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and live civilian lives. They are not familiar with military protocol and it is hard to perceive them living under military conditions. However, I don't foresee any objection if the military use the civilian facilities. This would, however, require the hospitals to be staffed by civilians to eliminate any conflict because of rank.

Let me call to your attention again the geographical locations. There were 11,524 people by the 1951 census on the Atlantic side of the Isthmus. Gorgas Hospital is on the Pacific side. Transportation is poor across the Isthmus. Under the heading of economy the medical facilities of Colon Hospital have been consolidated with those of Gorgas Hospital on the Pacific side. Colon Hospital has been reduced to mainly a maternity hospital and first-aid station. Considerable complaint has been made because of the lack of an eye, nose, and throat clinic on the Atlantic side.

Unfortunately for the employee who works on the zone, none of the great advances made by science have moved the Canal Zone out of the tropics. It is true they have developed many great cures for the physical disorders and a few effective preventatives, but the many infections and fevers of the tropies remain on the zone. Yellow fever has practically been eliminated, but every few years turns up in the areas surrounding the sanitated areas. Malaria has decreased considerably in the past few years but only by tight controls. However, the unnamed fevers that put you to bed for several days to 2 weeks prevail. Infection and parasites are natural to the tropics and must be recognized as such. Any 'move to increase hospital costs to the employee will be false economy for two reasons: First, it will increase his cost of living if he continues to use the hospital services as experience has taught white people in the tropics to use them. This will cause the good mechanics to return to the States. Second, if he doesn't use the hospital services as he should, he or his family will always be ailing. Good work has never been produced by an ailing or worried workman. It is good insurance for the company to provide good medical care for their employees. That was one of the things the engineers had to learn before they could build the canal.

ACCOUNTING PROCEDURE

Statements made before Appropriations Committee in prior years indicate that under the original accounting system the Panama Canal returned to the United States Treasury 2.7 percent interest on the capital investment. Public Law 841. 81st Congress, in reorganizing the Panama Canal reduced the capital investment $128 million. This represents the interest during construction. It also set the interest to be paid at 2.05 percent for the fiscal year 1954. Also, Government vessels which had transited the canal free now pay the regular tolls.

The principal source of income for the Company should be derived from its princiral business: that is, putting ships through the canal. The present toll structure was originally established by the Panama Canal Act of 1912 and modified by an act of Congress in 1937. The 1937 revision did not materially change the tolls. It dealt primarily with the method of measurement. This act left the setting of the tolls to the President of the United States with a maximum of $1 per ton for laden ships and a lesser amount for ships in ballast. The tolls were set at 90 cents for laden vessels and 72 cents for vessels in ballast. This rate, which was fundamentally set in 1912, prevails today.

With the rising costs of labor, supplies, and material estimated hy the Governor of the Panama Canal before previous Appropriations Committees to be 79 percent in 1948 and 95 nercent in 1949, the Panama Canal foresaw they could not meet their interest obligations. On advice of a previous Appropriations Committee. the Panama Canal attempted to increase the tolls to $1 per ton, the statute limits. This would have been effective October 1, 1948, by Presidential Proclamation 2775.

This increase was never put in effect. Instead, a committee of the House of Representatives was instructed to investigate and make a full and complete analysis of the financial operation of the Panama Canal.

I appeared before that committee on June 27, 1950, to testify in behalf of the employees. It was beliered at that time that any structural or accounting changes made would not affect the employee materially.

The outcome of this investigation was the enactment of Public Law 841, 81st Congress. Since this time the accounting nrocedure has been shifting costs from the basic business of the canal to the adjuncts.

This shift has raised the cost of living for the employee to such an extent that when rents for quarters were increased, in some cases above 100 percent, the employees were compelled to protest.

The result of this protest was a public hearing before an impartial panel appointed by the Panama Canal Company.

This panel consisted of Prof. Benjamin Kaplan, professor of law at Harvard University, chairman and public member; Dr. Herbert Ashton, Director, Transportation, Communications, and Utilities Division, Department of Commerce, Government member; and Mr. Orrin A. Burrows, international representative, International Brotherhood of Electrical Workers, A. F. of L., labor member. The hearings were held November 17, 18, 19, and 20, 1952, on the Canal Zone. This panel made certain observations and recommendations to the president of the Panama Canal Company on December 1, 1952. The board of directors reviewed these recommendations and, on December 9, 1952, issued a press release announcing that they had adopted 3 of the 4 recommendations. On January 3, 19.73, another press release was made explaining the changes made in the rent structure. The data supplied at this time indicated that if the interest charges were returned on July 1 of this year, the rent for some quarters would exceed that charged before the adjustment.

Further information supplied by the Panama Canal Company indicates that changes have been made in the individual quarter charges. However, in the analysis of the total figures, it appears that the United States rate quarters operation income was decreased $283,452. A decrease of $210,000 interest and $78,414 depreciation was made, but the general administration charges were increased $4,962.

The Panama Canal Company has informed the employees that the $210,000 interest would be added to the United States rate housing operation on July 1, 1953. The Company also stated that they had done everything they could and still be in line with the wishes of the House Appropriations Committee and the Bureau of the Budget.

The rent situation is only a part of the problem facing the employees. However, what is said of rents is also true of all items affecting the employees' cost of living. Therefore, the case presented in the rent hearings is also true of all employee service activities.

I have presented to the clerk of the subcommittee as exhibit A the proceedings of the rent hearings and the exhibits presented to the panel. This is bound in two volumes.

As exhibit B, the recommendations of the panel. We believe this is a fair summation of the material submitted and desire to call particular attention to paragraphs 3 and 4 on page 2; “It seems clear from his [President Newcomer's] publie expressions and from other evidence presented to the panel, that despite President Newcomer's reference to Public Law 841, he did not intend to invite from the Bureau (Bureau of the Budget] an all-costs-including-interest formula for rents on United States-rate housing. His reference to the statute rather seems to have been intended to suggest that the Panama Canal Company should be left free, like a private corporation furnishing housing to its employees, to determine its own rental policy having in view, however, that it must strive to recover costs including interest from its total operations, of which housing is only a small part. In any case, the Bureau of the Budget, desiring a substantial recovery from rents, adopted the formula for Panama Canal Company which has been quoted.

"In a letter dated November 14, 1951, from the Director of the Budget to President Newcomer, commenting on the latter's budget estimate for fiscal year 1953, the Director stated that the approved budget program contemplated that the Company would move more rapidly in making housing for other than local-rate employees completely self-supporting. “The 1953 budget will be presented on the basis that, as a first step toward this goal, rents will be increased sufficiently on March 1, 1952, to cover the cost of maintenance, operation, and depreciation.' As the Director of the Budget later explained, this contemplated deferral for an undetermined period of the requirement for including interest in computing the rates' (see the Director's letter to the Comptroller General, October 21, 1952, exhibit 9)."

Paragraphs 2 and 3 page 6 of the recommendation state:

"Cost elements.-Rents are of course fixed on the basis of projected costs. The Company has presented the cost elements which it proposes under the formula to recover through rents (see exhibit 2). We shall comment briefly here on these elements.

“First there may be grouped (a) maintenance and repair of quarters, including replacement; (b) general services, comprising various direct expenses in«cölnding such items as care of grounds, water, and termite control; (c) division administration, comprising administration of the housing program, including costs of operating rent offices, other housing management expenses, and a share of the cost of the offices of the Director of the Community Services Bureau; (d) general administration comprising allocation of certain indirect expenses called (i) employment costs and (ii) administrative and general expenses. Employment costs are related to benefits going to employees engaged in and about the housing operation-retirement and social-security contributions, death and disability compensation, subsidy on Panama line travel of employees on leave and railroad passes to employees, United States recruitment and repatriation expenses, and repatriation of aliens. Administrative and general expenses are related to expenses for the Company generally, such as finance and personnel bureaus." Paragraph 2, page 7, of the recommendation states:

"With respect to increases in categories (a)-(d), general rising costs play a part. Further, an official explanation (exhibit 6) stresses (among other things ) that no recognition had previously been given to employment costs such as subsidy on steamship transportation, recruiting, and repatriation expenses; that allocations of division and general administrative expenses had previously been nominal and not in accord with sound accounting practice; and that new costs have now been imposed covering the company's contribution to the civil-service retirement system for United States rate employees."

Under discussion and recommendations on pages 9 to 12, inclusive, it states:

1. Alleged relation of rents to canal tolls.—It was urged at the hearings on behalf of the employees that the basic statutory obligation of the Panama Canal Company is to recover costs and interest to the extent feasible out of its total operations; that the Company should be free to make this recovery in any way found appropriate as a matter of sound judgment; that the housing operation need not be made to pay its own way; and that canal tolls, rather than rents, should be the source used for recovering the depreciation and interest charge on United States rate housing. In this connection it was argued that the purpose of the total operation in the Canal Zone was to transmit ships through the canal; that the housing of employees is merely a means to this end; and accordingly that the tolls should pay in substantial part for housing. This argument was related to other contentions about the extent to which the Canal Zone operation is directed to the national defense, the inference being that some part of the cost of the housing operation should be met directly out of the defense budget, or that the cost of other operations should be met out of the defense budget, thus freeing a part of the canal tolls so that they could be applied to cover some part of the cost of the housing operation.

"The terms of reference under which the panel hearings were conducted seem to us to preclude consideration of these lines or argument."

"3. Certain special charges in relation to rents. In the course of testimony by the Company comptroller, attention was directed to the high actual and estimated costs for ‘Division administration' and 'General administration.' In response to the question whether these figures did not suggest that the Company's operations were inefficient, the comptroller stated that the operation in the Canal Zone was definitely more expensive than it would be in the United States. The higher expense results from certain special charges which tend to load costs: The 25 percent difference in salaries of United States-rate employees over Stateside salaries; various leave privileges in excess of those allowed to Government employees in the United States; expenses of initially transporting employees to the isthmus from the United States and repatriating them ; provisions at reduced rates of steamship transportation of employees and immediate families to the United States for leave purposes. There may be other similar expenses. These is also the requirement, relevant here, that the Company pay into the civil service retirement fund 612 percent of the United States-rate employees' wages (a requirement not imposed on ordinary Govern. ment agencies.)” I desire to call to your attention that this 642 percent is in addition to the 6 percent deducted from the employees' salary.

"In applying the formula, the Company would have the United States-rate employee pay these special charges as part of the rents, to the extent that the special charges find their way into the several elements of cost upon which the rentals are based. Thus a housing division United States-rate employee re ceives a 25 percent override in his salary; this is picked up in the cost of the housing division and goes into the computation of the rents for the United States. rate employees. The cost elements in which those special charges are reflected are not only division administration and general administration, but also maintenance and general services. (To a degree they are also reflected in the depreciation and interest figures, for they tend to swell the costs of construction performed by United States-rate employees).

"A serious question is raised whether or to what extent the special charges should be allowed to find their way into the rents for the effect of allowing this, as was said at the hearings, is 'to take back with one hand what is given with the other to the United States-rate employees. There has been a certain whittling away over the years of the special treatment traditionally accorded to United States-rate employees doing vital work in the zone; and it would appear that further invasions should not be made by indirection and without deliberate consideration of their effect. The point need not be labored further; it is appreciated by the Company comptroller who said that he had given it considerable study and contemplated making recommendations on it to the Board of Directors. The panel recommends that the exclusion of all or part of the special charges be considered in connection with the fixing of the proposed new rents.

“The comptroller indicated that a determination of the Board of Directors to exclude any such special charges should be presented to the Director of the Budget with a view to securing a modification of the formula by concurrence of the Director of the Budget and the chairman of the House Appropriation Committee. The Comptroller was not expressing an opinion that such reference and concurrence are legally necessary. The panel cannot express any binding legal opinion on the matter. It is our view, however, that what is involved is not a modification but an application of the formula. When the formula speaks of costs we take it to mean costs reasonably to be attributed to housing in the context of the facts in the Canal Zone, and we believe that this is a matter of application to be decided by the responsible heads of the Panama Canal Company to whom the operations of the corporation are committed. It is idle to pretend that a general catchphrase formula can itself really settle the delicate points; it calls for reasonable application by those on the operating level. It is also idle to pretend that accounting problems may not turn on equitable factors.”

I would like to call special attention to this reasoning as it deals directly with the recommendation I will make.

"Despite strenuous efforts to make all quarters livable, some are now at a standard that neither past administrations nor the present administration can be proud of. It is our view that in fixing the rents of the least desirable quarters, recognition should be given to the fact that there is an outstanding obligation created by a failure of sound planning during past years, to provide better quarters."

I also would like to call special attention to the second paragraph of Mr. Burrows' statement on page 15.

“For my own part, however, I would make one additional comment. The history of the development of the formula does not show to my satisfaction that adequate attention was paid by any of the agencies involved—the Congress, the Burean of the Budget, or the Panama Canal Company-to the special situation and special problems of the Canal Zone. I would, therefore, suggest the advisability of deferring all adjustment of the rents until the matter can be fully studied with the collaboration of employee representatives. This study should take into account the whole position of United States-rate employees as affected by measures which have been taken with respect to them over the years."

RECOMMENDATION I would like to suggest that this committee review this situation and before they report out this section of appropriation bill that they make the following changes :

(Page and schedule reference are made to "Budget of the U. S. Government for fiscal year ending June 30, 1954.)

Delete from employees' service activities schedule B (p. 685): Allocation of administrative and general expenses.

$738, 300 Allocation of employment costs.

371, 100 Depreciation -

1, 043, 100 Allocation of interest..

535, 400

Total...

2, 687, 900

These amounts to be placed, where we believe they rightfully belong, under "Canal activities” schedule B (p. 684). This will increase these figures to: Allocation administrative and general expenses.

$1, 540, 200 Allocation of employment costs.

1, 201, 200 Depreciation--

3,027, 100 Interest

6, 199, 700 This change would also necessitate corresponding methematical changes in other schedules in the proposed budget for fiscal year 1954.

I would like to again point out that this change will not cost the United States taxpayer anything.

I have here a newspaper clipping from the Panama Star and Herald dated March 20, 1953, headed New Traffic Record Set for Panama Canal. In discussing the vessel movement for the first 8 months of the fiscal year 1953, it states: "The amount of tolls and tolls credits for this fiscal year amounts to slightly over $24 million, or nearly $5 million above the 1952 fiscal year figures for the first 8 months. The amount of tolls collected this year exceeds that for a comparable period in 1952 by approximately $3,650,000 while tolls credits are over $1,200,000 higher."

On page 684 of the budget under “Canal activities,” the 1952 actual income from tolls is $26,995,772 and credit for tolls on United States Government vessels is $3,413,727; a total of $30,409,499. The 1954 estimate from tolls is $26,700,000 and credit for tolls on United States Government vessels is $3,400,000; a total of $30,100,000. The 1954 total estimate is, therefore, $309,499 under the 1952 actual figures.

The newspaper clipping indicates the total tolls and credits are approximately $4,850,000 above the 1952 actual figures for the first 8 months of the 1953 fiscal year. Therefore, it appears reasonable to assume that the 1954 estimate is underestimated by $5,159,499.

The recommendation I have made transfers an estimated $2,687,900 to “Canal activities." When this transfer is made the "Canal activities" will show an estimated $2,471,599 more than is indicated in the budget for 1954. Therefore, it appears that this recommended change could be accomplished without changing the toll structure.

I shall be glad to answer any questions I can or furnish any substantiating data the committee desires. I will make myself available to the committee or any of its members at all times.

Mr. HAND. Mr. Riley, we will be pleased to hear from you.

Mr. GEORGE D. RILEY. Thank you. My name is George D. Riley. I am a member of the National Legislative Committee of the American Federation of Labor. I am appearing in support of the position presented by Howard E. Munro, representing the Central Labor Union and the Metal Trades Council of the Panama Canal Zone.

Of particular concern is the matter of depreciation and interest which now are charged to employees of the zone. We maintain that such items rightfully should be charged to the overhead of taking ships through the canal.

I believe your committee will agree that Mr. Munro has prepared and submitted an excellent statement of the facts as they are in regard to life as it is in the Panama Canal Zone. Mr. Munro is our authority on Canal Zone matter. He has lived there and worked there. What he tells you is valuable information in which you can place implicit reliance.

The manner in which employees of the zone have been dealt with strongly suggests that they have been given haphazard treatment which I believe your committee would be well justified in examining in considerable detail. The increase in rents exceeding 100 percent in some cases is an example of what I have in mind.

The habit into which the zone authorities are compelling employees to defray the Government's cost of their part in the civil-service retire

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