However, in view of Transit's history in appropriating profits from operating revenues, we believe that government payments now would be like trying to stop a gully wash by tossing in dollar bills. They would be swept away in the flood of profits to the stockholder.

Transit predicts 1967 operating revenues of $33,694,409 and cash operating expenses of $31,642,384, with a cash balance of $2,052,025. Transit seeks to offset against this balance depreciation charges of $2,964,321 and thus achieve a new loss. We do not know, of course, what the WMATC projection will be nor its rulings on the depreciation amounts.

Without trying to be utility rate experts, we note that Transit needs no money for dividends in view of past overpayments and that its balance sheet of August 31, 1966, showed a track removal reserve of $752,771, a balance in the unamortized excess of the original-cost-over-cost-to-DCT item of $1,885,661, and retained earnings of $3,385,405. These sources seem to be ample for "revenue" needed to service the debts on recently purchased buses.

It might be helpful, however, for us to indicate the types of payments and increased revenue that might be made possible by government action.

1) In its January 1966 Order, WMATC stated that the reserve for future costs of track removal and street repaving, an obligation imposed by Congress, would have to be augmented by $800,000 to one million dollars per year for the next three or four years and that this cost to the bus rider is equivalent to 11⁄4¢ in fares. D.C. Transit said at our hearing that this cost could be as high as $18,900,000 for the remainder of its franchise.

2) In its January 1966 Order, WMATC also observed that Transit has to pay federal income taxes of 48% of its net profit and thus must obtain revenues of twice the magnitude that would be required otherwise. WMATC recommended that Congress grant an exemption for these taxes. At the increased rate of fares which Transit proposed for 1967, Transit estimates these taxes at $744,998. 3) On May 6, 1966, Gen. C. M. Duke, as Chairman of WMATC, wrote to Walter Tobriner, President of the D.C. Commissioners, recommending that the District Commissioners propose to Congress legislation which would allow the subsidy for school children to come out of general tax funds instead of bus fares. Congressional legislation now sets school fares at not more than 50% of the adult rate. Congress provided for Transit to be reimbursed for this subsidy but by a complicated formula which never applies to Transit. Changing the formula so as to make government payment possible would seem to be within the original intent of Congress. With Transit's estimate of 7,144,101 school riders in 1967, this payment from tax funds to Transit's operating revenue would be $803,711.36. (Transit's estimate at our hearing was $750,000.)

4) The suggestion was made at our hearing that interest costs could be reduced if equipment was purchased by the Government with money from Government bonds, or if the Government guaranteed Transit's bonds. Transit is now paying 62% while Government guaranteed FHA loans draw 6%. The difference of 12% on the long-term notes of $17,314,442 listed in Transit's August 31 balance sheet would make a saving of $86,572. Of course it would be greater if the Government made the direct purchase, issuing its own bonds.

5) Since our investigation started, Transit has applied for permission to carry advertising on the outside of its buses in order to get additional revenue. Profits from this source have been variously estimated but we believe a net of $275,000 per year to be a reasonable projection. The matter is now pending before the District Commissioners.

The above five items indicate the possibilities of Government assistance. In view of our long-range analysis and basic conclusions, however, we do not recommend any of them. In addition to our prior observations about Transit's money-grabbing proclivity and our belief that it simply does not deserve assistance at this time, we add two considerations:

1) Making payments out of tax funds is a political matter and depends basically upon the will of the people. Nearly every witness at our hearings opposed any subsidy for D.C. Transit, although many relented when presented with a flat supposition of a fare increase. Likewise most opinions that we have sampled informally in the community, including those from businessmen, are that Transit has already made too much money out of the public and deserves no subsidy. Apparently "the people" have already reached the conclusions we have formulated above so laboriously and Government assistance now is almost a political impossibility.

2) Easing franchise requirements and profit potentials now would be most unwise if the Government is to follow our recommendation and buy the out

standing capital stock of D.C. Transit and put it into a public authority. There is no point to increasing the value of what we are about to buy. This reminds us of the Mark Twain story about the fur merchant who kept buying a package of skins from a barefoot boy and tossing them on the pile out back, only to discover that the boy was going to the rear each time, retrieving his skins and bringing them to the front door for the merchant to buy again. We have done this more than enough already.

Lower Fares

We had hoped that some feasible method would evolve from our studies for a reduction in fares. We are convinced that if bus riding was made cheap enough, people would use buses instead of private cars, would make more city trips for purpose of business and pleasure and the city would be benefitted thereby.

WMATC staff personnel estimated that a reduction of the token fare from the present 214¢ to 15¢, with the cash fare remaining at 25¢ would increase patronage by 10% but cause a decrease in net earnings of over $8 million. D.C. Transit staff estimated a smaller change, with an increase of 6,572,962 riders and a decrease in revenue of $6,262,484.

Other possible fare reductions, shifts in schedules, the use of the weekly pass and even the abolition of fares with free rides for all or for certain groups, were also considered by the Council.

However, in view of our basic recommendation for a shift in ownership to a public authority, it seems pointless to go into possible fare reductions for D.C. Transit at this time. Our hope remains, however.

Summary of Recommendations

In view of the foregoing findings and analyses, we recommend:

I. That the District Commissioners recommend to the Congress the acquisition of D.C. Transit, preferably through purchase of its capital stock, and the transfer of the franchise and the holdings to a public authority which will arrange for the operation of the transit system at the lowest possible cost and maximum service to the community;

II. That no additional government payments, tax exemptions or other subsidy be given to D.C. Transit at this time;

III. That the Commissioners request an opinion from the Corporation Counsel on the feasibility of legal action to recover for the public prior excess payments of dividends and/or collection of unreasonable fares;

IV. That the Commissioners seek to expedite the consideration of the two cases now before the United States Court of Appeals so that early determination may be obtained on the validity of the 1962 fare increase and the January 1966 rulings by WMTAC;

V. That the Washington Metropolitan Area Transit Commission issue a preliminary, or anticipatory Order, on the applications now pending for fare increases in 1967 in order to give the public, the District Government and the Congress an opportunity to consider legislative alternatives to the Commission's final decision.

WITNESSES WHO APPEARED IN PERSON OR BY WRITTEN STATEMENT AT THE JUNE 10 OR OCTOBER 28 HEARINGS OF THE CITIZENS COUNCIL

1. Charles M. Haar, Assistant Secretary of the Department of Housing and Urban Development.

2. Delmar Ison and Melvin Lewis, Executive Director and Chief Accountant of the Washington Metropolitan Area Transit Commission.

3. Edgar H. Bernstein, Economic Consultant and former member of the D.C. Public Service Commission.

4. Dr. Royce Hanson, Professor of Government and Associate Director of Washington Center of Metropolitan Studies.

5. Leonard N. Bebchick, Attorney for various fare-paying passengers.

6. Metropolitan Citizens Council for Rapid Transit by Duncan Wall, Chairman. 7. Downtown Progress-National Capital Downtown Committee, Inc.

8. Alfred S. Trask, Chairman of Transportation Committee, Federation of Citizens Associations of D.C.

9. Capitol Hill Southeast Citizens Association by Leonard P. Ousley, First Vice President.

10. Rev. Walter A. Gray for the League for Universal Justice and Goodwill. 11. William H. Press for the Metropolitan Washington Board of Trade.

12. National Capital Local Division 689 of the Amalgamated Transit Union by George W. Apperson, President.

13. D.C. Transit System, Inc. by Robert R. Nathan, Economic Consultant, and Manuel J. Davis, Attorney.

14. Democratic Central Committee by Mrs. Helen Leavitt.

15. James G. Banks, Executive Director of United Planning Organization.

16. Peter S. Craig, Chairman, Northwest Committee for Transportation Planning.

17. American Transit Association.

18. Nelson C. Roots, President, D.C. Federation of Civic Associations.

EXCERPTS FROM THE COURT OPINION IN D.C. TRANSIT SYSTEM v. WMATC (121 U.S. App. D.C. 375, 350 F.2d 753 (1965))

"We think Congress used the figure of 6.5% simply to suggest a general objective of this regulatory scheme . . . It clearly seems to be intended that the rate making authority should look to other criteria as well." p. 766

"A just and reasonable rate is one that assures that all the enterprise's legitimate expenses will be met, and that enables it to cover interest on its debt, pay dividends sufficient to continue to attract investors, and retain a sufficient surplus to permit it to finance down payments on new equipment and generally to provide both the form and substance of financial strength and stability. A rate fixed without particularized reference to these needs does not satisfy any standard of rate making of which we are aware, including that of return on operating expenses." p. 778.

The Commission stated “that it did not regard (such an inquiry) as either relevant or required under the operating ratio method-an error of which the Commission, as a new agency making its first start in the rate-making field, should be disabused at the outset in the interest of avoiding future difficulties." p. 779

"But what facts it relied on the Commission does not say. It had before it a statement of Transit's current annual interest charges, but it seems to have made no inquiry into the cost to Transit of borrowing money . . . Transit's annual dividend pay-out of about $500,000 appears to have been treated as if it were a cost of operation, like the annual expenditure for gas and oil, with no examination of, or conclusion about, its appropriateness." p. 779

"We think the time has come for the Commission to make a careful review and analysis of the earning experience of Transit from its inception, and of what that experience has meant to the equity owner, both by way of dividend payments and growth in book values through retained earnings. We do not see how current fare increases can properly be appraised apart from such a study." p. 780

"This matter of earnings is the more important in the light of Congress' direction to the Commission . . . in the Compact to give due consideration in setting fares '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.' The Commission is thus required to see that the fare-payers pay no more than is necessary to insure the continued adequacy of the company's service and provide a return to the shareholders that is reasonable under the circumstances." p. 780

J. SKELLY WRIGHT, concurring:

"Whatever system of rate making is used in determining a proper bus fare, two basic questions must be answered: 1) How much money have the owners of DC Transit invested in the Company, and 2) What has been and what is the return on that investment? Until the Commission answers these two questions in words of one syllable so the public, and the Court, can understand, the suspicion of unconscionable profits at public expense will persist." p. 781

"In view of this statement by the Government, the Commission in its opinion on remand should set out, year by year, beginning with 1956, the amount of capital actually invested by the owners of DC Transit, followed by the earnings, year by year, on that investment. Of course, if any capital has been returned to the owners, in any way, the year and amount thereof also should be disclosed." p. 781

29-234 0-69- -13

Mr. DUDLEY. The Council report noted the highly profitable operation of Capital Transit Co. during World War II and the subsequent acquisition and milking of that company by Louis E. Wolfson. That company's affairs reached an alltime low in services, finances, and public relations in 1955 when a strike stopped its operation. Consequently, Congress revoked the company's franchise, as of a year later, and officials began their search for a new company.

After various efforts to start a new private corporation failed, the U.S. Senate passed a bill on May 10, 1956, providing for a nonprofit Metropolitan Transit Authority. The House continued to work on the private corporation theme and passed a bill embodying that concept. Various companies negotiating with Capital Transit reached a commonly accepted price of $13,440,000, and on June 26, the District Commissioners recommended to Congress a proposal made by Mr. O. Roy Chalk. Congress accepted this, and in July 1956 granted a franchise to Mr. Chalk's company, D.C. Transit.

The finances of Mr. Chalk's acquisition of the old Capital Transit have always intrigued this community. Capital Transit had $7,580,650 in cash plus other assets bringing the total book value to $23,879,041. For this, Mr. Chalk paid only $13,540,000. Of this amount, however, he and his associates put in only $500,000 in cash. The balance consisted of loans and credits secured by only the assets being purchased. Specifically, in addition to the $500,000 in cash, there was $5,600,000 borrowed on the security of $5,600,000 deposited in cash out of Capital Transit's cash holdings, plus two additional loans secured by mortgages on the acquired personalty and on the acquired realty.

In the next 3 years, 42 months, to the amazement of the community, Mr. Chalk paid off all of those loans, and thus completed his purchase payments out of the operating revenues and acquired assets.

In that same 3 years, 412 months, Mr. Chalk also paid the interest on those loans, increased the retained earnings, and refunded the original $500,000 to himself and his fellow stockholders and then gilded the gift by paying them an additional $640,000 in dividends. All of this came out of operating revenues and acquired assets.

Thus, by January 1960, Mr. Chalk had recovered all his money and had acquired the company for nothing or, to put it another way, with money extracted from the public.

For the next 612 years, Mr. Chalk continued to pay himself and other stockholders dividends of $500,000, or 100 percent, each year. This "gravy" came out of operating revenues; that is, out of the busriding public.

OPPOSITION TO FURTHER SUBSIDIES

The Citizens Council stated frankly in its report that it undertook its 1966 study with the thought that various types of Government payments or subsidies might be desirable in order to avoid a fare increase. It then concluded:

However, in view of Transit's history in appropriating profits from operating revenues, we believe that Government payments now would be like trying to stop a gully wash by tossing in dollar bills. They would be swept away in the flood of profits to the stockholder (p. 23).

A subsidy to a private, profitmaking corporation is always politically dangerous. We have a somewhat humorous example in Kansas

City. Some years ago it, too, faced the prospect of a fare increase. To avoid this, the city contributed $100,000 to the transit company.

However, the company had a better year than pected and at the end of the year declared a dividend of $100,000. The political leaders figured they had merely contributed $100,000 to the stockholders and vowed they would never do it again.

Mr. Chalk's and D.C. Transit's reputation is even more pointed. The public realizes that it has been milked first by Louis Wolfson, and then by Roy Chalk, and is determined that it will not happen again.

Mr. Chalk's current position and public statements make his requests even more intolerable. Having drained the company of its reserves and practically bankrupted the corporation, he talks proudly of the right to make a profit. In 1967, he announced that D.C. Transit was for sale and suggested a price of $25 million. In 1968, he testified the net worth was $50 million. Today, he is asking $75 million. Apparently the more worthless the company is, the more he asks for it.

The basic difficulty is Mr. Chalk's failure to distinguish between the ordinary, private corporation engaged in competition with others to make as much money as possible and the more select public utility which has a Government monopoly and is engaged primarily in rendering a public service. He has operated D.C. Transit as though it were the Good Luck Gold Mining Corp., entitled to rake in all the nuggets it could find without regard to anyone else.

When John F. Kennedy was chairman of the Public Utilities Subcommittee of the House District Committee, in 1952, he said in commenting on the District situation:

"Transit companies, whether in Washington or any American city, are vitally affected with the public interest and are not primarily avenues for developing personal fortunes."

Since Roy Chalk still does not understand this, it is clear that he and D.C. Transit are not qualified to receive further subsidies.

IN SUPPORT OF A PUBLIC AUTHORITY

The Citizens Council report noted the increasing difficulty and probable impossibility of operating a mass transit system on a profitmaking basis. The heavy Government subsidies to highway construction and maintenance have caused a major shift to travel in private cars. This also has caused city workers to live farther and farther out in the suburban areas. A bus or subway system cannot extend its lines so far for so few travelers.

The nature of today's urban mass transit need requires an unusually expensive type of service. There is the demanding rush hour in the morning, and again in the evening, when "practically everybody" insists on rushing from the edge of the metropolitan area to the center, and then back again.

These two peaks of traffic require a large quantity of expensive equipment and manpower, which is largely unused and thus unproductive during the rest of the day. Hence the difficulty of obtaining the revenue to pay for them.