Mr. ROONEY. We have not officially heard from OMB on this matter. Did you have any problems with OMB during your negotiations?

Mr. HAGEN. No. We had a very successful conversation with OMB. Perhaps Mr. Alan Dean can elaborate on that point.

Mr. DEAN. We have been informed that the estimates we have presented have been acceptable to OMB and are being incorporated in an additional supplemental being submitted by the President.

Mr. ROONEY. Obviously, USRA's tasks will not be as great next. year as they have been in the past. Consequently, I understand that you have had considerable reduction in your staff. How many staff were on hand last year versus this year?

Mr. HAGEN. We hit a staffing level when we completed the final system plan of 311 people. We have now reduced that staffing level down to 172; 15 of these people are reimbursable positions, people working for Con Rail or doing special jobs under the 215 program for the Department of Transportation. So, essentially on our payroll we have about 156 or so.

Mr. ROONEY. How many of the people who have been furloughed have gone over to Con Rail?

Mr. DEAN. Only a limited number. I will furnish for the record the exact number, but I would say it would be in the neighborhood of about 20.

[The following statement was received for the record:]

"Con Rail has hired 26 former USRA employees.

Mr. ROONEY. You said in your statement that Unified Con Rail requires revision of plans for blocking and scheduling, utilization of rolling stock, et cetera. Why isn't this the function of Con Rail?

Mr. HAGEN. I think the evaluation of the funding needs for ConRail this is a task that USRA should undertake. We have a plan that Con Rail would be evaluated against. We just want to improve the plan, update it and make sure we have it consistent with the present structure. Once the initial plan is completed, then we will be reviewing Con Rail against some standard.

Also, in the case of the litigation it is our job to provide the input and the backup for the financial projections in the FSP, and therefore it becomes USRA's job to furnish that information.

Mr. ROONEY. Are you as optimistic as Chairman Lewis is with the prospects that Con Rail will make money in 5 years from now?

Mr. HAGEN. Yes; I am. I think our initial look at it tells me that Con Rail is probably going to be on target. I think the current business pickup has been very helpful in that respect, but we are still very optimistic about how the outcome will be.

Mr. SKUBITZ. Why are you optimistic? Where is the pickup in business? What areas?

Mr. HAGEN. In what commodities or what areas?

Mr. SKUBITZ. Yes.

Mr. HAGEN. I think the piggback traffic and the automobile traffic are both coming back right now, which would mean a great deal to the Penn Central. Other commodities such as paper and lumber are starting to move. As you probably noticed, housing starts are improving rather dramatically. I think all of those will be very helpful. Mr. SKUBITZ. Mr. Chairman, may I ask one more question? What about coal? Has there been any pickup in the hauling of coal? Mr. HAGEN. I will have to check that.

Mr. SKUBITZ. Isn't that one area that you intended to do a lot of business in? As I recall, this is one place where we thought we were really going to pick up a lot of business. Isn't that right, Mr. Chairman?

Mr. HAGEN. The financial projections, I know, did have an increase in coal but most of that increase is expected to be realized after 1978. Mr. SKUBITZ. Will you put that in the record at this point?

Mr. HAGEN. Yes. We didn't contemplate it would happen the first few weeks, Mr. Skubitz.

[The following information was received for the record:]

COAL TONNAGES HANDLED BY CONRAIL

Con Rail coal carloadings for April 1976 were somewhat lower than the rate projected in the Final System Plan. No conclusion should be drawn from the first months experience. However, the most recent information on coal tonnages follows:

In answer to your request for information on coal tonnages handled by Con Rail, the following numbers have been developed:

Shortfall (11.7 percent)..

These figures are based on

Tons

6, 880, 000

7, 793, 000 913, 000

(1) The Temple Barker & Sloan annual projections made for the FSP, adjusted to exclude double counting among the Con Rail railroads and then adjusted to represent April only; and

(2) Actual April 1976 carloads handled by Con Rail multiplied by average capacity per car.

Mr. ROONEY. Mr. Hagen, with regard to the administration of section 211(h) of the 1976 act, can you indicate how long it will take you to identify the current assets and cash available in the estates for postconveyance payments of prior obligations?

Mr. HAGEN. We started on this problem, of course, before April 1 and have identified what we thought would be usable in satisfying those obligations. That issue had to be ruled on by each of the bankruptcy courts.

I would like Jay Hillman, our general counsel, to comment on that. Also Russ Murphy, our vice president for finance, may want to talk about the ongoing effort that we have underway to make sure that we can free up these assets for use by Con Rail for paying off these liabilities.

Jay.

Mr. HILLMAN. The act, itself, required that the reorganization court, as you probably know, Mr. Chairman, identify the cash and other current assets which could be used for meeting preconveyance obligations. A good deal of discretion perhaps was intended to be left with those courts, but in fact all the courts, except one, that is, the Ann Arbor court, did was to apply a very technical accounting definition to the concept of cash and other current assets.

As a result, they held that none of the escrow accounts would be available for this purpose, which cut back substantially on the assets that we think are properly available. Both Con Rail and the Association have now filed appeals to the Third and Sixth Circuit Courts to reverse the reorganization courts, other than Ann Arbor, on that issue. The estate has filed an appeal in the case of the Ann Arbor.

We believe that the better part of the argument is that Congress clearly intended not to apply a rigid technical ICC balance sheet accounting concept to cash and other current assets. We are hopeful that we can get those rulings reversed and that then in arguing as to the discretion of the court we can free up an appropriate part of the escrow account to be made available for these preconveyance obligations. But that is in litigation, and that issue may not be decided yet. for several months.

Mr. ROONEY. As a result of the Chessie and Southern not participating in the plan, isn't the question of supplemental transactions rather moot at this time?

Mr. HAGEN. We find that the possibility of supplemental transactions under the present legislation might be lessened quite a bit because everyone has learned from the experience of Chessie and Southern, and probably will not get themselves in the same trap.

However, I think there is a possibility that proposals will be initiated.

71-072 O-76-4

We have not budgeted any money in our particular efforts here to cover that type of activity. We find, as you do, that supplemental transactions are something that have to be considered in the future. If a proposal was developed, however, we would have a role.

Jay, have you anything to add?

Mr. HILLMAN. No. I suppose in one sense the fact that Con Rail is a large, unified Con Rail presents what may be greater possibilities for supplementary transactions but, on the other hand, the experience of what led to a unified Con Rail may discourage it.

So I agree with Mr. Hagen, it is very hard to foresee and, as I understand it, there are no funds included in the budget in any case.

Mr. ROONEY. Many suppliers have outstanding obligations. When do you think you will commence repaying these obligations?

Mr. HAGEN. That relates to the previous question that Mr. Hillman discussed. The issue is the bankruptcy courts not allowing a large proportion of the escrow funds to be used for payment of such obligations.

Jay or Russ, why don't you discuss that?

Mr. MURPHY. When USRA is involved in paying those suppliers, it is really a very indirect involvement. Con Rail as an agent is paying those suppliers' bills against the estates with estates' resources. It is the bankruptcy courts that are making the resources available.

At this particular point in time the courts have made an inadequate amount of funds available to pay those liabilities.

Mr. HILLMAN. I think our advice at this point, in the absence of any additional funds, is that it looks as though the larger part of the loan funds would be used for the labor-related claims to which the act gives a priority, but it is really too early to tell at this point until we have finally identified the available funds.

Mr. ROONEY. Mr. Russo.

Mr. Russo. No questions, Mr. Chairman.

Mr. ROONEY. Mr. Madigan.

Mr. MADIGAN. I was sitting here trying to calculate what some of these things are worth. What was your reaction from OMB? Did they approve the bill? Is that what you said?

Mr. DEAN. We have presented to OMB estimates on both the supplemental which is before the Congress and an amended level for 1977 fiscal year. We had hearings before OMB. We were advised by OMB staff that the hearings were successful and that there was no difficulty.

We also understand the President has transmitted a further supplemental appropriation providing for it.

Mr. MADIGAN. What does that mean? The hearings were successful? Mr. DEAN. That is, as Mr. Hagen indicated, we successfully made our case before the OMB division, and we were so advised by the OMB staff.

Mr. MADIGAN. Does that mean they support the bill?

Mr. DEAN. Yes, sir.

Mr. MADIGAN. How was this $7 billion figure arrived at by the Penn Central trustees?

Mr. HAGEN. You can move the value of the properties around to any level you want. For example, you could start with reproduction of the plant where you go out now and buy the property and build a new railroad; buy the tracks, buy the rail, buy the ties, buy the

property. That would result in a monumental number. I think that the trustees talked about such a process costing in the range of $14 billion.

The theory that the $7 billion is predicated on, as I remember it, is a mix of going concern value and outright sale of their property in pieces to the highest bidder.

One major difference between their estimated value and ours is that because they had a common carrier obligation, they couldn't sell the property in pieces, they would have to sell virtually the entire property. We do have a vast difference in our estimated values.

Mr. MADIGAN. The lowest land value on Penn Central land in central Illinois, that is, the land that could only be used for agricultural purposes, that would never have an industrial or commercial evaluation attached to it, is $2,000 an acre.

I sat here and figured out, if you took their land at that lowest valuation, which is $2,000 an acre, if you took the rolling stock at scrap value, if you took the track at $10,000 a mile, which is maybe 5 percent of what it would cost to replace it-I suspect that is not even its junk value. Its value as junk metal would be worth more than $10,000 a mile. But if you attach that valuation to it, I come up with a total almost three times your $690 million.

I am concerned that your valuation is totally unrealistic and to predicate your success on your ability ever to get out of the negotiations with Penn Central for $690 million just is not realistic.

Mr. HAGEN. I think here again it goes back to your theory of valuation.

I will ask Mr. Murphy and Mr. Hillman to elaborate on this point. You mentioned the cost of replacing the track. That makes the presumption that the property is going to be used in railroad service. We also talked about the scrap value.

Our scenario is a rather elaborate one that says, if you are not going to have railroads in this area, you are going to have to do several things. One of them is that you will have to take the track up and therefore you are going to have not only the income from the sale of the scrap but the cost of picking it up off the ground, dismantling the bridges, and cleaning up the property so that it is salable.

Mr. MADIGAN. We are talking about scrap now.

Mr. HAGEN. Right.

Mr. MADIGAN. The junk dealers who would bid on it, whether they are taking down a cable on an old electric car line or pulling up trolley tracks or tearing down an old coal mine or anything like that, scrap processors will do that. They would be glad to take this track up and still pay for it.

Mr. HAGEN. For track I think you are correct, but for bridges our studies have shown that they have a negative value, that you cannot have someone come out and bid on a bridge for the scrap and tear it down, that you would have to pay them to tear it down.

Railroads have traditionally had this problem. For example, there often is a great effort made to give bridges away, for example, to bicycle groups or whatnot so they don't have to tear them down.