Since I last testified on H.R. 2500 in March, the government of the District of Columbia, in testimony by the Chairman of the D.C. Council and the Deputy Mayor, has proposed certain amendments to the bill. I have reviewed the transcript of that hearing and amendments proposed by the city, and would have no objection to them. My main interest, as chairman of the Transit Commission, is that you should enact some form of legislation that will provide the means through which funds can be fed into the transit system from a source other than the fare box, to keep the fares from rising again.

AMENDMENTS PROPOSED

H.R. 2500, as proposed to be amended by the D.C. Government, would, in my view, accomplish that purpose. Whether the subsidy is provided by way of a money payment to make up the operating deficit, as the Commission proposed in the original version of H.R. 2500 3 years ago, or whether the subsidy is accomplished through purchase of the bus fleet and payment of a smaller amount to make up the operating deficit, is a policy matter for determination by Congress. I will defer to your views on that question.

The bus purchase plan, while it does represent a considerable initial outlay of funds, has the advantage of allowing the city to use federal matching funds which have been earmarked for just this sort of program and which have been used by other municipalities throughout the country to alleviate the problems besetting their mass transit operations. Once title to the buses has passed to a public agency, the annual subsidy payments required to make up the operating deficit would be substantially reduced.

SUBSIDY COST ESTIMATES

We have developed some estimates of the costs of providing a subsidy assuming that (1) expenses which are not recovered from the fare box will be made up by the subsidy, and (2) the subsidy will cover the reasonable profit to the operator to which it is entitled under the law. First, under a subsidy plan that does not provide for bus purchase, the payment to D.C. Transit during FY 1973 to keep the basic fare at 40 cents would be $3 to $4 million. This estimate is based on cost estimates which have been presented by the company and the Commission staff in the current rate case. Since that case has not yet been decided, I cannot say precisely what the level of allowable costs will be. Second, if you assume that the program for acquisition of the buses is to be authorized and a subsidy is to be paid to make up the operating deficit, the subsidy payment for FY 1973 would be approximately $1.2 million. That is because if the company no longer owns the buses, the ratepayer would not be required to pay depreciation charges for the buses amounting to $1,858,000 and interest on bus purchase loans of $128,000. In addition, we estimate that there may be about $250,000 in tax savings to the company and its riders, and the reduction of other interest payments not related to bus purchase in the amount of $447,000. The total saving to the ratepayer through the bus purchase plan would be approximately $3 million in the first year.

Of course, the bus purchase plan would require an initial outlay of approximately $18 million for the purchase of the fleet. Twelve million of that would presumably come from the Urban Mass Transportation Administration which has funds earmarked for capital grants to assist in improving mass transit facilities. The other $6 million would be local matching funds which the Congress would appropriate for inclusion in the budget of the District of Columbia. Thus, the initial cash outlay for the District of Columbia to buy the bus fleet and provide an operating subsidy would exceed the cash outlay for the first year if an operating subsidy were paid and the buses were not acquired. However, the bus purchase outlay of $6 million would save the ratepayer $211⁄2 to $3 million every year thereafter, not merely in the first year. This would in turn reduce the operating subsidy requirement by that amount in every year thereafter. Looking at the problem from the perspective of the next 2 or 3 years, therefore, I suggest that it might be wise to allow the city to purchase the buses now rather than simply allow payment of an operating subsidy.

WMA OPERATIONS

One other point should be mentioned, while D.C. Transit is by far the largest operator in terms of the number of bus patrons carried in the District of Columbia, there is another regular route operator providing service to intra-District of Columbia passengers that would receive subsidy under H.R. 2500. WMA Transit Co. operates between Prince George's County and the District of Columbia carrying approximately 16,000 riders per day. Of that total, approximately 4,000 are intra-District of Columbia riders. Their fare is currently 45 cents. The cost to the District of Columbia to subsidize their fare, assuming it would be lowered to the 40 cents currently charged by D.C. Transit, would be $150,000 in fiscal year 1973.

I hope the information I have given you is helpful to your understanding the alternatives before you. If you have any questions, I will be happy to answer them.

Mr. CABELL. Do you have any questions, Mr. Chairman?

Mr. MCMILLAN. I have no questions.

Mr. CABELL. Mr. Waterman, as you know, this hearing is to consider legislation for a subsidy to maintain the operation of D.C. Transit at fares comparable to present fares.

Mr. WATERMAN. Yes.

CONSULTANTS' RECOMMENDATIONS

Mr. CABELL. The newspapers have reported that the Commission has provided for a study of D.C. Transit's financial condition, and that the consultants' report recommended that transit should increase its equity by $12 million.

Would you explain the financial problems of D.C. Transit as disclosed in the consultants' report, and what means the consultant recommended to increase this equity?

Mr. WATERMAN. I think I will ask Mr. Schneider to give you the figures to that, Mr. Cabell.

Mr. SCHNEIDER. There is another reason I would like to discuss it rather than have Chairman Waterman discuss it, and that is, it is a matter that is before the Chairman in a rate case, and I think it is probably inappropriate for him to be discussing that evidence here or anyplace else. So, if you don't mind I will talk about it.

This study is a financial analysis that we had done basically because after the Commission raised the fare to 40 cents in 1970, on the assumption that the company then could proceed to purchase buses along the lines of the bus purchase plan that the Commission had established in an earlier time.

It turned out that the company couldn't get credit even after the fare was raised by 25 percent. The Commission's feeling was that this was a manifestation of some dire financial difficulty and wanted to look into it.

We hired a firm to do an analysis. And their analysis is basically that the company needs approximately $12 million in the next 12 months to provide financial stability.

Only about $3.5 million of that will come through the farebox. That mans that there is $9.5 million of cash need that is going to have to come from some other source. And the consultant has suggested a number of sources, including liquidating some of the company's below-the-line assets, and calling in some loans that are out to other affiliated companies that the consultant thought might be made available to the parent company rather than be out to the affiliated companies. And he also suggested that maybe there might be some more capital contribution by the company's owners.

D.C. TRANSIT PROPERTIES

Mr. CABELL. It has also been noted in the papers that in many cases restrictions have been imposed on the sale of D.C. Transit's property, by an agreement with American Airlines at the time of the sale of Transcaribbean Airlines.

Could you explain the provisions of this agreement as you know them and their effect on the sale of non-operating property, a course which I believe was recommended to the Commission as a source of funds to increase the transit company's equity.

Mr. SCHNEIDER. Yes. As you may know, TCA and D.C. Transit at one time were affiliated. TCA was, I think, a grandparent, I think TCA was the parent of D.C. Transit of Delaware, which is the parent of D.C. Transit of D.C.

While they were so affiliated there were certain income tax liabilities that were asserted by IRS growing primarily out of some operating matters of D.C. Transit of D.C., questions of the taxability of moneys involved in the track removal porgram, for example. They were D.C. Transit of D.C. tax liability issues, as I understand it.

And then TCA and D.C. Transit were separated. And a couple of years later TCA was sold to American Airlines, I think, for $18 million. At that time American Airlines said, well, TCA has a contingent liability here of about $9 million growing out of this unsettled IRS claim. And they asked for some security against the possibility that that liability would come due to them through TCÂ.

So, D.C. Transit, or I guess Mr. Chalk, pledged the subsidiary properties of D.C. Transit against that liability. And so it is a pledge of those properties against the possibility that tht liability became due and payable.

I guess that pledge means that those properties cannot be sold until that liability is cleared up. On the other hand, it may be possible for someone to negotiate with American Airlines, I suppose, and get some other kind of security. I don't know.

Mr. CABELL. Do you have any idea when that question might be resolved?

Mr. SCHNEIDER. I am told by D.C. Transit management that the issue is somewhere in the IRS at the moment. They seem to be confident that the laibility question will be one which they will win on, and they won't have the liability, certainly not in the degree that IRS asserted it. But I only hear that from them. I don't know how that situation is developing. It is just undecided at the moment. It is still with IRS.

BUS MAINTENANCE

Mr. CABELL. It has been alleged that the transit company has been operating some very poorly-maintained buses, both mechanically and sanitation and comfortwise.

What would you say is the effect on ridership of poorly-maintained buses?

Mr. WATERMAN. I think I will ask Mr. Schneider to answer that. That is involved in our rate case, Mr. Chairman.

Mr. SCHNEIDER. Well, in the first place, I don't want to defend D.C. Transit where they shouldn't be defended. On the other hand, I think it is easy to allege mismanagement. It is a lot harder to show it. The fact is, we don't have a bad transit system here in this city compared to what we have in a lot of other cities, particularly since we don't have a subsidy such as they have in many other cities, and we have been able to keep fares down and keep good service going without subsidies.

On the other hand, I don't think we have a maintenance problem in terms here of maintaining the buses mechanically. Every now and then there are too many buses out of service for repairs. And we have stayed pretty much with that. The Commission has required a night shift, for example, in the last rate case, we required the company to hire a night shift to use their facilities at night to make sure that the number of buses needed to be on the streets were there.

The cleanliness maintenance is another question, and it is a question that we on the Commission staff have been concerned with, and we have raised this in the current rate case. We don't think they are doing enough to keep the buses clean on the inside.

On the other hand, they are difficult to keep clean, because people eat their lunch and throw papers on the floor. I don't know-I guess the situation is, if the company is not cleaning the buses properly, the public then psychologically says, why should I bother to keep them clean? So it kind of balances itself.

I think the company can do better. But I don't think it is a major

case.

Mr. CABELL. It is kind of a question of which comes first, the chicken or the egg.

Mr. SCHNEIDER. It is kind of an easy problem to solve, and it seems to me they could do it.

BUS REPLACEMENTS

Mr. CABELL. Does your Commission have a standard of replacement that you consider to be the best operating and the lowest cost operating factor on the age and mileage of buses?

Mr. SCHNEIDER. The Commission has had a policy that the company should replace 1/14th of its bus fleet each year. This policy began, I think, five or six years ago. The idea has been to get the fleet converted all to the so-called new look buses with the air conditioning on the basis of 1/14th of the fleet each year. The company has not been able to maintain that schedule.

I guess over the time that the program has been in effect they have only been able to comply with it about half that time. I don't think they have bought any new buses since 1968. We are not pleased with that.

On the other hand, the funds have not been coming through the farebox to allow them to make their purchases, they claim they are in a situation where they can't get credit to buy the buses. The consultant we have in the cases recommended that they pay cash for the buses. But there is a question of where you get the cash. So, there is a situation that has not been adhered to, but it is not entirely the fault of the company.

FARE INCREASES AND BUS RIDERSHIP

Mr. WATERMAN. I would like to add one suggestion to what Mr. Schneider has said in regard to an additional factor which probably has the greatest impact on ridership. And that is, our experience has been that fare increases seem to have a very substantial impact on the ridership. Every increase in fares that we have had in recent years has resulted in a decrease in the ridership.

From 1964 until 1967, the fares did not rise. But in 1967, 1968, 1969, and 1970, in each of those years we had an increase in the fares. Ridership during that period of those increases dropped from 137 million down to 100 million. Now, this is, of course, a very serious problem. And not all this decrease was due to the fare increases, but it was a very substantial part of it.

Declining ridership certainly obviously affects the vitality of the bus service. We should be at this time in my view strengthening the bus system rather than weakening it, because if the bus system is weakened this in turn will weaken Metro, which is going to be substantially dependent upon the bus system as a feeder system. If the people are going to give up bus riding and take to riding jalopies and other vehicles, it is going to weaken the transit system. And also affect the pollution problem in the city.

DEPRECIATION RESERVES

Mr. CABELL. In the operation of the company, how have their depreciation reserves been utilized?

Mr. WATERMAN. Mr. Schneider.

Mr. SCHNEIDER. Mr. Cabell, I don't understand the question, how have they been utilized? The Commission allows depreciation on de