LIABILITIES-CONTINUED Reserve for injuries and damages__. Reserve for track removal and paving_. Special court-ordered reserve_. Unamortized excess of original cost of properties over cost to D.C. Transit_ Capital stock, 5,000 shares. Retained earnings--- Total liabilities.. $2, 026, 049. 38 752,771.55 453, 588. 41 1,885, 661. 68 500,000.00 3, 385, 405. 96 37, 358, 567. 06 The asset of "Real estate and other rental properties" includes properties no longer used for operations, such as a substantial portion of the headquarters building at 3600 M Street, N.W., which is rented out, the Maryland right-ofways to Glen Echo and Riverdale, the Gary Street powerhouse used for cable cars, and four or five other buildings now considered surplus. The values used are the original costs, less depreciation as indicated. The asset of "Investment in subsidiary companies" consists of the value of the stock issued to D.C. Transit in exchange for certain properties retired from operations and transferred respectively to subsidiaries. One such subsidiary is the M Street Estates, Inc., which has the old streetcar shop in the 3200 block of M Street, N.W. Another is Georgia Avenue Estates, Inc., which has the old Central Garage located across from the Griffith Stadium and formerly used to house and service up to 110 buses. This building is now rented to the U.S. Post Office Department. Another is the Fourth Street Estates, Inc., which took the old streetcar house at 4th and T Streets, N.E. This building has been rented recently to a wholesale drug firm for $10,000 yearly. Still another subsidiary is the L Street Estates, Inc., which has the Navy Yard streetcar yard, which is now rented to the U.S. Government for warehouse space. All of these properties were in the package bought from Capital Transit and paid for from fares collected by D.C. Transit. The values used were book values, i.e. original cost less depreciation, at the dates of the transfers. No dividends have been paid to D.C. Transit by any of these subsidiaries. Their cash balances total $50,908.73. There is an additional cash balance of $422,224.89 in a fifth subsidiary, the WV&M Coach Company. These five companies have raised and loaned a total of $941,007.78 to other companies owned by D.C. Transit of Delaware, which amounts are listed as Accounts Receivable. These amounts are thus assets of D.C. Transit of D.C. and arise from the Capital Transit assets purchased and paid for out of operating revenues since August 1956. Service Important to Everyone Witnesses at the hearings indicated a consensus that efficient, economical mass transportation is essential for the welfare of the city and all of its parts. The Assistant Secretary of the Department of Housing and Urban Development stated: "Nor are the benefits of a good public transportation system limited to those who actually ride it. They inure to every single citizen. Taxpayers are advantaged if land remains on the tax rolls, instead of being used for highways, and if construction, maintenance and policing costs are reduced. Employers need to be able to draw from a large pool of available labor. Commercial enterprises must be accessible to the largest possible number of customers. Cultural activities starve if patrons are unable to reach them . . . . Finally, every person who chooses to drive an automobile benefits if congestion and inconvenience are slashed." WMATC said, January 26, 1966: "Increased usage of public transportation facilities benefits everyone." Downtown Progress wrote the Citizens Council: "We are in complete agreement that good mass transit is essential to the revitalization of downtown Washington." The League for Universal Justice and Goodwill testified: "The bus system is an indispensable necessity, not only for a large part of the citizens of the District of Columbia, but for all citizens." Downtown Progress filed a subsequent statement which said: "1. Good mass transit is essential for a healthy community; "2. The transit system must meet the needs of low income people who have no other choice in transportation and it must also attract those who do have a choice." The Democratic Central Committee testified that good bus service, sometimes at less than cost, is a "deserved convenience for our citizens; it is also essential. for the maintenance of the inner city and of downtown Washington." The Executive Director of the United Planning Organization testified: "Mass transit services in this city are not adequate to serve the needs of the public. Low-income families and the unemployed are particularly disadvantaged by our inadequate public transportation system. . . . A goodly number of jobs exist in suburban areas at moderate wages which can not be filled because people who need jobs can not get to them in a reasonably satisfactory manner. "My own feeling is that a good deal of the expense to the city in terms of welfare and other costs could be reduced if transportation were improved to facilitate the movement of the poor around the metropolitan area to serve their employment and service needs." The Metropolitan Board of Trade, through its Executive Vice President, said: "Business leaders of this community, through the Board of Trade, are, of course, intensely concerned about suitable local transportation facilities. They are also deeply involved in making plans for the preservation and improvement of the central city. . . . Good surface bus lines are very much needed to feed and supplement in local areas the service which will be rendered by the mass transit system. We, therefore, recognize our responsibility to formulate policies and objectives which will permit suitable and needed bus systems to serve this community." D.C. Transit's witness commented: "Mass transit will affect the nature and the character of urban and suburban life which we are going to have in the period ahead of us. Do we want the sprawl or do we want concentrations in the urban areas? You've got to decide how we seek to meet these needs, or how we will seek to focus our mass transit to meet the possible objectives of the people." The essentiality of good mass transportation, including bus service, was thus stated by witnesses across the board. It was implicit in the remarks of all who appeared. We believe all segments of the community concur. The only questions are what systems, what procedures and what methods of financing best serve the public interest. A LONG-TERM ANALYSIS It is not our purpose to review the details of operation and financing of D.C. Transit. That was the function of the District Public Utilities Commission until March 1961 and then of the Washington Metropolitan Area Transit Commission and of the United States Courts of Appeal. We are not public utility accountants or attorneys. Our function is to review the broad sweep of events and the results in terms of social policy. Our purpose is to analyze and to recommend policies, or changes in policies, which we believe to be in the best interest of the public. The franchise granted D.C. Transit by Congress in 1956 did not set a criterion for earning and fares, except that the Company "should be afforded the opportunity of earning such return as to make the Corporation an attractive investment to private investors" and except for a finding that a return of 62% on "either the system rate base or on gross operating revenues would not be unreasonable." The PUC and the WMATC wisely held that the finding was not a command. In 1965 the U.S. Court of Appeals reviewed the history and implications of this language. It rejected Transit's claim that there was a guaranteed rate of return, holding that the rate was merely advisory or a warning as to what might be unreasonable. (D.C. Transit v. WMATC, 350 F 2d 753). The interstate compact, approved in 1960, was more specific. It stated that the Commission was to have jurisdiction for "the regulation and improvement of transit and the alleviation of traffic congestion;" and that the carriers were to charge "just and reasonable" fares. In addition to paraphrasing the above language from the franchise, the compact required the Commission in setting fares to give due consideration— "... to the inherent advantages of transportation by such carriers; to the effect of rates upon the movement of traffic by the carrier . . .; to the need, in the public interest, of adequate and efficient transportation service by such carriers at the lowest cost consistent with the furnishing of such service; and to the need of revenues sufficient to enable such carriers, under honest, economical, and efficient management, to provide such service.” (Italic ours) In administering the above provisions, the PUC and the WMATC, although not required by Congress to do so, have followed the general policies laid down by legislative and judicial bodies for public utility rate regulation. This has involved such concepts as the rate base, operating properties and income, non-operating properties and income, the transfer of assets from the operating to the nonoperating categories, above-the-line and below-the-line expenses, et cetera. We will not enter the discussions based on these technical principles. Therefore we will not attempt to evaluate PUC and WMATC rulings in these areas. But we do note, however, that the PUC orders of 1960 and 1961 granting a 5¢ fare increase were reversed by the U.S. District Court as unreasonable and Transit was ordered to set aside an approximation of its excessive collections in the "court-ordered reserve". We also note that the WMATC Order on Transit's 1962 application was appealed to the U.S. Court of Appeals, which held that WMATC had not made sufficient findings of fact or statement of its reasoning for either WMATC or the Court to determine a just and reasonable fare. The case was remanded to the WMATC and, as far as we can tell, it is still unsettled and at issue in the Court of Appeals. We will attach an appendix hereto, stating some of the Court's opinion on the facts and the analysis necessary for a rate determination. We note that the history and the amount of the company's earnings are relevant. We are also informed that the WMATC Order of January 1966, using the court-ordered reserve as current earnings, is also on appeal before the Court of Appeals. These court decisions curtail somewhat our confidence in Commission Orders. We have recorded above (p. 9-10) the amazing procedure by which D.C. Transit bought Capital Transit with only $500,000. The rest of the purchase price consisted of mortgages on the assets being purchased, namely the cash, the personalty and the realty. The buyer put up no additional collateral, had no additional assets and in practical effect got ownership with merely a promise to pay. We admire such financial skill. We have also recorded above (p. 10-11) D.C. Transit's financial manipulations and success in paying off the entire purchase debt and interest in three years, four and a half months-all of it coming out of cash flow from operating revenues, perhaps with an assist from the sale of the Fourth Street car barns. The rates, amounts of depreciation and presumably the application of these funds had the approval or at least the acquiescence of the District Public Utilities Commission. In effect it meant the investment of the depreciation set-asides in debt reduction and the saving of interest costs. Payment of the debt from revenue made crystal clear the fact that the bus riders paid for the company, except for the original $500,000, and that the stockholder's total investment and total financial interest was that same $500,000. The Congressional franchise provision for "such return as to make the Corporation an attractive investment" thus has to refer to the return on the only investment made by the stockholder, namely $500,000. From the viewpoint of social welfare and ethics, the community owned the system and owed the investor only adequate annual dividends on his stock, or a refund. Congress mentioned a return of 62% in connection with the base or gross revenues. Considering that the operation is dedicated to the public welfare, and is a government protected monopoly with many tax exemptions, a 62% return on the original investment seems quite adequate. This makes $12,153.74 for the 42 months in 1956 and $32,500.00 per year thereafter. The company officers of course received adequate salaries for their personal services and we are concerned here with only the use of the $500,000 in money. The above pages (10-11) show dividend payments of $290,000 for the year ending December 1957 and $400,000 for that ending December 1958. Broken down on the above rate of return, this $690,000 equals $77,153.74 for the 6%% return on investment, $500,000 for the return or reimbursement of the capital investment and $112,846 bonus. In this manner, the fare-paying bus riders paid off the investing stockholder in full by the end of 1958. The payment of the $450,000 in dividends in the year ending December 1959 is thus inexplicable. If we assume that the previous payments to stockholders were not to return the investment but were entirely dividends, the rates would be 58%, 80% and now 90% in 1959. Commencing in 1960, the so-called dividends rose to $500,000 or 100%-a complete return of the investment each year. This is far in excess of the Congressional provision for “an attractive investment." The WMATC has continued its approval of the 100% dividend rate, plus the accumulation of $3,385,405 in retained earnings or undistributed profits, despite the clear provisions in the compact for setting rates "at the lowest cost consistent with the furnishing of such service" and the "need of revenues sufficient to enable such carriers, under honest, economical and efficient management, to provide such service." Dividends of 100% seem to us to be a clear and flagrant violation of such provisions. Of course, the Transit Company prefers to compute its returns on more favorable bases, such as the percentage of the "stockholders equity" which includes ploughed-in profits, or the "rate base" or "gross operating revenue." These returns are set forth in Exhibit #39 of the current 1966 proceedings. They show net income as high as 32%, 67% and even 84% of stockholders equity in certain years and as low as negative 11.3% in 1966 if the courtordered reserve is not included. Yet Transit has already paid $250,000 in dividends in 1966. The net operating income for the first 8 months was $411,380. This is after the payment of all expenses and set-asides for depreciation. We are aware of the flexibility of depreciation set-asides. High depreciation transfers add to operating costs and thus reduce the apparent amount and ratio of the operating profits. Yet the depreciation is cash and used by the company for debt retirement, interest, genuine reserves or distribution to stockholders, as it wishes. We assume the $3,385,405 listed in the last balance statement as "retained earnings" consists of net operating profit, surplus reserves and profit from the sale of the car barns on 4th Street, S.W. The disappearance of real estate no longer used for operations into subsidiary corporations looks like a leak of assets to us. These properties were part of the package bought from Capital Transit. They were paid for by the bus riders. They belonged to D.C. Transit and, in terms of social ethics, to the Washington community. Yet we see them being transferred at book value, i.e. original cost less depreciation, to wholly controlled subsidiaries whose profits are not regulated by WMATC and, apparently, are not available for the operation of buses. Considering the tremendous rise in real estate values, these properties constitute gold mines. But the gold is not shown on the books and is not available to the public or the bus riders. It is thus profit to the shareholder over and above the 100% dividends paid out of operating revenue. The property in the 3200 block of M Street, N.W. may be an example. It apparently was transferred to the subsidiary in exchange for $99,605 in stock. Yet it has been able to borrow $2,407,975 on a long-term note and to run up current liabilities of $672,164. These operations thus provided $3,079,000 in working capital. Some of this was probably loaned to D.C. Transit's affiliated companies investing in profitable real estate transactions. But the interest on the loans and the profits on the real estate do not get back to the bus riders, as far as we can determine. Basic Conclusions We regard the present situation as highly unsatisfactory. Although D.C. Transit accomplished a financial miracle in 1956 and since then has built-perhaps with prodding from the WMATC—a relatively efficient, comfortable and useful system, it has succeeded at the same time in getting the D.C. bus riders to pay the entire cost for the system without owning it and has collected unconscionable profits of over 700% on its investment, plus laying the groundwork for huge real estate profits. In effect we are back where we were in the 1952-55 years, when the management had dissipated the reserves and profits to itself and then proceeded to cry poverty to the public. John Fitzgerald Kennedy called then for a recapture for the public of some of the excess earnings of previous years and declared: "Transit companies are vitally affected with the public interest and are not primarily avenues for developing personal fortunes." We can not tell whether this loss of public resources is due to less-than-eternal vigilance on the part of the regulatory commissions or to basic inadequacies in the laws establishing those agencies. The result, however, is clear. Twice in the last 25 years the bus riding public of the District has paid for an entire system, only to have it taken from them. It is possible that the Commissions thought they were legally powerless to preserve windfalls, high profits and depreciation reserves as cushions for lean years. Yet in 1947 the District Public Utilities Commission did create a special reserve for excess returns to be used to meet future deficiencies. The Commission and WMATC may have thought the dividend rate was beyond their jurisdiction yet in its January 1966 decision, WMATC specifically permitted an operating return that would cover the 100% dividend "because the marketplace assumes the continuation of such dividend." If the dividend pay-outs had been reasonable from the beginning, D.C. Transit's cash reserves would now be larger by nearly three million dollars. This would surely be of interest to the marketplace. Since we see no indication that the present arrangement of a private corporation regulated by a commission can or will correct itself, we will recommend that the District Commissioners recommend to Congress the creation of a public authority which will acquire and own a bus transit system for the area and, we suggest, contract with a private corporation for its operation. We recommend that the authority acquire the 5,000 shares of capital stock in D.C. Transit. Such acquisition would not only acquire the system intact but also the subsidiary corporations and their real estate holdings and thus the assets paid for by the bus riders in 1956-59. We also recommend that the Commissioners ask the Corporation Counsel for an opinion as to the feasibility of the District Government taking legal action to recover prior excess dividend payments or, to obtain, in line with the District Court's decision in 1963, the transfer to a reserve of amounts equivalent to unreasonable fares already collected. The Trend Toward Public Authorities It is quite possible that regardless of our above analysis of D.C. Transit's finances, the time might come very soon when the District would need to move to public ownership of its transit system. At least that seems to be the trend in major cities throughout the nation, as shown by the following tabulation for the 15 largest cities: City Transit Authority and Port Authority Trans-Hudson Corp.- Chicago Transit Authority-Chicago__ Southern California Rapid Transit District--Los Angeles--. City owns 53 out of 72 miles of subway and elevated lines, which are operated under lease by Philadelphia Transportation Co.Philadelphia Detroit Department of Street Railways-Detroit_. In transition from private to public corporation-Baltimore.... Cleveland Transit System-Cleveland....... D.C. Transit System, Inc. (private)-Washington, D.C___. 7,781, 984 3,550, 404 2, 479, 015 2, 002, 512 1,670, 144 939, 024 938, 219 876, 050 763, 956 750, 026 741, 324 740, 316 697, 197 679, 684 627, 525 Bi-State Transit System (public) operated by Transit Services Corp.- Milwaukee & Suburban Transport Corp. (private)-Milwaukee_. This trend seems to be caused by an increasingly narrow margin of profit in urban transportation-so narrow that the systems must operate on a non-profit or even a subsidized basis. Transit corporations were strong financially after World War II, with ample reserves to install new, modern equipment. However, heavy federal subsidies for highways in the 1940s and 1950s gave the drivers of private automobiles such assistance that many people moved from the inner city to the suburbs and to the country and used the highways for travel. Local transit operations could not buck those subsidies and so tended to dwindle away. But in major cities, the highways-only policy results in traffic jams, clogged streets and huge parking lots. Mass transit is requisite. However, in those cities the size of the peak loads in the rush hours requires a large amount of equipment which requires a heavy capital investment, although much of that equipment is used remuneratively for only a few hours each day. Hence the importance of low financing costs which are an attribute of government borrowing. In fact, with the highway competition, the suburban spread, and rising labor costs, all economies and tax exemptions arising from non-profit operation are of the greatest importance. Conclusions Re Government Subsidy The Citizens Council undertook this study with the thought that D.C. Transit might merit a fare increase in 1967 and that perhaps various types of government payments might be desirable to offset or avoid that increase. We still believe that fare increases are hard on low-income people, discourage desirable travel and encourage a greater use of private automobiles which, in turn, causes greater traffic congestion and deterioration of the inner city. The avoidance of any fare increase is of great social importance. |