Because of the fact that the railroads have a higher wage ratio than manufacturing industries, an increase in the wage cost of the railroads creates more than twice as much pressure on railroad rates if the cost is to be recovered, than that which is created on prices by a similar increase in a manufacturing industry.

The railroads are caught in the vise of higher operating costs and increasingly intense competition from other forms of transportation. Table V portrays the declining participation of the railroads in the intercity freight service.

(Table V follows:)

Source: Estimates and reports of Interstate Commerce Commission.

Mr. MONROE. In 1945 the railroads performed 67.3 percent of the total intercity freight traffic, but in 1955 that ratio had fallen to 49.4 percent of the total.

Motortrucks show a directly opposite trend. Their ratio increased from 6.5 percent in 1945 to 17.7 percent in 1955. Traffic on inland rivers and canals shows a trend similar to that of motortrucks. Traffic on the Great Lakes has lost ground, but oil pipelines have increased their relative share.

The railroad proportion of total commercial passenger traffic fell, also, from 72.9 percent in 1945 to only 36.4 percent in 1955. Air carriers handled only 2.7 percent of the intercity passenger load in 1945, but by 1955, their ratio had grown rapidly to 29.1 percent.

Senator MORSE. One question for information on definitions. That last sentence:

Air carriers handled only 2.7 percent of the intercity passenger load in 1945 * what is the significance of the term "intercity"?

Mr. MONROE. That excludes, Mr. Chairman, passengers in private automobiles.

Senator MORSE. I see.

Mr. MONROE. The increases in freight rates and passenger fares which the Interstate Commerce Commission authorized in 1956 and 1957 have not improved the inadequate level of railroad net earnings..

Thus, the railroads are faced with the necessity of conserving their revenues to meet heavily increased wage costs already realized or contracted for, and are in no position to carry such excessive costs as would be imposed upon them by the legislation here under consideration.

During the course of hearings before your subcommittee on March 14, the chairman indicated that he would like to be advised as to the benefits the railroads have received in recent years from accelerated amortization.

Under section 124A of the Revenue Act of 1950, which was designed to stimulate the construction of facilities for national defense, industry was authorized, for tax purposes, to amortize the cost of such facilities over a period of 60 months. That provision was made effective January 1, 1950, and the railroads were enabled to secure rapid tax amortization for the period to December 31, 1955, on certain facilities installed or firm orders placed by that later date.

Thus, since January 1, 1950, the railroads have derived the following amounts of "tax deferrals" through authorized rapid amortization of certain facilities:

1951. 1952

1953

Millions of dollars

41. 0 1954. 97.6 1955. 146. 41956.

Millions

of dollars

148.8

179.2

180.2

It should be made clear that these taxes have not been avoided, but the time of their payment has merely been deferred. In the future it will be necessary for the railroads to pay income taxes on earnings— if they have any net income at all-which do not take into account normal depreciation charges on certain property then being utilized. While accounting procedures prescribed by the Interstate Commerce Commission have required the railroads to include resulting tax credits in their accounts as though they were current earnings, the carriers are not permitted to make the amortization charge to operating expenses. Thus, operating expenses include only normal (full service life) depreciation rates, while tax accounts reflect the reductions resulting from accelerated amortization. When the period of accelerated amortization for certified defense facilities is over, annual operating expense accounts will still include normal depreciation charges, but such charges will not then be available as deductions from taxable income. The tax credits which are now being taken will then become tax liabilities.

Therefore, evaluating the earnings of the railroads in 1951 to 1956, it must be borne in mind that the net railway operating income is overstated to the extent of the income tax credits, amounts which have been borrowed from the income of future years.

The more significant figures in regard to the earnings of the railroads for recent years are those excluding the amount of tax deferrals. The rates of return on net investment are as shown in table VI.

(Table VI follows:)

TABLE VI.-Rate of return on net investment, railways of class I in the United

Mr. MONROE. I might say the rate of return as reported for 1956 was only 3.95 percent, but excluding the tax deferrals, it drops to 3.29 percent.

As the railroads are not in a position to assume unwarranted increases in operating costs, they urge that your committee do not favorably report S. 1313, but give consideration to the necessary financing of the cost of the 10 percent increase in benefits provided last year. Also, we urge your consideration of the amendments to the Unemployment Insurance Act presented by Mr. Calhoun.

Senator MORSE. I wonder if my friend from Colorado would permit me to ask a couple of questions. I have to go to a meeting and then I would like to have the Senator from Colorado finish with the witness after I have left. I won't be too long.

Let it be understood that after the Senator from Colorado finishes his questions, we will resume again at 2 p. m. with Mr. Schoene as the witness for the brotherhoods.

I was interested, Mr. Monroe, in your discussion of your wage negotiations and new contracts for the coming 3-year period. My first question is: Did you, during those wage negotiations, discuss at all any of the provisions that the brotherhoods subsequently asked for

in S. 1313.

Mr. MONROE. I believe in my appearance before one of the boards, Mr. Chairman, I did mention the fact that they were before this Congress asking for increases under S. 1313. I don't know if we had a number at that time.

Senator MORSE. Was there any attempt in those negotiations to get the brotherhoods to enter into any agreement that they would not make any of the demands that we find in S. 1313, or was the wage agreement entered into on the part of the carriers with full knowledge of the brotherhoods' intention to press for such demands?

Mr. MONROE. Mr. Chairman, the pattern agreement was set well in advance of the submission of a bill before this Congress.

Senator MORSE. Would it be fair to say, then, that when the carriers entered into the final agreement there was no contemplation on the part of the carrier negotiators that the brotherhoods would proceed to seek legislation in the nature of S. 1313?

Mr. MONROE. We knew nothing about it at the time the agreement was made with the nonoperation organization and the firemen back in November 1956.

Senator MORSE. Would it be fair to say, then, you were taken by surprise when S. 1313 was introduced by the request of the brotherhoods?

Mr. MONROE. Personally, I was taken by surprise. We thought a bill would be presented merely to provide for financing benefits legisiated last year. I was surprised at the increase requested.

Senator MORSE. Would the reading of your wage negotiations, if one were available, disclose that the carriers made a record which would justify the conclusion that the brotherhoods understood that it was not to be expected that any of the requests made in S. 1313 would be subsequently made?

Mr. MONROE. No, sir.

Senator MORSE. Would I be justified in my assumption, Mr. Monroe, that unless you specifically raised the issue in your negotiations that sought an understanding from the brotherhoods that they wouldn't raise such issues, that the carriers could at least be charged with the knowledge, based upon past experience with the brotherhoods, that they would be perfectly free to go ahead and make these requests outside the terms of the new wage agreement?

Mr. MONROE. Well, the new wage agreement, of course, had nothing to do with this bill before the Congress. I said the pattern of the agreement was consummated long before action was taken here. We did realize and had in mind that we would probably be faced with an increase in the payroll tax to take care of the benefits of last year. That is as far as I think we went.

Senator MORSE. That is the point I wanted to make a record on here. I find that, until I have more information on what happened in negotiations, it is difficult to believe that when you negotiated the wage pattern you didn't have reason to believe on the basis of your past negotiating experience with the brotherhoods that anything that wasn't encompassed in that agreement would be a subject matter which the brotherhoods would be perfectly free to obtain legislation

on.

Mr. MONROE. You must realize, too, Mr. Chairman, I was not on the negotiating committee.

Senator MORSE. I understand that, but I am making these points based upon your testimony, as to what you said about the additional wage cost under the pattern agreement and the additional costs that would be a burden to the carriers if S. 1313 in its present form would be adopted. It seemed to me that testimony might be subject to interpretation if we don't make the record-I am now talking about the possibility that the carriers feel that maybe they were taken a little advantage of in the wage negotiations because they thought that when they had finished the wage negotiations, except for the matter of financing last year's negotiations, that they were through with additional costs and as far as the labor bill was concerned for the next years. You and Mr. Calhoun have pointed out, and I think rightly so, much of the cost of S. 1313 in its present form is to be considered as labor costs, but I want to first find out whether or not you think that there was any failure on the part of the brotherhoods to deal with the carriers in good faith on this matter.

93396-57-25

Mr. MONROE. Well, all I can say, Mr. Chairman, is that we knew nothing about this bill until the Monday before its submission to the Congress.

Senator MORSE. You had no idea that there was a movement on foot to seek to obtain such benefits as we find in this bill? Did this all come as a complete surprise to the carriers?

Mr. MONROE. It did to me.

Senator MORSE. Do you think it did to the negotiators for the carriers? Of course some of the provisions of S. 1313 are carryovers from past demands of the brotherhoods, so you did have that on record and a good many of their railroad periodicals in recent years have certainly set these goals up as objectives of the brotherhoods. You have seen that come out; isn't that true?

Mr. MONROE. I know, Mr. Chairman, but the retirement bill of last year granted an increase of 10 percent in benefits and we thought that would be satisfactory for at least awhile. We didn't expect it every

year.

Senator MORSE. Let me tie my point of view down to this comment: Let the record show if I thought that the carriers pleaded good faith and negotiated a 3-year wage pattern agreement with the brotherhoods, based upon any agreement, expressed or implied, that that was going to be the totality of the brotherhoods' request, except for the qualifying limitations you have expressed, and that you realized that something had to be done to finance the bill that was passed last year, then I would have a somewhat different attitude towards considering these requests than I would if the record showed that the carriers were not taken by surprise, that they just didn't include it in negotiations, that they did not attempt to get any comment on the part of the brotherhoods as to these benefits which, as I have said, I think would have to be considered as a part of the labor costs, and they didn't seek to get any commitments from the brotherhoods on them in their negotiations of the so-called pattern.

Mr. MONROE. I don't think that there is any reason to endeavor to secure any commitments. I said I wasn't on the negotiating committee, but I would see no reason why they should secure any commitments, for they just got benefit increases last year and we knew that some financing had to be done to take care of that increase.

Senator MORSE. I see no reason for discussing it unless you had knowledge that the brotherhoods were thinking in terms of benefits over and above what were encompassed in last year's bill.

Mr. MONROE. We had no knowledge of it.

Senator MORSE. One other question. I have Mr. Bevan's statement here, and his exhibit Q-I am only asking for information-I want to call your attention to chart Q contained in the Bevan statement. It deals, Mr. Monroe, with financing of the so-called "equipments." Isn't it true that in recent years the railroads spent very substantial sums in amounts of interests on "equipment trusts" and this chart Q shows from 1956 to 1965 a considerable amount of interest for these equipment trust holders, which are somewhat like bondholders, are they not? It shows that they are getting in interest far in excess of what your stockholders are getting in dividends and this is all carried as costs. Is this not, however I speak loosely for descriptive purposesis this not a form of income as far as these equipment trusts and bondholders are concerned, while they are getting substantial interest payments?