about twice as great on a revenue basis as on a passenger-mile basis. The reason, of course, is that while railroads must carry all kinds of traffic, the trucks concentrate on the more lucrative, high-rated freight, and the airlines attract the higher-fare first class travel and the more profitable longer hauls. This has a severe impact on the profit margin of the railroads. During the period in which railroads have been subjected to the pressures of growing competition which has been abetted in part by Government aids, they have also felt the impact of inflationary forces on their unit costs of operation. As members of this committee know, the railroads in late 1956 executed agreements with their employees extending over a 3-year period to October 31, 1959. In addition to wage increases made effective November 1, 1956, the agreements provided for increases in wage rates of 7 cents per hour on November 1, 1957, and again on November 1, 1958, plus adjustments in wage rates tied to changes in the cost of living. The substantial annual increases in wage costs, including fringe benefits, which the railroads have had to assume since November 1, 1956, are set out in table IV. May I ask that table IV be made a part of the record? Senator MORSE. Table IV will be copied into the record at this point. Mr. LOOMIS. May I point out the significance of table IV? If in 1959 the same number of service hours are performed on the railroads that were performed in 1958, the increased cost for 1959 would be $886,500,000 greater than it would have been under the rates in effect October 31, 1956, just a little over 2 years ago. (Table IV follows:) 1 Includes increased health and welfare benefits and payroll tax on wage increases. 2 Includes payroll tax on wage increases. Annual cost $264, 200, 000 19, 600, 000 *62.500, 000 251, 500, 000 19, 600.000 82,300,000 167, 200, 000 19, 600, 000 886, 500,000 Thus, since November 1, 1956, the railroads have experienced increased wage costs of $886 million per annum. About $699,300,000 of that total increase in wage costs was fully reflected in operating expenses for 1958; the additional $187 million will be fully reflected in 1959. The proposed legislation before this committee would add another $102 million for 1959, increasing to $228 million per annum in 1969. An increase of the unemployment payroll tax rate to 4 percent would make these additional taxes $130 million in 1959, increasing to $256 million in 1969. Table V sets forth the retirement and unemployment benefit costs to a railroad employer as compared to such costs for other employers, including railroad competitors, who are subject to the Social Security Act and State unemployment insurance laws. May I ask table V be copied in? Senator MORSE. Table V will be put in the record at this point. (Table V follows:) TABLE V.-Comparative employer costs under statutory retirement and unemployment plans for employees working 40 hours per week and earning $4,800 per year in 1959 Based on weighted average wage base of $3,020 and average of 1.6 percent (including Federal tax of 0.3 percent) under State systems as of Jan. 31, 1958. Mr. LOOMIS. You will note in the lower part of the table showing the cost per hour for railroad employees for retirement and unemployment under the present law and for retirement and unemployment under S. 226, in the last column, is the cost per straight-time hour for employers subject to the Social Security Act, and the unemployment act of the various States. For an employee working 40 hours per week and earning $4,800 per year, the railroad employer, under the present law, now pays a total tax for retirement and unemployment purposes of $388.50 per year as contrasted with a total tax of $168.32 for other employers. S. 226 would immediately increase the annual railroad tax to $492 for such employee and the tax would gradually increase to a total of $600 for such employee by 1969. If the tax rate for unemployment benefits, paid entirely by the railroads, should be raised to 4 percent instead of 32 percent as specified in S. 226, the annual tax per full-time employees would become $192 per annum instead of $168 as shown in table V. The total cost for retirement and unemployment would become $516 per employee per year. At the present time, railroad retirement and unemployment taxes are equivalent to 18.7 cents per straight-time hour in contract with 8.1 cents per hour for other employers. If S. 226 becomes law the cost will immediately increase to 23.7 cents per hour. If the unemployment tax rate were raised to 4 percent, it would raise the immediate equivalent cost of 24.8 cents per hour. In 1969 it would become 28.8 cents per hour under S. 226. It should also be pointed out that the employee himself will have to contribute an equal amount to the retirement fund, $324 in 1959, scaled upward to $432 in 1969 and thereafter if S. 226 becomes law. All groups of railroad employees have participated in the increases in wage rates and fringe benefits which have already added so heavily to railroad unit costs. As the inevitable result of the coincidence of increased unit costs and decreased revenues, a sharp reduction in railroad employment has occurred. Railroad employment in 1958 was the lowest reported for the past 60 years. Average 1958 employment was about 20 percent below that of 1955 and 15 percent below that of 1957. The reduction in employment since 1945 is shown in table VI. Senator MORSE. It will become a part of the record at this point. (Table VI follows:) 1945 1950. 1955. 1956. 1957. TABLE VI.-Average number of employees-Class I railroads, 1945, 1950, 1958 (preliminary) – Mr. LOOMIS. The curtailment of employment which has resulted from the squeeze on railroad earnings has been especially pronounced among maintenance personnel. During just the past 2 years of increasing costs and declining revenues, railroads have reduced their employment in the maintenance categories by about 110,000 employees or more than one-fourth. Much work which must eventually be done has been deferred, including both maintenance and capital improvements. Railroads gave heavy repairs to only 178,000 freight cars in 1958, a decrease of 32 percent under the total of 261,000 cars repaired in 1957, and 41 percent under the total of 301,000 repaired in 1956. Freight cars not in service and awaiting repair at the beginning of 1959 amounted to 8.6 percent of total freight-car ownership, compared with less than 4 percent 2 years ago; and the number of serviceable cars has declined so rapidly in the past year that concern has been expressed about the railroads' ability to meet any sudden upsurge in traffic. Freight-car supply was adversely affected also by curtailment of capital expenditures in 1958, and that curtailment has carried over into 1959. Class I railroads installed only 39,000 new freight cars last year, less than two-thirds of the number required to offset retirements, and had only 30,000 new cars on order at the beginning of 1959. Freight-car ownership declined by nearly 21,000 cars in 1958; and this decline, together with the increase in bad-order cars, resulted in a drop of 79,000 cars in serviceable ownership. The freight car repair programs of the railroads should be stepped up to insure an adequate railroad car supply, but they cannot be stepped up unless the necessary money is available. Imposition of increased payroll taxes on the railroads would drain off scarce funds badly needed for maintenance and other essential purposes at a time when the national defense potential of the railroads is already a cause of concern. In this connection, Mr. Chairman, there was a meeting of the National Association of Shippers Advisory Board, at St. Louis, Mo., last week. Those boards are made up entirely of shippers from the various regions of the country, and their principal function is to deal with freight-car supply and potential traffic and requirements for cars. I quote from the report made by the new president of that association, and which was adopted in the form of a resolution by the National Association of Shippers Advisory Board. In my opinion the recommendations of this board should be renewed in the following respect: First, that a minimum of 10,000 new cars per month be placed in railroad ownership; Second, that the total ownership be set at a goal of 2 million freight cars to be reached within the period of 5 years; and Third, that the bad order situation be held to 3 percent of total ownership. These recommendations are being submitted although management may consider the foregoing to be a large order in the face of the low earning experience of 1958. However, now that the Nation is on the road to economic recovery it is only through carrying out the consistent and permanent program set forth in these recommendations that an adequate and servicable supply of all types of equipment can be made available not only to take care of the needs of the railroads themselves; but, also, of an expanding national economy. To proceed: Railroad earnings do not provide an adequate return on the money invested in railroad transportation property. Six percent, while less than that deemed proper for other industries, has long been regarded as a reasonable standard of railroad earnings, but what have the railroads realized in the past 4 years? In 1955 the railroads earned a return of only 4.22 percent in net investment, in 1956 it was reduced to 3.95 percent, further declined to 3.36 percent in 1957, and averaged only 2.76 percent in 1958. Such returns are clearly insufficient to insure an adequate railroad plant to meet the needs of commerce and the national defense. Senator MORSE. Does that apply to class I, or all railroads? To proceed: The decline in railroad earnings from the substandard return of 4.22 percent in 1955 to the wholly inadequate return of 2.76 percent in 1958 simply reflects the inability of the railroads to absorb huge increases in operating costs. Railroads have increased their rates and fares where the competitive situation will permit; they have effected operating economies wherever possible, including substantial cuts in employment; they have borrowed from the future earnings through deferred taxes and deferred maintenance; but they have not been able to avoid this shrinkage in their margin of profit. Mr. Schoene presented to the committee certain statistics of earnings of what he characterized as representative railroads in the various districts of the United States. He commented only on the New York Central, Pennsylvania, Chesapeake & Ohio, and Norfolk & Western, and then stated that he would supplement that with a memorandum. Our copy of the record does not contain such a memorandum and I don't know whether it has yet been filed. But my comments will be based on the presentation that he did make to the House committee, and on the assumption that his memorandum will follow along that line. Senator MORSE. Well, for the record, let it show that if the brotherhood files with the subcommittee any supplemental memorandum, you may supply your supplemental in reply for the record. He showed that the net railway operating income of these so-called' representative railroads and there were 13 of them in the best months of 1958-September, October, and November-showed substantial improvement over the corresponding months of 1957 and compared favorably with those of 1956, and he concluded that the railroads have recovered from the effects of the economic recession to which he attributed their troubles in the early part of 1958. In the Mr. Schoene's showing was misleading for several reasons. first place, the earnings of his "representative" railroads are not representative. Comparing earnings in the 3 months of 1958 with the corresponding 3 months of 1956, Mr. Schoene's selected railroads show an increase of 8.2 percent, whereas all other railroads in the United States had a decrease of 20.8 percent, and class I railroads as a whole show a decrease of 6.2 percent. Returns for the last 4 months of the year, including December which is now available, provide a similar comparison. Mr. Schoene's selected roads in the 4 months of 1958 had aggregated net railway operating income of $213,690,000, compared with $160,778.000 in the corresponding months of 1957, and $199,806,185 in the 1956 months. Thus, these 13 railroads in the best months of 1958 had a substantial improvement in their earnings over those of the last 4 months of 1957, and an increase of 6.9 percent over the 1956 period. However, the earnings of the other 100 class I railroads in the same 1958 period showed an increase of only 5.6 percent over the same period in 1957 period and had a decrease of 19.8 percent. under their earnings in September-December 1956. It should also be remembered that earnings in the period selected by Mr. Schoene were affected only to a limited extent by the substantial further increases in wage costs which became effective in November 1958 and January 1959. I might reiterate here that in 1956, a year which Mr. Schoene appeared to regard as a prosperous one, the railroads earned by 3.95 percent on their investment--a wholly inadequate return by any reasonable standard. I believe this committee should also know that the New York Central and Pennsylvania Railroads, which according to Mr. Schoene have recovered from the effects of the 1957-58 recession, had a rate of return of about one-half of 1 percent in the full year 1958. Based on net investment at the beginning of the year, the New York Central earned 0.59 percent in 1958, compared with 1.49 percent in 1957 and 2.96 percent in 1956. The Pennsylvania return on the same basis was 0.49 percent in 1958, as compared with 1.78 percent in 1957 and 2.77 percent in 1956. Each of these railroads was benefited in July 1958 by receipt of about $1812 million in back mail pay ($37 million for the two roads), and in each case about $5 million was credited to 1958 operations and reflected in net railway operating income. The balance, applicable to prior years, was reflected in net income for the year 1958. I have already stated that the railroads have failed to share in the prosperity prevailing generally in the United States in the years since World War II. Among 73 industries and industry groups for which the First National City Bank of New York compiles and publishes ratios of net income to net assets, railroads in 1957 had the lowest ratio,. |