terstate Commerce Commission because, in 1958, the Department of Transportation was not in existence and the only agency we had to work through was the Interstate Commerce Commission. Senator HARTKE. Thank you, Mr. Chairman.

I would say that the Penn Central was one of our giant corporations; today it is bankrupt. I have some ideas as to why and how this happened, and as far as I am personally concerned, I intend to do everything I can to ascertain every significant detail before we are through. My principal concern today, however, is to make sure the U.S. Government, through the instrumentality of this committee of the U.S. Senate, knows exactly what is happening in a bankruptcy of this kind and I hope we can find out from the court on a day-to-day basis.

The Congress wrote the bankruptcy law; we are now being asked to dole out vast sums of money to support the transportation industry. I think we owe an obligation to the millions of people affected by this bankruptcy directly or indirectly to keep posted on a day-to-day basis as to exactly what happens. The Bankruptcy Act of 1938, which I have reviewed in detail, made some significant changes and I hope the court will follow the general outline of the intention of the policies at that time.

I do think that there is one other aspect, Mr. Chairman, to be put in perspective here, and that is the fact that we are just now seeing an attempt by the House of Representatives to concern itself with the Hill-Burton Hospital Construction Act and the Labor and HEW appropriations bill earlier this year, both of which were vetoed. Now we are being asked to put the full faith and credit of the Congress of the United States behind a measure to improve the credit position of a bankrupt railroad which has been plagued with management problems and which allegedly has $7 billion in assets.

I think this raises some interesting questions and I hope we can get into these as we proceed.

The CHAIRMAN. They raised some interesting questions for the chairman for about 6 months last year when they vetoed the HEW bill.

Senator PASTORE. Will the chairman yield for a moment?

The CHAIRMAN. Yes.

Senator PASTORE. One thing disturbs me. I have read Mr. Volpe's statement, and understand the bill that was introduced by Mr. Cotton gives a wide range of authority to the Department of Transportation. It will be up to you, Mr. Volpe, to determine who should receive a loan and who should not receive loan. And then you have to call upon the Treasury Department to give you the money that you are guaranteeing in case of default.

Secretary VOLPE. Only in the case of default.

Senator PASTORE. Up to the tune of $750 million, over a period of 5 years.

Now I read in the paper only the other day, and correct me if I am wrong, that in the squabble between Mr. Saunders and Mr. Gorman, Mr. Saunders stepped out with a retirement pension of $144,000 a year.

Now the question that occurs to me, where does this money come

from? I would hope during the progress of these hearings we could determine some of this. I mean, who is paying for this pension? Where is the money coming from, who are we trying to help and why are they in the difficulty they are today if that is the extravagance that has been exercised on the part of the officials who have been around here with their hats in their hands trying to get Federal

money.

Senator HARTKE. I would like to say to Senator Pastore, in line with that pension concern, that was one of the reasons I am so concerned about the bankruptcy. What is going to happen to the pension rights of the employees, the vast number of people; are their rights going to be protected?

This is a serious problem in relation to the bankruptcy hearing. That is why, Mr. Chairman, I have indicated that I hope that some place along the line, not alone the Interstate Commerce Commission which is an arm of the Congress sometimes I wonder how strong— but this committee also sought to be kept informed on a day-to-day basis what is happening in that bankruptcy.

The CHAIRMAN. Let us make some short statements here and hear from the Secretary and then we will have some questions.

Senator Cotton?

Senator COTTON. I have some questions but I would like to hear from the Secretary first and question him afterward. That is usually the way we proceed.

The CHAIRMAN. Yes. I thought you might have a preliminary

statement.

Senator COTTON. No, I don't want to shoot off until I

The CHAIRMAN. Until you know what you are aiming at.
All right.

Mr. Secretary, you go right ahead. We know that you have been over in the House testifying yesterday and this morning, so you can go right ahead with your statement. And will you identify the people with you for the record?

STATEMENT OF HON. JOHN A. VOLPE, SECRETARY OF TRANSPORTATION, DEPARTMENT OF TRANSPORTATION; ACCOMPANIED BY JAMES M. BEGGS, UNDER SECRETARY OF TRANSPORTATION; CHARLES D. BAKER, ASSISTANT SECRETARY OF TRANSPORTATION; AND CARL LYON, DEPUTY ADMINISTRATOR OF THE FEDERAL RAILROAD ADMINISTRATION

Secretary VOLPE. Thank you very much, Mr. Chairman, and members of the committee.

On my left is my hardworking Under Secretary, James Beggs; on my right, Assistant Secretary Charlie Baker; and to Mr. Beggs' left, Carl Lyon, the Deputy Administrator of the Federal Railroad Administration.

I want to express my gratitude for this opportunity to discuss with you S. 4011 and companion measures, which would authorize the Secretary of Transportation to guarantee loans to railroads.

One only has to look at the current headlines to see that all is not well with the railroad industry today. Going behind the head

lines, it is not difficult to demonstrate the serious financial condition of the industry:

1. The margin of net operating income to gross has deteriorated markedly since 1966 when it was 8.2 percent. It is now down to about 4.5 percent, little better than the 4 percent of the critical period of 1960-61.

2. Financial strains are reflected also in net working capital, which has declined steadily since 1963. Net working capital in that year was $828 million. By December 31, 1969, this figure had dropped by almost $800 million-reaching a low of $58.4 million. If any single statistical trend captures the essence of the industry's financial problem, it is this one.

3. In recent years, cash flow from retained income and depreciation/retirement charges has provided for only about 60 percent of gross capital expenditures. The remainder has come principally from additional borrowing for equipment and drawing upon working capital.

4. Equipment obligations outstanding increased from $2.5 billion at the end of 1962 to $4.2 billion at the end of 1968, or by almost 65 percent over this period.

Comparing 1969 to 1968, there was a 10-percent drop in net income; operating revenues were up 5.4 percent to a record of $11.5 billion, but operating expenses rose 5.6 percent to a record of $9.1 billion; and net railway operating income for 1969 was off about $24 million. Twenty-one of the 74 class I railroads showed deficits for 1969. Let me repeat that, 21 of the 74 class I railroads showed deficits for 1969. Of these, 14 railroads are in the eastern districts. six in the west, and one in the south. The results for the full year 1969 were worse than 1968; and the industry entered 1970 in no better financial condition than in the preceding year.

One of the best indicators of the health of the industry is the rate of return on investment. This is true in any industry. From a postwar high of 4.22 percent, the rate of return reached a postwar low of 1.97 percent in the recession year of 1961. From that low, the rate of return rose to a high of 3.9 percent in 1966. Since 1966, it has steadily dropped, reaching 2.38 percent in 1969.

While the general health of the industry is disturbing, I should not leave the impression that all railroads are in severe financial straits. Obviously, if 21 of the 74 class I railroads showed deficits for 1969, 53 either broke even or showed a profit. We are dealing with a national system, however, and the effects of disturbances any place in that system are felt throughout it.

Taking the Penn Central Railroad as a case in point, 21 percent of all freight cars loaded pass over the Penn Central, and 70 percent of Penn Central traffic involves other railroads.

This traffic moves either from the Penn Central to another road or from another road to the Penn Central. When one considers that of total intercity freight movements the railroads move 66 percent of our food, 84 percent of our lumber and wood products, 73 percent of our pulp and paper, 66 percent of our primary metals, 69 percent of our transportation equipment, and 58 percent of our chemicals, we can appreciate the role of the Penn Central Railroad in the efficient functioning of our entire railroad system.

If traffic moves inefficiently over this road, the loss may be felt by every other railroad. If for any reason traffic were to stop moving over this road, it would result in loss of employment and revenues not only to the Penn Central but to many other railroads and the industries they serve.

You have all seen or heard the railroad commercials and I would have to agree that we do all need the railroad. In 1969, the railroads carried 780 billion ton-miles of freight, or an increase of 34 percent over the 580 billion ton-miles carried in 1960. I should note that notwithstanding this gain, the railroads' share of traffic is declining as a result of strong competition from other modes in the last 20 years their share of total has dropped from 56.2 percent to 41.2 percent.

Looking to the future, we estimate that by 1980, the railroads will be carrying almost 43 percent more freight than they carried in 1969, or well in excess of 1 trillion ton-miles. The railroads will continue to be by far the largest single mover of intercity freight.

No other modes of transportation singly or in combination could conceivably fulfill the role of the railroads. In fact, the other modes will have their hands full meeting the projected demands for their own services. There can be no question, if we are to move efficiently the goods necessary to meet the needs of this Nation, we must maintain a healthy railroad industry. Our projections are based on the assumption that we will.

Without attempting to identify all of the problems facing the railroads today, and which must be overcome, I would like to mention a few some of which the administration and the Congress are attempting to deal with. We urgently need to improve rail passenger service and, at the same time, relieve the railroads of the very heavy passenger service deficits they are currently experiencing.

I might add I would like to pay tribute to this committee and the Members of the Senate for the very expeditious way they handled the bill and, on a completely bipartisan basis, passed the bill, if I remember correctly, by 77 to 3, which is a pretty good vote anytime.

The CHAIRMAN. Well, that is par for the course for this committee. I think we ought to say there that we are very hopeful that this will relieve some of the problems we are talking about. But it is down the road. It just can't take hold for another year or year and a half.

Secretary VOLPE. That is true.

The CHAIRMAN. It is going to be a gradual thing, but it ought to be very helpful; we hope it will be.

Secretary VOLPE. Yes, we could improve railroad finances almost immediately by prohibiting discriminatory State taxation.

Improving railroad safety is another matter of great urgencyand the accident at Crescent City early this week underscores the need. While there may be short run costs to the industry in meeting higher standards of safety, there should be very substantial longrun savings. I again commend this committee for dealing affirmatively with this problem.

Finally, I would mention the problem of freight car shortages. The Department and the ICC are now examining the ways by which this problem might be attacked and solved.

These actions will all help improve the financial condition of the railroads, but more is needed. Last week, the administration forwarded to the Congress one of the bills before us this morning. which would authorize the Secretary to guarantee loans to rail carriers to aid them to meet temporary and urgent financial requirements.

The very serious financial condition of the Penn Central Railroad. as well as several other roads, prompted the legislation. Because of the uncertainty as to whether the administration's bill would be promptly enacted, the Defense Department's interim loan guarantee was not forthcoming.

As you know, the Penn Central thereupon on Sunday, filed for reorganization under the Bankruptcy Act. I do not believe that this fact has lessened the need for the authority we seek.

The Penn Central needs cash. We would hope that trustee certificates providing the necessary cash could be sold without a Government guarantee, but the consequences of any failure to raise cash make it imperative, in my view, that the guarantee authority be available to be used if needed.

I do not wish to imply that passage of the legislation would assure a guarantee to the Penn Central or any other railroad. In this and every other case, the request for a guarantee will be carefully scrutinized and made only if there is a reasonable chance for repayment of the loan.

The problem is not simply the Penn Central. Several other railroads are now experiencing financial difficulties and their condition could deteriorate. Should situations arise where the timely guarantee of a loan by the Government might avoid a financial crisis such as that being experienced by the Penn Central, the authority to avert it should be at hand. And that authority is contained in S. 4011.

Very briefly, S. 4011 would authorize the Secretary to guarantee a loan to a rail carrier for the purpose of meeting its temporary and urgent financial requirements and we would assure that the funds were used only for railroad purposes.

The loans guaranteed could not exceed the interest rates established by the Secretary and could not extend beyond 15 years from the date of issuance.

The outstanding aggregate amount of all loans guaranteed could not exceed $750 million. A guarantee fee would be charged in connection with each loan. A rail carrier receiving a guaranteed loan could not declare a stock dividend without the consent of the Secretary.

This flexibility in the payment of dividends is necessary to cover the situation where dividends are paid to a parent railroad company by a subsidiary. We would not want to cut off this cash flow.

In the event of default on a guaranteed loan, the Secretary would make good on the default by borrowing from the Secretary of the Treasury. The Secretary's authority to guarantee loans would expire 5 years after the date of enactment. In both form and substance, this bill, as the chairman indicated, is quite similar to the 1958 law granting authority to the Interstate Commerce Commission. As you know. that authority expired in 1963.

One of the major differences between the administration's pro