! Includes increased health and welfare benefits and payroll tax on wage increases. * Includes payroll tax on wage increases.

This means that if the service hours performed in 1959 equal those performed in 1958, the labor cost to the railroads will be in 1959 $886,500,000 greater than they would have been for the same hours under the rates in effect on October 31, 1956, just a little over 2 years ago.

Mr. LOOMIS. 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 that table V also be copied into the record?

The CHAIRMAN. It will be included in the record at this point. (The table referred to 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

1 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. 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, or 18.7 cents per hour. H.R. 1012 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 H.R. 1012, the annual tax per full-time employee would become $192 per annum instead of $168 as shown in table V. That appears opposite the heading for "Unemployment.'

The total cost for retirement and unemployment would become $516 per employee per year, instead of the figure of $492 shown.

At the present time, railroad retirement and unemployment taxes are equivalent to 18.7 cents per straight-time hour in contrast with 8.1 cents per hour for other employers. If H.R. 1012 becomes law, the cost for railroad employers 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 to 24.8 cents per hour. In 1969 it would become 28.8 cents per hour under H.R. 1012.

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 H.R. 1012 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.

May I ask that that be copied into the record?

The CHAIRMAN. That will be received.

(The table referred to follows:)

TABLE VI.—Average number of employees, class I railroads, 1945, 1950, and 1955-58

Mr. LOOMIS. You will note that since 1945 on a preliminary estimate for 1958 the decline in employment has amounted to 580,000 in round figures.

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 cor 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, let me quote a paragraph from a report to the National Association of Shippers Advisory Boards, which was made at St. Louis last Wednesday and adopted by resolution of the Association of Shippers Advisory Boards. The report states by the chairman:

In my opinion the recommendation 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 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 serviceable 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 expanding nationl economy.

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 on 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.

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, for the Railway Labor Executives' Association, presented certain statistics of earnings of what he characterized as representative railroads in the various districts of the United States. He showed that the net railway operating income of these so-called representative railroads 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.

Mr. Schoene's showing was misleading for several reasons. In the first place, the earnings of his "representative" railroads were not representative. Comparing earnings in the 3 months of 1958 with the corresponding 3 months of 1956, Mr. Schoene's selected railroads showed an increase of 8.2 percent, whereas all other railroads had a decrease of 20.8 percent, and class I railroads as a whole showed 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 1958 period showed an increase of only 5.6 percent over the 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 but 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 $182 million in back mail pay—$37 million for the 2 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.

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, with two exceptions.

All industries studied had an average return on net assets of 10.6 percent. Manufacturing industries averaged 12.8 percent, wholesale and retail trade 10.9 percent, mining and quarrying 9.7 percent, and public utilities 9.6 percent. While 70 of the 73 industries and groups showed average returns of from 4.7 to 24 percent, the railroads' return on net assets was only 4.4 percent. The only two industries having a return less than the railroads were meatpacking and fire and casualty insurance.

I have already shown in table VI how sharply railroad employment was cut in 1958. Other economies effected in 1958 are shown by the record of railroad expenditures for capital improvements and for the purchase of fuel and other materials and supplies required to operate and maintain the railroads.

Such expenditures were cut by about $114 billion in 1958 under those of the previous year. According to the latest estimates of the ICC, railroad capital expenditures amounted to about $740 million in 1958, a reduction of $654 million, or 47 percent under the 1957 total. Other purchases are estimated at $1.2 billion in 1958, down by more than $600 million, or about one-third from the 1957 level.

Such curtailment of spending by the railroads has an adverse effect, of course, on the general economy of the Nation, but it was only by virtue of such curtailment that the railroads were able to protect against even more severe financial distress in 1958.

Recent trends in railroad traffic are shown in table VII. May I have that table copied in the record, Mr. Chairman?

The CHAIRMAN. Yes, let it be included.

(The table referred to is as follows:)

TABLE VII.-Traffic trends, class I railroads, 1955–58

Mr. LOOMIS. Railroads hopefully expect improvement in their traffic volume in 1959. In the first 6 weeks of 1959, however, carloadings of revenue freight were only 1.8 percent greater th..n the depressed level of loadings in the corresponding period of 1958.

As Mr. Schoene pointed out in his appearance before this committee on February 5, the railroads in the postwar years have enjoyed a

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