenance costs.
As I have indicated, however, the acquisition of new equipment is vitally necessary for the New Haven. Roughly one-half of its commuter car fleet has an average age of 37 years and is extremely expensive to maintain.
We are informed it would take about 1 year to get the new equipment on line after it is ordered.
Substantial tax relief is also a necessary part of any program preserve essential rail passenger and commuter services. This relief is especially important for the New Haven.
Even though a debtor in reorganization may postpone or defer payment of State and local taxes, the taxes accumulate against the estate. They cannot be eliminated by any plan of reorganization.
As Judge Anderson's recent opinion makes clear, it would be unconscionable to permit large State and local tax accruals to continue to erode the security of creditors of the estate.
Senator PASTORE. All right, gentlemen, it is now 20 minutes past 12. We will come back at 2 o'clock.
(Whereupon, at 12:20 p.m., the committee was recessed, to reconvene at 2 p.m., the same day.)
Senator LAUSCHE. The meeting will come to order.
Senator Pastore will be back at 2:30. During his absence I will preside.
Mr. Webb, you will continue with your presentation. I understand that you reached the point at the top of page 7 this morning when the recess was taken. Is that correct?
Mr. WEBB. Yes, sir; that is correct, Senator Lausche. Before the recess I was indicating that, in the opinion of the Commission, there were three essential ingredients to an assistance program for hardpressed carriers, particularly the New Haven.
One, the acquisition of new equipment, which I indicated need not be handled in a temporary emergency relief measure.
The second form of assistance that is necessary is substantial State and local tax relief because, as Judge Anderson made clear, it would be unconscionable to permit large State and local tax accruals to continue to erode the security of creditors of the estate.
Picking up now with my prepared statement, the New Haven's need for cash is obvious. We estimate that approximately $9 million would insure the continued operation of the New Haven for another year and finance a modest program of rehabilitation.
Approximately $6.5 million of that $9 million could be made available under the provisions of S. 325.