Tate, James H., Mayor, city of Philadelphia, Pa., statement.

751

Volpe, Hon. John A., Secretary, Department of Transportation, letters of:

December 3, 1970_.

774

December 15, 1970__

776

FAILING RAILROADS

MONDAY, NOVEMBER 23, 1970

U.S. SENATE,

COMMITTEE ON COMMERCE,

Washington, D.C.

The committee met, pursuant to notice, at 10:15 a.m. in room 5110, New Senate Office Building, Senator Vance Hartke presiding. Present: Senators Hartke, Cotton, Prouty, Pearson, and Baker.

OPENING STATEMENT BY SENATOR HARTKE

Senator HARTKE. Good morning, gentlemen.

Although I expect that your presence this morning here means bad news, I am interested to learn what we can about what has happened to the Penn Central in the past few months. Good information and facts have been in rather short supply since this matter began.

The administration could not tell us much when it rushed up here with a very broad measure. It would have made $75 million in guarantees available without much restriction, without limitation, without any understanding whatsoever of the potential clients or people who would qualify for such a loan.

Although this bill was entitled "The Emergency Transportation Assistance Act," I think a better title would have been "Bank Bailout Bill."

Despite Secretary Volpe's assurance that our choice was between the administration's bill or nationalization, and that immediate action was urgent, the Penn Central is still running. We have had some time to study the situation. Things are not as they were represented to be.

It was not enough for the old Penn Central management to run a railroad, to get into real estate developments, golf clubs, beauty parlors, amusement parks, pipelines, and even the air carrier business.

They said the new nonrailroad acquisitions provided the money to keep the railroads running. But the pipeline sprung leaks; the real estate development company has run out of money; and the airplane venture has resulted in violations of Federal law, the second highest penalty in CAB history and millions of dollars down the drain.

The Interstate Commerce Commission has been working for 4 months to try to figure out what happened. Last Thursday, the Commission sent up a letter to the chairman of this committee showing that the subsidiaries had not brought in cash to keep the railStaff members assigned to these hearings: A. Daniel O'Neal and John Cary.

road running. Instead, the railroad, short of cash for years, continually growing shorter, depleted its cash by $153 million in order to diversify. If you add up the interest costs, the total is $209 million. $209 million in cash spent to get into the nonrailroad business. In my opinion, if that money had been kept in the railroad, the Penn Central would not be in the condition it is today. It was the railroad that provided the cash for the subsidiaries, not the other way around.

I personally, and I do not believe anyone that I know of in the Senate, wants the Penn Central to stop operating. But we don't want to bailout just anyone out of this mess.

I expect that the public will in turn demand that the railroad keep its service going. So we have an obligation to be cautious in committing taxpayers' money to a private corporation. Our only justification for doing so is to preserve an essential public service. It is for this reason that I am hopeful we can have some information today which will not alone be of help to us in making our future decisions, but also to clarify what are obviously either some misrepresentation or some misinterpretation of facts. Mr. WIRTZ?

STATEMENT OF WILLARD WIRTZ, ACCOMPANIED BY GEORGE P. BAKER, RICHARD C. BOND, JERVIS LANGDON, JR., TRUSTEES; WILLIAM H. MOORE, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF THE RAILROAD; JOHN GUEST, FINANCIAL CONSULTANT AND GENERAL PARTNER IN KUHN, LOEB & CO., S. H. HELLENBRAND, VICE PRESIDENT-REAL ESTATE AND TAXES AND PRESIDENT, THE PENNSYLVANIA CO.; ROBERT BLANCHETTE, COUNSEL FOR THE TRUSTEES

Mr. WIRTZ. Thank you, Mr. Chairman.

May I first introduce the witnesses here today.

There are eight of us at the table, the four trustees: at my left, Mr. Bond, at my right, Mr. Langdon and Mr. Baker.

In addition, Mr. Moore, the president and chief executive officer of the railroad, and at the far end of the table, Mr. John Guest, partner in Kuhn, Loeb & Co. Two places to my left, Mr. Hellenbrand, who is the vice president of the railroad in charge of real estate and taxes and is also president of the Pennsylvania Co. At the far end of the table, Mr. Robert Blanchette, counsel for the trustees.

I think there is probably no need in introducing the trustees individually in terms of this background. Let me simply say that at least the other three come here with a very considerable background and familiarity with the field of finance and particularly with the field of the railroads.

I should also refer to the fact that the most important person in this picture as far as the trustees are concerned, is, of course, Judge Fullam of the U.S. District Court for the Eastern District of Pennsylvania.

We are trustees responsible in our stewardship to the court, and he shares fully the view that we should present here the complete information about this matter.

With respect to our plan of presentation, Mr. Chairman, members of the committee, with your leave we would file for the record the very long statement which we have here, which has gone into considerable detail.

Senator HARTKE. The entire statement will appear in the record and you may highlight such provisions as you wish.

Mr. WIRTZ. I will do that and in the questioning we will turn to the various trustees if the questions that are raised fall into their area of competence and familiarity.

Mr. Chairman and members of the committee, we have taken the risk of oversimplification which is involved in presenting this matter in its general terms. It is an involved situation and we feel we can best serve your interests by summarizing as you have suggested.

We will do three things. First, summarize the situation at Penn Central, then indicate those measures of self-help which appear to be indicated, and finally, suggest certain elements of additional assistance, which we feel are imperative to revitalize the railroad.

There are three points of terminology I should clear up very briefly and at the outset.

The first involves the phrase Penn Central. There is attached to the statement attachment No. 1 a chart, which shows this complicated Penn Central structure in its broadest outlines. The one corporation which is in reorganization, and of which we are trustees of the debtor estate is the Penn Central Transportation Co.

Very quickly, there is above in corporate hierarchy, the Penn Central Transportation Co., the holding company, the Penn Central Co. We have no control over its affairs, it has as a practical matter,

none over ours.

There are technical points of importance, but we are talking about Penn Central Co. The Penn Central Transportation Co. has one very important subsidiary, along with a number of others, important in the sense that it presents problems of the kind to which you referred in your opening statement.

It is the Pennsylvania Co. that holds in one way or another, most of those nonrailroad assets to which you referred. We hold, the Transportation Co. holds 100 percent of the common stock of the Pennsylvania Co. There is preferred stock which is publicly held. Technically, Pennsylvania Co. is a separate corporation, but we do not say that to in any way suggest any lack of or limitation on responsibility as far as we are concerned there.

So it is just roughly the holding company, Penn Central Co. here, the Penn Central Transportation Co. which is referred to in this testimony as PCTC, which is the corporation in reorganization. It is the old Pennsylvania Co. and New York Central brought together. It is the corporation which is in bankruptcy and then below that the Pennsylvania Co.

Now, the second point of terminology which ought to be cleared up is that there are two sets of figures which run all of the way through this testimony. We have got to use both of those figures.

We have on the one hand the profit and loss figures which show where we would stand today if we were not in reorganization. So that would assume we are paying all of our taxes, we are paying our debt, and so on. Thost profit and loss figures, which are in some places referred to here as accrued figures, give you a picture of where this corporation would be today if it were not in bankruptcy and reorganization.

The other set of figures has to do with our cash flow situation. Now our cash flow is affected by the fact that a number of these payments are being deferred now, because we are in reorganization. În immediate terms, of course, it is the cash flow figure which is of particular importance to us; that is the figure that determines whether we are going to stay alive or not. But, there are those two sets of figures.

Then the third point which should be cleared up in connection with the figures and which is dealt with carefully as we go along, involves the fact that there is presently pending a wage increase recommendation. An emergency board held hearings, issued a report, and that board has recommended wage increases for 1970 retroactive to the first of the year. Some of them wage increases for 1971 and for 1972. And we have tried to indicate the extent to which those recommendations are or are not included.

So there are those three points of clarification as far as terminology is concerned.

Now we will go over the whole picture, but make clear at the outset, Mr. Chairman and members of the committee, the key elements in our approach to this situation and the first to which you referred is the Penn Central, is obviously in grave difficulty.

The two sets of figures which suggest that are these: We will run out of cash as nearly as we can determine the facts, we will run out of cash or come down just about to the zero basis at the end of the first quarter of 1971. The other figure which suggests the degree of the difficulty in which we find ourselves is that our losses, figured on an accrued basis, which means if we were paying all of our taxes, debt, and the wage increases, our losses in this year, 1970, would come to over $300 million.

Those are historic figures. We would have been here earlier if we would have been in a position to say exactly what these figures are with our full confidence. We are here now because it is our judgment those are the fair reflections.

The second key factor in this situation is in our judgment there are very real prospects for improving this situation.

If I started with a dichotomy to which you refer, between good news and bad news, we couldn't avoid your classification and yet we think it is good news that we know what the truth is.

I guess it would be a mistake to say the truth will make us free here. It will make us pretty expensive.

But, on the other hand, we do have facts and they are facts which lead us to no sense of hopelessness at all. We see the figures we have just given you in this perspective. Our operation, the one about which we are talking here, is so vast, that if we could improve the relationship between what comes in and what goes out by 12 to 15 percent, then we would meet at least our imperative needs. That is our goal.