Senator SMATHERS. Mr. Barton? Mr. BARTON. Mr. Shoemaker, what that says in very simple language is that if there is a default Congress has an obligation to appropriate the money to pay it off. There is nothing that compels Congress to do so in this legislation at present, is that right? Mr. SHOEMAKER. Mr. Barton, I am going to talk specifically about the problems created by lack of appropriations as a fifth point because I think it necessitates separate treatment. If I may answer that to you at that time I would appreciate it. Mr. BARTON. Yes, sir. Senator SMATHERS. Why don't you ask him then? The question arises in my mind that the problem you are talking abo now, about the difference between collections for payments, is not then related to this problem that counsel Barton raises as to whether or not there is an obligation on the part of the Congress to appropriate the money to pay back the lender in the event there a default. Am I right on that? Mr. BARTON. I think the two are related. It seems so to me. Senator SMATHERS. All right; you will discuss it later on. Mr. SHOWMAKER. To continue, a guaranty of collection also creates uertainty with respect to status under the guaranty of any expenses which may be incurred by a lender in exhausting its legal remedies agrant a borrower. The new legislation which continues the guaranty program should state unequivocally that the ICC may guarantee the payment of loans to railroads. 2. Purposes of loans: The act requires that any loans guaranteed tereunder must be for the purpose of capital investment or mainteLance. In view of the serious financial emergency which now faces auber of railroads, the purposes for which the guaranty program was enacted cannot be served by narrowly circumscribing the types of which may be guaranteed. 1e railroads which need the guaranty program require funds for getal working capital, which may from time to time be disbursed for a multitude of purposes, such as payroll expenses, taxes, and the Pyment of other debt obligations. From a lender's point of view the limitations on purposes create certainties with respect to the scope of the guaranty. Whether or Lot: proceeds of a loan are to be or have been disbursed for capital Vement or maintenance rather than operating expenses or some et..er unqualified purpose is essentially an accounting problem which nay not be correctly resolved until some time after a lender has been ied, on the strength of the guaranty, to make a loan. Senator SCHOEPPEL. Mr. Chairman, if I remember correctly, empass was placed upon a guaranty on the basis of the capital equip... and on staying out of guaranteeing the operating expenses of the Now, I wonder if I have correctly retained in memory what was ted and what was advocated at that time? Has there been a shift in position on this now? Mr. SHOFMAKER. Senator, you are entirely correct as to the broad purpose of this act at the time it came into being in 1958. Now, the Congress specified that this was to give encouragement for capital expenditures, for equipment, for yards, for the centrai i traffic control, and the things that the railroads needed to do and di hot have money to do. In the meantime, particularly in the East, we have gotten into th.. economie d.letama which is going to take some time to work out andi which is not a simple thing and which has no panacea of a smp e rature to answer it. We have in the Erie Lack ne man's case, applied to the Commiss on for a $15 million loan specifically for capital improvements in cotes nection with merger yards, track extensions, lighterage and station fuit es, centra.zed trahe control, and so forth all of which hieve sary to a breve të savings which we anticipate comit g from, t merger of our rulroads. On the other hand, under the act as it is presently written, we can go back to 157 and ut: ze capital exper ditures made dura g the past 4 years or 3 years; show the depletion of working capital, tredje tion of our resources which has been occasioned by post cap tal pet dures, and ask for a guaranty for reimbursement of past expa expenditures rather than future capital expenditures, in which case t..at rembursement of funds may well be necessary for current o eratig purposes. Now, sotue of the roads which have been before the ICC for lov I know, have had the necessity for provider g themselves with work cap tal and they have achieved it through the entirely properly so through falling back upon reimbursements for previous capital ex penditures. I thk th stringency of finance on the eastern ra fronds to be with us for some littlet me. I think mergers, is one things to strvizi ten it out, to iuprove if We do not atti sings from merger will be fully achieved for 5 vers 11 great payments to labor to n. ake over that period in volv erance of employment and compensation for men that are fiel, and at sort of thing * Senator Scharry. I was just wonder g about the very destir gipshed derman of the subcommittee here, Set Vor from Florida, indicated a while ago. We are goug to v-k for an extension of this at vi ne ve to have to have certarly some trust a it or for a swith of .. and adding new provisions pr to th which we had in t ́e or giral one w 15, I do low f' at Bere won a fee' 1g at t I glad tokave your t ensor, it now, of course, Senator SMATHERS. Mr. Shoemaker, may I ask you this question: Suppose in this section 503 of the act which we passed in 1958 where we set up the right of the Government to guarantee these loans and it >ays: For the purpose of aiding any common carrier by railroad subsidies in financing or refinancing first, of additions and betterments made or other capital expenditures made after January 1, 1957, or to reimburse the carrier for expenditures made from its own funds for such additions, betterments, or other capital expenditures. Suppose we struck out that phrase, "made after January 1957." That would be some relief, wouldn't it? Mr. SHOEMAKER. If you strike out the phrase "made after January 1957," do you mean that we might go back for 10 years? Senator SMATHERS. I am just saying-I am asking you the question. Wouldn't that-I don't know what the Commission would interpret, but if you struck out that provision, then, of course, it would mean, it would seem to me, that there would be no limitation as to time as to when you made it. Strike out "made after January 1957." Mr. SHOEMAKER. Well, Mr. Chairman, the January 1, 1957, has not been a handicap in my opinion, sir. Senator SMATHERS. All right. Mr. SHOEMAKER. Most of us have made on a normal continuing basis enough additions and batterments in equipment payments loans u: der existing equipment trusts and conditional sales contracts to meet the test of having enough reimbursement to meet any normal amount of cash required. Mr. BARTON. Your problem is what you can do with the money after you get it, isn't it, Mr. Shoemaker? Mr. SHOEMAKER. That is right, sir. Senator SMATHERS. That pretty much is an accounting problem, isn't it? Actually by accounting, if some of the limitations were taken off, particularly that date, could you then not-I don't know, I am getting into something I don't know. I just withdraw that. You go ahead. I am not completely clear on that. Mr. SHOEMAKER. Perhaps I have been awkward in clarifying the point on this, but certainly the validity of the guaranty should not depend upon accounting distinctions. When the ICC approves, as I hope it will, the $15 million loan for Erie-Lakawanna, there will not be a fence built around that money when we take it down from the erders. We intend to carry out these programs of capital improve At the same time, once the money is in the Treasury some of those particular dollars may be used for maintenance or payrolls or what Five you. I think that we have built a constriction into this thing that is unLeary and unrealistic. Senator SMATHERS. It may be, but I would like to tell you this much at it, and Senator Schoeppel, I am certain, will agreee with me. When we were discussing this whole provision originally and it orinated sort of with us in this subcommittee right here, that we had several Senators on the subcommittee, one of whom is still on it, who was rather clear in his mind that this limitation should be in the act, that the money should not be permitted to be used for operation. that it should be primarily, in fact ex bsively, in his view, for what we termed for lack of a better word, additions and betterments, wi we though the luded ail capital expenditures, expenditures for cap al programs and development progi uns and things of that chara Father than operat 1 g programs. Whether or not that view has bee changed by some of these Senators, I don't know. But speaking for myself, and I think speking generally for the Senator from Kansas, we were of the more liberal view at that ti but we did not have the votes to eliminate what you are talking a thes fence around the use of this money. Mr. SHOPMAKær. I remember very well the very excellent res of this subonnettee preceding the precedent to the 1s leg dat and it did directly have this intention, but I wou'd ask this q When you are reimbursit g my company for additions, and bettern made last year or the year before these actual dollars that you re tabure, g, there then is to restriction as to how these may be Asen practical matter there should not be. Serator SMAthers. I tr, dk toe pry tical matter depends upon t facility and ag lity of your að ou sting There really would be ra way to follow that, would teret In other words, von could not in port of fact inst mark tuos lars when von put it in to your treasury and say, “It s is for acata and betterments wire a fave beer mate Just how you use? if money is pretty d., qt to a certa n, 19 at 12 Mr. SHOP MAker Yes, suæ ; very As long as funds borrowed us der the guaranty progTATI VEI used to pay divider ds, it would seem to be consistent with the cre purposes of tie a ↑ to permette guaranty of loste, the p Whh are to be used for get or al corporate peitpea 3. De getot e borrower'koraj t a loan under tie at it must n keg for obtain erv]]* @se©W jete at “reasol 15 e rites Mr. SHOEMAKER. I believe, Mr. Barton, that the broad purposes of the act are suflicient guidelines for the Interstate Commerce Commission to exercise proper discretion. Mr. BARTON. Wouldn't you have to have some specific provision, that it must be found by the Commission to be in the national interest or something in that nature, rather than just leaving it open end as far as their exercising the discretion goes? Mr. SHOEMAKER. I think such language might be quite helpful to the jurisdiction of the Commission and its authorities. Mr. BARTON. Incidentally, the item you are talking about in this section is probably the most important of the ones you are talking about today, isn't it? Mr. SHOEMAKER. I think this is a very important item, and one winch, Br. Barton, I'm sure has discouraged railroad people from using this guaranty provision of the act. Any management will not come to go through all the publicity of this sort of thing if there is any possible way of avoiding it. That, in turn, has delayed capital expenditures which would have been in the best interests of the railroad industry without any question. With respect to financing pursuant to conditional sales agreements and leases, it is generally recognized that conditional sales agreements and leases are common methods of financing equipment in the railroad industry. Certainly the draftsman of the act contemplated that guaranties of indebtedness incurred under such arrangements would be granted by the ICC under the act, and in fact, the ICC has issued some such guaranties. But here again, the language of the statute fails to clarify and any new legislation should make it clear that cor ditional sales agreements, leases, and I might include bond is, or any other type of financing which perform the same function as a conventional loan will be eligible for a guaranty. 5. Problems created by lack of appropriations: The act provides at guarantee payments are to be made by the Secretary of the Treasury but no specific fund has been appropriated by Congress from which such payments are to be made. Moreover, the act does not, by its terms, pledge the full faith and credit of the United States in support of the guarantee. Many doubts with respect to the validity of a guarantee issued under the act as an obligation of the United States were dispelled by an opinion of the Attorney General of the United States under a previous administration. However, that opinion did not resolve a problem which has worried lenders who have n. ade loans on the strength of such guarantees; that is, will long and exper sive delays be encountered when the United States is called upon for payment pursuant to a guarantee and no funds have been appropriated by Congress for that purpose. A need for a direct pipe to the Treasury is particularly acute when a security has to be de acceptable and attractive for sale to the public. Any new legisolat on should at least put the certainty of payment under a guarare sued under the act on a parity with certainty of payment unger the ship mortgage insurance program. Therefore, the Secretary of the Treasury should be authorized under any new legislation to draw upon unappropriated funds in order to meet the obligations of the United States incurred under the guarantee program since its inexption in 1935 which are not otherwise provided for by a direct ap propriation. 67136-61 |