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    "title": "Railroads - Revitalization Act (1)",
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    "ocrText": "The original documents are located in Box 28, folder \"Railroads - Revitalization Act (1)\" of\nthe James M. Cannon Files at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Gerald Ford donated to the United\nStates of America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nDigitized from Box 28 of the James M. Cannon Files at the Gerald R. Ford Presidential Library\n[March 1975]\nINFORMATION\nTHE WHITE HOUSE\nWASHINGTON\nMEMORANDUM FOR THE VICE PRESIDENT\nFROM :\nSUBJECT :\nRAILROAD JIM CANNON Jain MEETING\nAttached is a decision memorandum, prepared by the Office\nof Management and Budget, on the proposals by Secretary\nColeman for a major railroad initiative. The memorandum\nwas completed on Thursday, March 27, for use at a meeting\nwith the President last Friday on economic matters. How-\never, because of the absence of Secretary Coleman, the\nPresident did not take up the substantive issues involved,\nand instead, asked the Domestic Council to follow up on\nthem with Secretary Coleman, Secretary Simon, Jim Lynn,\nFrank Zarb, and Bill Seidman.\nThe OMB memo, which was written in coordination with\nSecretary Coleman, takes up three major issues:\n1. Should the Federal Government pay for\npayments incurred by railroads berrowing\nthe S% billion nt guaranteed loans; which\nwill be provided under legislation soon to\nbe submitted by the Administration?\n2. Should the Administration propose\nlegislation to bypass the ICC in certain\ncases involving joint use of track, mergers,\netc., and require DOT approval. instead?\n3. Should the Administration propose a major\nprogram to reduce unemployment and help the\nrail industry, consisting of $3 billion over\ntwo years?\nWe have already agreed on two elements of railroad\nlegislation:\na) reform of the economic regulation of\nrailroads, and\nb) $2 billion in loan guarantees to revitalize\nthe capital assets of all the Nation's\nrailroads.\nAttachment\nFORD LIBRARY & GERALD\nMEMORANDUM FOR:\nThe President\nFrom:\nJames T. Lynn\nSubject:\nRevitalization and Job Stimulation Proposals for\nthe Nation's Rail Freight System\nBackground\nThe problems of the U.S. rail freight system are serious, and growing\nworse as a result of the recent economic slump. Current estimates\nindicate that the industry will show that the first quarter 1975\nloss will be the largest in its history. Roughly 50% of rail track\nis restricted to below-normal speeds due to poor maintenance. On\n15-20% of mainline track speeds are restricted to 10 miles per\nhour.\nRevertheless, the rail system remains an essential national asset.\nIt carries 38% of all freight (in ton-miles) and over 75% of all\ncoal shipments.\nFor this reason, several proposals are now being considered by the\nAdministration which would help the freight railroads through\nfinancial assistance, reorganization, and regulatory reform.\nIn addition to the rail passenger service programs (AMTRAK and\nNortheast Corridor), the freight related programs include:\n- Restructuring of Northeast bankrupt railroads (primarily Penn\nCentral)\nU.S. Railway Association has completed preliminary plans;\nfinal submission to Congress by July 26.\nFederal cost estimated at more than $4 billion over 10 years,\nof which $2.6 billion is already authorized.\nAdministration position being developed by late April.\nGERALD FORD CIBRARY\n3\n- This plan, the Rail Employment proposal, and the Rail Revitalization\nAct, will each have a major track rehabilitation component.\n- They should therefore be designed to complement each other, and\navoid duplication, especially on a geographic basis.\nRAIL REVITALIZATION ACT OF 1975\nOn March 22 you agreed to send to Congress the Administration's rail\nregulatory reform bill, including a $2 billion loan guarantee financial\nassistance package. Subscquently, DOT has concluded that two additional\nprovisions should be included in the bill. We request your decision on\nwhether to include these provisions, as described below.\nIssue #1: Interest Subsidies\nThe Act would authorize the Secretary of Transportation to pay (i.e.,\nsubsidize) some or all of the interest payments incurred by railroads\nin borrowing $2 billion of guaranteed loans under the Act. Provides\nup to $650 million through 1978. The Secretary may require applicants\nto use tracks and other facilities jointly or to acquire or sell assets\nto achieve greater system efficiency as one of the conditions for pro-\nviding financial assistance. (See issue #2),\nShould the provision of $650 million for interest payments be included\nin the Rail Revitalization Act of 1975?\nPros\n- DOT believes that these funds, and associated conditions, will\nenable the Federal government to bring about a more rational\ngeographic structure for the rail freight system. This would,\nin turn, improve the financial viability of the railroads.\n- Without the $650 million interest provision, DOT anticipates\nthat very few railroads would have sufficient incentive to\nparticipate in the loan program. This would tend to undermine\nthe value of the loan program as a sweetener to the regulatory\nreform package.\n- DOT believes the subsidy is necessary to deal with the railroads'\nserious cash flow problem.\nCons\n- This would set is potentially costly precedent for other Federal\nGERALD FORD LIBRARY\n4\nloan programs, and particularly for the new rail program.\n- It is not clear that this is the best way to create the desired\nincentive for participation. An alternative might be to relax\nthe criteria for use of the $2 billion in loan guarantees. For\ninstance, a portion of the funds could be made available to help\npay interest. during the first few years.\n- By staying within the $2 billion funding level in this way, there\nwould be no violation of your \"no new spending program\" policy,\nwhereas a $650 million add-on would require an exemption from\nthis policy.\n- The guarantee itself would provide a significant savings in the\ninterest cost, which should in itself be an incentive for\nparticipation.\nDecision\nOption A: Provide interest subsidy grants\n(supported by DOT)\nOption B: Allow loan guarantees to pay interest during first few\nyears\n(supported by ONS)\nIssue #2: Mergers\nPermits \"by-pass\" of ICC authority for joint use of track, purchase/sale\nof assets, and mergers. Opportunity for informal public hearings provided,\nbefore DOT approval. \"Least anticompetitive\" options must be approved.\nSuch joint use and mergers may be required, to qualify for financial\nassistance in the bill.\nPros\n- Would avoid onerous and drawn out merger procedures currently\nimposed by ICC, and thereby permit streamlining of the rail system.\n- DOT sees this as an integral feature of the financial package in\nthe bill.\nFORD & LIBRARY 938870\n5\nCons\n- This provision would inject DOT into a very contro-\nversial role, without a clear understanding of how\nit would exercise its authority, in terms of procedures\nor criteria for analyzing merger applications.\n- Although DOT indicates labor support for this provision,\nshippers. and local communities would oppose it because\nof the downgrading of service on certain lines which\nwould result. This could jeopardize passage of the bill.\n- An interagency working group is presently developing a\nmore thorough proposal to reform rail merger laws and\nstandards. Pending their recommendations, this proposal\nappears to be premature.\nDecision\nOption C: Permit \"by-pass\" of ICC merger authority\n(supported by Coleman)\nOption D: Further study to develop more complete merger\nlaws and standards\n(supported by Lynn)\nRAIL REHABILITATION AND EMPLOYMENT PROGRAM\nIssue #3: Whether to support such a proposal immediately,\nnot at all, or subject it to further comparison\nwith employment proposals in other areas.\nDOT proposes a two-year program to assist the rail industry in\nexpanding its maintenance program. Total $3 billion two-year\nauthorization ($1 billion in grants, $2 billion in loans).\nDirect employment impact over life of program optimistically\nestimated at 60,000 man-years; indirect employment estimated\nat 105,000 man-years. Federal government would provide grants\nfor labor cost, and income debentures for material and\nequipment cost. (see Attachments II and III for details).\nPros\n- Aimed at two major problems: unemployment and rail\ndeterioration. DOT believes the proposal would have\nDERALD R. FORD CIGRAPT\n6\na significant impact on each area. Improved roadbed is\nconsidered critical to a viable rail system.\n- Funding package designed to insure maximum railroad\nparticipation. Without labor grants, DOT believes that\nrailroads could not afford to take advantage of the\nprogram.\n- Strong support for this program by rail management,\nlabor, and. Congress.\nCons\n- Not in accord with your policy of \"no new spending\nprograms\".\n- If considered, should be compared with other job creating\nprograms to determine relative employment impact.\n- Need more analysis of relationship to other pending rail\nassistance programs, to insure coordinated approach. Need\nto further assess overall impact on Federal involvement\nwith railroads.\n- Direct payroll subsidy for private firms is an unprecedented\npractice in the U.S.; to violate this boundary between the\nprivate and public sectors could open up a host of similar\nproposals from other financially troubled industries.\nDecision\nOption E: Support DOT concept. Direct Secretary to prepare\nlegislation for Executive Branch clearance.\n(supported by DOT)\nOption F: Consider later in relation to other actions to\nstimulate the economy, and in the framework of\noverall approach to railroad industry.\n(supported by OMB)\nOption G: Basically disagree with this proposal, and so inform\nthe Secretary. Do not pursue further.\nAttachments\ncc: DO Records, Director, Director's Chron, Deputy Director,\nMr. Scott, Mr. Bray, Return to Mr. Johanson\nEGD AJohanson:vt 3/27/75\nFORD is LIBRARY\nAttachment I\nBreakout of Federal Funds for\nPending Rail Freight Proposals\n($ millions)\nUnder\nAuthorized\nConsideration\nTotal\nI. Northeast Rail\nPlanning and interim\ncash assistance\n340\n340\nInterim maintenance\nand improvement of\nplant\n300\nI\n300\nLabor protection and\nbranch line subsidies\n430\nI\n430\nFinancial assistance to\nnew rail system, AMTRAK,\nand other connecting\nrailroads\n1,500\n2,000\n3,500\n2,570\n2,000\n4,570\nII. Rail Revitalization Act*\nLoan guarantees\n-\n2,000\n2,000\nInterest subsidies\n-\n650\n650\nI\n2,650\n2,650\nIII. Rail Employment*\nGrants\n-\n1,000\n1,000\nLoan Guarantees\n-\n2,000\n2,000\n-\n3,000\n3,000\nTotals\n2,570\n7,650\n10,220\n* Expected to substitute for some of Northeast rail funding require-\nment.\nFORD & LIBRARY 938870\nTHE SECRETARY OF TRANSPORTATION\nWASHINGTON, D.C. 20590\nMarch 21, 1975\nMEMORANDUM FOR HONORABLE JAMES T. LYNN\nDirector of Management and Budget\nSUBJECT: Stimulating Employment Through a Federally Supported\nRail Rehabilitation Program\nDuring the current economic downturn, railroad industry revenues have\ndeclined sharply as car loadings (level of freight traffic) dropped 15 per-\ncent below last year's level. This, in turn, has forced the industry to\nreduce substantially its maintenance efforts. The result is that the\nindustry is experiencing both a high rate of unemployment and a more\nrapid deterioration of its physical plant.\nThe total amount of deferred maintenance in the industry is not known\nexactly but conservative estimates put the figure in the range of $5.5\n10 $7. 5 billion. Even at the 1974 level of maintenance, effort, which\ninvolved the employment of 92, 000 workers, the backlog of deferred\nmaintenance 1125 increasing annually. It is estimated that 10, 000\nmaintenance-nf-way workers have already been laid off this year and\nthat an additional 20, 000 workers may be furloughed by June 1975.\nRail's rapidly croding physical plant may soon result in a situation where\nit would become a positive drag on the whole economy. The only alter-\nnatives then would be massive amounts of direct Federal assistance or\nFederal ownership.\nWe believe that the present situation constitutes a unique opportunity to\nundertake a Federally-assisted but industry managed effort to provide\nmore jobs while raising the industry's currently planned level of maintenance.\nSuch an effort would not only produce additional jobs in the railroad industry,\nit would also have 2 substantial indirect job creating effect in the supporting\nindustries (c. :., steel, lumber, equipment, etc.). Such a program will\nmeet urgent national needs in i: vital industry while stimulating employment,\nand this would be far more productive than the public sector job programs.\nThis is 2 view that seems to be shared by many in the Congress, as evi-\ndenced by the several bills introduced by Sensiory Buckley, Congressman\nHeinz, and others to authorize such a program. We strongly urge that the\nAdministration develop a better program of its own as a response to\nCongressional initiative.\n&\nFORD\nGERALD\nAdvania\n(ached to this memorandum are the specifications for such a program.\n1)\nsummary, this Department recommends the following:\n1.\n1 two-year program to assist the industry in expanding its\nplanned maintenance program;\n2.\nFor railroads in reorganization under the Regional Rail Re-\norganization Act, Federal financial assistance would be in the\nform of a grant for the costs of labor, material, and equipment\nwith a proviso that the benefits must accrue to ConRail. These\nfunds then would simply substitute for funds which the Federal\nGovernment would be providing later to ConRail anyway;\n3. For all other railroads grants would be available for the labor\nportion of the costs associated with the Federal assisted\nincremental maintenance program with loans available for the\nrelated materials and equipment;\n4. The loan provisions would be in the form of income related\ndebentures and would provide a flexible repayment scheme\nfor both interest and principal, based on the carnings perform-\nance of the individual railroads during the repayment period;\n5. The program anticipates a total authorization of $3 billion for\nboth the grant and the loan elements, with a $1 billion effort\nin the first year and with $2 billion in the second year;\n6. In order to ensure that the program is truly additive, i.e.,\nover and above that which the railroads would do with their\nown resources, a maintenance of effort provision would be\nrequired for participation.\n7. To emphasize that the program is geared basically to the\ncurrent unemployment situation and is not 2 permanent\nassumption by the Federal Government of a role in normal\nprogram maintenance, a \"trigger\" is employed which would\nkeep the program in effect only during periods when the\nnational unemployment rate exceeds 6% (or some other\nappropriate figure);\n8. Two-thirds of the funds would be apportioned among the rail-\nroads on a formula basis and one-third would be left to the\ndiscretion oi the Secretary; and\n9. The program envisions project approval by the Secretary.\nGERALD FORD LIBRAR,\n-3..\nin addition, the proposal includes $95 million to accelerate (forts to\nmaintain and improve current passenger service on the Northeast\nCorridor. This effort is envisioned as a continuation of the program\nrecently authorized as part of the Penn Central emergency legislation.\nThe additional $95 million will not in any way preempt decisions related\nto the long term improvements required in the Northeast Corridor.\nIn total, this program should create 20, 000 additional jobs in the rail-\nroad industry and 35, 000 jobs in related industries during the first\nyear. The second year job effect would be roughly double that of the\nfirst year.\nI recognize that this program will have an effect on the budget but the\ntotal impact over the long run will be significantly smaller than the\ntotal dollar amount because of loan repayment and the substitution of\nConRail assistance. Morcover, it is my judgment that the social\ndividends resulting from whatever net cost is involved will be worth\nthe cost. It will help avert further layoffs and, indeed, should increase\nthe employment within the industry. It will foster much needed rehabi)-\nitation and improvement in the physical facilities of the industry and\nensure that the nation's rail transportation system will not deteriorate\nfurther during this economic downturn.\nA viable rail transportation system is fuel efficient and is needed to\nensure that the transport of bulk commodities and other resources can\nbe efficiently executed. The program should improve the safety record\nof the industry. The program, itself, is temporary, but it also sets the\nstage for and dovetails well with the financial assistance program included\nin the Administration's proposed Ra Iroad Transportation Improvement\nAct. Finally, we sense a great deal of interest for such a program in\nthe Congress and, in the absence of a Administration proposal, we\nwill undoubtedly be forced into a reactive posture.\nMy staff and I are prepared to discuss this proposal with you in greater\ndetail as soon as possible.\nWilliams T.Waman &\nWilliam T. Coleman, Jr.\nAttachment\nGERALD Address FORD\nATTACHMENT\nTHE SECRETARY OF TRANSPORTATION\nIII\nWASHINGTON, D.C. 20590\nCRIEN sirils \" AMERICA\nMarch 24, 1975\nMEMORANDUM FOR HONORABLE JAMES T. LYNN\n; DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET\nSubject: Stimulating Employment Through a Federally Supported\nRail Rehabilitation Program: Rationale for Grants\nto Solvent Railroads\nIn a memorandum of March 21 outlining the above program, we\nrecommended that the funding of the entire program for bankrupt\nrailroads and the labor portion of the program for solvent\nrailroads be effected through Federal grants. The bankrupt\nrailroads account for approximately 16% of the track miles that\nwould be eligible for rehabilitation. The labor element of the\nprogram would be approximately one-third of the total program.\nThus, in a $3 billion program, the bankrupts might be expected\nto receive approximately S500 million in grants and the solvent\ncarriers approximately $800 million in grants.\nIn the attached memorandum we give the reasons why, in our\njudgment, it is desirable to fund the labor portion of the\nprogram for solvent railroads with Federal grants, rather than\nloans.\nWilliam T. Coleman, Jr.\nAttachment\nCC: Honorable L. William Seidman\nHonorable James M. Cannon\nFORDO is OFRATO LIGHARY\nThe Critical Role of Grants in a Federally Supported\nRail Manatenance and Relabilitation Program\nThe Department of Transportation has proposed for consideration\n2 temporary program to stimulate employment in the railroad industry,\nspecifically in the vital areas of track and plant maintenance and\nrehabilitation. This program would cover the entire industry, i.e.,\nboth solvent and bankrup! companies, and would employ a combination\nof Federal grant and loan financial assistance. The program's under-\nlying rationale and specifics have been covered in another paper.\nThis paper addresses the critical role of grants for the labor cost\ncomponent in ensuring the program's acceptance and success.\nSummary\nPowerful arguments can be made that any Federal financial assistance\ndesigned to siimulate employment could be directed to no better purpose\nthan the maintenance and rehabilitation of the nation's railroads. To\nrealize the full potential of this opportunity, especially in light of the\ncurrent state of railroad finances, a grant component (for the direct\nlabor costs involved) in the Federal financial assistance program would\nbe essential.\n-- Federal grant assistance for at least the labor component\nof such a program appears critical to obtaining the partici-\npation of \"solvent\", albeit current money losing, railroads\nwhich constitute the bulk of the nation's rail system.\nA Federal program of financial assistance to the railroads\nmust treat both \"solvent\" and \"financially distressed\" (includ-\ning bankrupt) railroads equitably, lest ii unfairly disadvantage\nthe former.\nThe truly vital nature of the work to be supported by this\nprogram -- affecting directly the economic efficiency of the\nnation's rail system as well as the safety of its operation --\nmust be given appropriate weight in any consideration of this\nproposal's morit.\nAny \"grant\" assistance given in this.program would be truly\n\"additive\" in terms of its ultimate economic impact, providing\na significant multiplier effect.\nFORD is LIBRARY DERALD\n2\nDiscussion\nCentral to an understanding of this real nature of the rail maintenance\nand rehabilitation problem is a recognition that: (i) it is pervasive,\naffecting all parts of the rail industry -- both solvent and bankrupt\ncompanies -- albeit in somewhat different ways and degrees; and\n(2) the costs of a rundown, inefficient national rail plant will be paid\nfor by society one way or the other. It will be paid:\neither in terms of increasing accidents and derailments, more\n\"slow orders\" and train delays and the higher freight rates and\nimpaired service inherent in the foregoing,\nor in terms of a positive effort to arrest the deterioration of the\nrail plant, to rebuild and rehabilitate that plant (especially the\nvital mainline links), and to put presently furloughed maintenance-\nof-way employees (now receiving Federal unemployment pay) and\nother idle workers back into truly productive employment in an\nindustry vital to the nation's economic health.\nThe reality for rail industry finances of the recent sharp drop in\nrevenues stemming from the depressed economy and the poor prospects\nfor an early revenue recovery means that virtually no railroad, solvent\nor bankrupt, will carn a profit this year and few, if any, will do so in\n1976. Across the industry, rail managements have almost uniformly\ncut back sharply on maintenance activities in an effort to husband cash.\nIn this situation, the management imperatives to curb deferable\nexpenditures are as real and sharp for the normally \"healthy\", sol-\nvent railroad as they are for the financially shaky or bankrupt company.\nGiven the foregoing, several powerful arguments can be advanced for\nincluding a strong grant component in any Federal employment support\nprogram oriented to the national rail maintenance and rehabilitation\nproblem.\n1. Encourage Maximum Participation\nAs noted above, any railroad facing the prospect of depressed revenues\nFORD\nand an uncertain traffic outlook will be very reluciant to take on addi-\ntional indebindness for the materials, supplies and equipment needed\nfor maintenance and rehabilitation unless there is a strong financial\nincentive for them 10 do SO. Federal grant financing for the labor\ncomponent of the maintenance and rehabilitation projects approved\nunder this program will ensure that all major railroads will participate.\nA pure Isan program would almost certainly be shunned by most, if\nnot all of the solvent roads under present circumstances,\n3\n2. Provide a Measure of Equity As Between the Solvent and Bankrupt\nRailroads\nWithin the overall national railroad system, carriers -- solvent carriers,\nfinancially periled carriers, and bankrapt carriers -- compete with one\nanother not simply for traffic but for profit, and; in a very real sense,\nfor economic advantage and even survival. While acknowledging\ngovernment's responsibility for ensuring the provision of vital trans-\nport services, including substantial direct financial assistance, govern-\nment's programs and policies should not work to penalize the well-\nmanaged, relatively efficient, \"succossful\" carrier vis-a-vis his\nbankrupt competitors. The effects of the present recession, which\ngives rise to both the unemployment and rail maintenance problems,\nfall equally heavily on all parts of the industry. In a program such\nas the one being considered here, Federal financial assistance should\nbe provided evenhandedly across the entire industry.\n3. The Vital Nature of the Work To Be Supported\nThe physical condition of the rail network bears directly on the system's\noverall economic effectiveness and on the safety of those who work in\nrailroading and those who ride on trains. It is the principal determinant\nof the real value of a vital national transportation asset and one of the\nmost important factors in the overall efficiency and productivity of the\nnational economy. To put it bluntly, rail maintenance employment is\nabout as far from \"leaf raking\" as you can get in terms of true social\nand economic value to the country.\n4. The Incremental Nature of the Federally Assisted Program\nThe Federally assisted program will be a true net addition to what\nwould otherwise be invested in maintaining and improving the nation's\nrail system. Safeguards are built into the program to ensure this.\nThus, Federal grant assistance for the employment component of the\nprogram will not only reduce unemployment payments and add to the\nemployed rolls in the railroad industry, it will also leverage very\nsignificant additional employment and economic activity among\nsuppliers and vendors of materials and equipment.\n5. The Threat of Disruntive Litication the Program Is Confined\nFORD\nto the Banitriets 05 Discriminates Address ing Dolvents in a Way to\nLIBRARY\nAffect the Competitive Balance\nIf a Federally assisted program were in benefit soldly the bankrapts\nor were to discriminate against the solvents, the latter would almost\n1\ncertainly bring suit on the grounds that they were being unfairly\ndisadvantaged vis-a-vis their competitors. While i! is believed that\nsuch suits would not ultimately prevail, in light of the clear public\ninterest objectives involved, the hurt to the solvents would be real.\nBeing real, they would likely elicit much sympathy from the Congress,\nand, perhaps, from the courts.\nTPI-30\nMarch 23, 1975\nFORD i LIBRARY 9ERALD\n[march 1975]\nporu & pummis\nopten\n$1.2 B for\nevery transfer\nFORD & 039400 LIBRARY\n[march 1975\nI\n(-\\\nT\nIs 12 of shoned wilde\nwhy but propert up\nto $8 ya\n1) within 480\nII\nDepute The & tutni - who has\nupt Ts appon or drycn\nG truture -\nBin consult\nAnti-Dut ingut of from appone\n(s)\n111\nEnergen\n$700 Hutche Praph,\n5\nDERALO Re FORD\nwe will\nsv jobs bui\noutop\npurveph\n[march 1975]\n11.2 Bulion\n100 + They\n300 MA\n$500 / 700\n74\nA\nx\n$10 Down 10yan\nLIBRARY GERALD = FORD\n[March 1975]\nDRAFT PRESIDENTIAL STATEMENT ON THE\nREVITALIZATION OF THE RAILROADS\nThe rail industry in the United States is in a deeply troubled\nstate. Large parts of the rail plant are in a state of physical\ndeterioration. Some railroads are in bankruptcy and others are on\nthe brink of financial collapse.\nThe country has neglected the rail problem too long and the\ndesperate condition of the industry is testimony of this neglect.\nWe must begin at once a major and massive initiative to restore\nthe vitality of this essential industry. I have established for\nthis Administration a goal that calls for the complete revitalization\nof the Nation's railroad system so it can serve the needs of modern\nAmerica. We are moving forward with a program to assure a healthy,\nprogressive rail system. I have directed the Secretary of\nTransportation, William T. Coleman, Jr., to lead this effort and to\nmake it one of his prime concerns.\nAs an essential part of this program I am today sending to the\nCongress the Railroad Revitalization Act (RRA). This legislation\nis the result of several years of study and consultation with\nindustry and Congressional authorities.\nThere has been extensive work in the 93rd Congress on rail\nregulatory legislation and I am confident that the 94th Congress can\nand will act decisively. A good base has been developed for prompt\naction.\n-more-\n- 2 -\nThe Railroad Revitalization Act has two primary functions --\nto improve the regulatory climate under which railroads operate\nand to provide critically needed financial assistance for railroads\nthroughout the country. A major problem faced by the railroad\nindustry is an overabundance of Federal regulation. Much Federal\nregulation, originally imposed to prevent monoply abuses and regulate\ndevelopment in the western States, has long since outlived its\noriginal purposes. Indeed, Federal regulation has grown so cumbersome\nthat it retards technical innovation, economic growth and improved\nconsumer services. The legislation I am proposing is designed to\nimprove significantly the regulatory climate under which all railroads\noperate by lifting unnecessary and excessive regulatory constraints.\nThe proposed bill addresses rail regulatory problems by amending\nthe Interstate Commerce Act to:\n1. Permit increased pricing flexibility.\n2. Expedite rate-making procedures.\n3. Outlaw anticompetitive rate bureau practices.\n4. Improve the procedures for dealing with intrastate rail\nrates.\nIn addition, RRA makes available to the rail industry financial\nassistance which it must have to accomplish necessary modernization\nof outdated plant and equipment. This assistance is provided in two\nforms. First, the bill will make available $2 billion of long-term\nloan guarantees (20 years or less) so that the Nation's railroads\n-more-\n- 3 -\ncan obtain badly needed modern equipment and facilities, and repair\ndeteriorating roadways at reasonable financing costs. If necessary,\nthe Secretary of Transportation would be authorized to pay varying\namounts of interest on these loans. Up to $200 million a year for\nthree years would be made available to the Secretary for this purpose.\nThis financing will be available when funds cannot be obtained\nin private capital markets. It is one of the purposes of the program\nthat the financial condition of the rail industry be restored to the\npoint where the private sector will once again make capital available.\nThe bill also authorizes the Secretary to conduct research into\nthe design of a national rolling stock scheduling and control system\nwhich would be capable of expediting the movement and improving the\nutilization of freight cars and locomotives. Funding of $15 million\nto conduct this study and initiate implementation of the system is\nauthorized.\nIn view of the rail system's role in our Nation's economy, I am\nurging the Congress to give this measure immediate consideration.\nThe importance of regulatory reform to the efficiency of our\ntransportation system cannot be over-emphasized. While special\ninterests may resist these necessary changes, I am confident that the\nbenefits to the American people are, so great and so clear that the\nCongress will act quickly.\n-more-\n- 4 -\nWhile we are working with the Congress on this legislative\npackage we have a parallel responsibility to deal with the Northeast\nrail problem which has already reached cricis proportions.\nI consider the restructuring and rehabilitation of our northeast\nrail system to be of the highest national priority. As required by\nthe Regional Rail Reorganization Act, the United States Railway\nAssociation has developed and published a Preliminary System Plan\nfor the restructuring of the railroad system in that region. Under\nthe chairmanship of Secretary Coleman, I have established a task force\nof the Economic Policy Board to review and assess this plan so that I\ncan move quickly to make informed and comprehensive decisions on a\nFederal program for the northeast railroads. The task before us is\nlarge. The need for success is enormous. We will not shrink from\nrecommending to the Congress substantial Federal investment and bold\nrestructuring measures to put the region's railroads on a sound and\nenduring base.\nAs we grapple with the complexities of our rail freight problems,\nwe must deal with the interlocking concerns of a presently inadequate\nrail passenger system. In this regard, the Department of Transportation\nis nearing completion of detailed plans for significant upgrading of the\npassenger service along the heavily traveled Washington-Boston line.\nThis project will include substantial right-of-way improvement so\nthat true high-speed passenger service can be put into operation in this\nvery densely populated and heavily traveled corridor.\n-more-\n- 5 -\nAs another part of our commitment to revitalizing passenger\nservice on the Nation's railroads, we have already submitted major\nlegislation to reform Amtrak. Much as been accomplished since Amtrak\nbegan operations almost four years ago. On-board services have been\nimproved. New routes and equipment have been added, and during last\nyear's energy crisis, we found that many Americans used Amtrak trains\nas an alternative to using their automobiles. However, much still\nneeds to be done to shape a viable system of inter-city rail passenger\nservice.\nAmtrak must have firm, long-term funding commitments from the\nCongress and the Executive Branch so that it can develop long-range\noperating and capital plans. To this end, the Administration has\nproposed a four-year authorization of $2 billion to meet Amtrak's\noperating and capital requirements. If this long-term funding\ncommitment to rail passenger service is to be effective in developing\nand promoting inter-city passenger service, Amtrak must have the\nnecessary flexibility and management discretion to implement efficient\nservice. At the present time, the responsibility for the promotion of\npassenger service is fragmented among a host of Federal agencies.\nReducing regulatory and political control over Amtrak's management\nsystem is essential. The Administration proposal is designed to\nachieve this result. In addition, the bill will provide a more efficient\nmechanism for States to initiate inter-city rail passenger service. I\nbelieve this proposal will provide a sound basis for increasing the\neffectiveness and efficiency of Amtrak operations.\n-more-\n- 6 -\nThe current economic downturn is having a very serious adverse\neffect on employment in the railroad industry. Earnings have declined\nby more than 15% and the industry has been forced to lay off large\nnumbers of employees. At the same time, railroads have substantially\nreduced the maintenance of their physical plant. This, of course,\ncontributes to a further deterioration in rail facilities. In order\nto arrest this physical deterioration and to provide job opportunities,\nI intend to propose special legislation which will create a Federal\nassistance program to provide jobs in the rail industry. I recognize\nthat this proposal will have an effect on the budget but it is my\njudgment that the social dividends resulting from it are well worth\nthe cost. This program will avert further layoffs and, indeed,\nincrease employment within the rail industry. It will foster much\nneeded rehabilitation and improvement in the physical facilities of\nthe industry and effectively combat the further deterioration of the\nNation's rail transportation system.\nWhile the Railroad Revitalization Act is a significant part of\nour rail revitalization program, it is also a very important first\nphase of my overall program to seek fundamental reform of the regulatory\npractices which govern the economics of the entire transportation\nindustry. Such regulation, established long ago, in many instances\nno longer serves to meet America's transportation or economic needs.\nConsumers, too, often bear the costs of inefficient regulation in the\nform of inadequate service and excessive cost. Therefore, I will soon\n-more-\n- 7 -\nbe submitting proposed legislative reforms for motor carrier, domestic\nwater carrier, and airline regulation. Taken together, these proposals,\ncould save consumers billions of dollars annually while improving\nefficiency and conserve scarce energy resources.\nAmerica must have a modern, revitalized and efficient transportation\nsystem to meet the needs and demands of our Nation's commerce.\nSecretary Coleman and I stand ready to work closely with the Congress\nto secure passage of legislation to achieve this objective.\n####\nor\nDEPARTMENT\n0\nTHE SECRETARY OF TRANSPORTATION\nONLITED\nWASHINGTON, D.C. 20590\nAMERICA\nSTATES\nof\nMarch 21, 1975\nMEMORANDUM FOR HONORABLE JAMES T. LYNN\nDirector of Management and Budget\nSUBJECT: Stimulating Employment Through a Federally Supported\nRail Rehabilitation Program\nDuring the current economic downturn, railroad industry revenues have\ndeclined sharply as car loadings (level of freight traffic) dropped 15 per-\ncent below last year's level. This, in turn, has forced the industry to\nreduce substantially its maintenance efforts. The result is that the\nindustry is experiencing both a high rate of unemployment and a more\nrapid deterioration of its physical plant.\nThe total amount of deferred maintenance in the industry is not known\nexactly but conservative estimates put the figure in the range of $5.5\nto $7. 5 billion. Even at the 1974 level of maintenance, effort, which\ninvolved the employment of 92, 000 workers, the backlog of deferred\nmaintenance was increasing annually. It is estimated that 10, 000\nmaintenance-of-way workers have already been laid off this year and\nthat an additional 20, 000 workers may be furloughed by June 1975.\nRail's rapidly eroding physical plant may soon result in a situation where\nit would become a positive drag on the whole economy. The only alter-\nnatives then would be massive amounts of direct Federal assistance or\nFederal ownership.\nWe believe that the present situation constitutes a unique opportunity to\nundertake a Federally-assisted but industry managed effort to provide\nmore jobs while raising the industry's currently planned level of maintenance.\nSuch an effort would not only produce additional jobs in the railroad industry,\nit would also have a substantial indirect job creating effect in the supporting\nindustries (e.g., steel, lumber, equipment, etc.). Such a program will\nmeet urgent national needs in a vital industry while stimulating employment,\nand this would be far more productive than the public sector job programs.\nThis is a view that seems to be shared by many in the Congress, as evi-\ndenced by the several bills introduced by Senator Buckley, Congressman\nHeinz, and others to authorize such a program. We strongly urge that the\nAdministration develop a better program of its own as a response to\nCongressional initiative.\n-2-\nAttached to this memorandum are the specifications for such a program.\nIn summary, this Department recommends the following:\n1.\nA two-year program to assist the industry in expanding its\nplanned maintenance program;\n2. For railroads in reorganization under the Regional Rail Re-\norganization Act, Federal financial assistance would be in the\nform of a grant for the costs of labor, material, and equipment\nwith a proviso that the benefits must accrue to ConRail. These\nfunds then would simply substitute for funds which the Federal\nGovernment would be providing later to ConRail anyway;\n3. For all other railroads grants would be available for the labor\nportion of the costs associated with the Federal assisted\nincremental maintenance program with loans available for the\nrelated materials and equipment;\n4. The loan provisions would be in the form of income related\ndebentures and would provide a flexible repayment scheme\nfor both interest and principal, based on the earnings perform-\nance of the individual railroads during the repayment period;\n5.\nThe program anticipates a total authorization of $3 billion for\nboth the grant and the loan elements, with a $1 billion effort\nin the first year and with $2 billion in the second year;\n6. In order to ensure that the program is truly additive, i. e. ,\nover and above that which the railroads would do with their\nown resources, a maintenance of effort provision would be\nrequired for participation.\n7. To emphasize that the program is geared basically to the\ncurrent unemployment situation and is not a permanent\nassumption by- the Federal Government of a role in normal\nprogram maintenance, a \"trigger\" is employed which would\nkeep the program in effect only during periods when the\nnational unemployment rate exceeds 6% (or some other\nappropriate figure);\n8. Two-thirds of the funds would be apportioned among the rail-\nroads on a formula basis and one-third would be left to the\ndiscretion of the Secretary; and\n9.\nThe program envisions project approval by the Secretary.\n-3-\nIn addition, the proposal includes $95 million to accelerate efforts to\nmaintain and improve current passenger service on the Northeast\nCorridor. This effort is envisioned as a continuation of the program\nrecently authorized as part of the Penn Central emergency legislation.\nThe additional $95 million will not in any way preempt decisions related\nto the long term improvements required in the Northeast Corridor.\nIn total, this program should create 20, 000 additional jobs in the rail-\nroad industry and 35,000 jobs in related industries during the first\nyear. The second year job effect would be roughly double that of the\nfirst year.\nI recognize that this program will have an effect on the budget but the\ntotal impact over the long run will be significantly smaller than the\ntotal dollar amount because of loan repayment and the substitution of\nConRail assistance. Moreover, it is my judgment that the social\ndividends resulting from whatever net cost is involved will be worth\nthe cost. It will help avert further layoffs and, indeed, should increase\nthe employment within the industry. It will foster much needed rehabil-\nitation and improvement in the physical facilities of the industry and\nensure that the nation's rail transportation system will not deteriorate\nfurther during this economic downturn.\nA viable rail transportation system is fuel efficient and is needed to\nensure that the transport of bulk commodities and other resources can\nbe efficiently executed. The program should improve the safety record\nof the industry. The program, itself, is temporary, but it also sets the\nstage for and dovetails well with the financial assistance program included\nin the Administration's proposed Railroad Transportation Improvement\nAct. Finally, we sense a great deal of interest for such a program in\nthe Congress and, in the absence of an Administration proposal, we\nwill undoubtedly be forced into a reactive posture.\nMy staff and I are prepared to discuss this proposal with you in greater\ndetail as soon as possible.\nSIGNED BY\nWILLIAM T. COLEMAN,\nWilliam T. Coleman, Jr.\nAttachment\nPrep by: TPI-30:RFWalsh:gms:3-21-75\ncc: S-1, 2, 10\nTGC, TCI, FRA\nTPI-1, 2, 3, 5, 30\nDEPARTMENT of\nTHE DEPUTY SECRETARY OF TRANSPORTATION\nWASHINGTON, D.C. 20590\nUNITED ST 4/15 OF ASSIRICA\nMarch 24, 1975\n7'le\nMEMORANDUM FOR HONORABLE WALTER D. SCOTT\nASSOCIATE DIRECTOR ECONOMICS & GOVERNMEN\nOFFICE OF MANAGEMENT AND BUDGET\nJune\nSubject: Administration's 8 Rat Program\nIn accordance with our discussions this morning, herewith the\nfollowing:\n(1) Proposed inserts for the draft Presidential Message.\n(2) An analysis of rail industry problems and the principles\nof our program.\n(3) Position papers on the two immediate issues:\n(a) subsidizing the interest rates on guaranteed loans;\nand\n(b) the proposed rail rehabilitation and employment\nprogram.\nWith respect to the third issue of this morning, the\nrolling stock management information system, if OMB\ninsists on deleting that provision from the RRA on the\nground that it is a new money program, we will not press\nthe issue for Presidential decision. We would suggest\ninstead that we delete the specific authorization of\n$15 million, but retain the language authorizing the\nprogram, which we would then fund under the regular\nDOT authorization.\nLet me know if you have any suggestions or need anything more.\nJohn John W. Barnum\nLr\nL. Finne\nAttachments\nCC: Honorable L. William Seidman\nHonorable James M. Cannon\nHonorable Michael Raoul-Duval\nDRAFT: 3/24/75\nProposed Inserts for Draft Presidential Message\n\"The rail industry in the United States is in a deeply troubled\nstate. Large parts of the rail plant are in a state of physical\ndeterioration. Some rails are in bankruptcy and others are on the\nbrink of financial collapse.\"\nThe facts are startling. Over one half of the rail track is\nunfit for normal operations. At any given time between 15 to 20% of\na typical railroad's main line tracks is subject to slow orders\nlimiting the maximum speed to 5 to 10 miles per hour. Deterioration\nof the rail plant is spreading at an accelerated rate and this is\ncalling into question the ability of the rail industry to provide\nessential services.\nTrack deterioration delays the safe shipment of both people and\ngoods. During the first ten months of 1974 there were nearly 7,000\ntrain derailments, a 15% increase over the same period in 1973. The\nslow transit times and unreliability of service is causing the erosion\nof the rail industry's share of intercity traffic.\nA crucial problem is the grossly inefficient use of the freight\ncar fleet. A typical freight car moves loaded only 23 days a year.\nRail cars represent over 50% of the rail industry's net capital\ninvestment. No other industry has such an inefficient utilization of\nits capital investment.\nRails are a vital national asset essential to the commerce and\ndefense of the country. Today railroads are being called on to play\n- 2 -\na key role in our energy conservation program. Railroads are a very\nenergy-efficient means of moving freight. Morewver, if we are to\nachieve the goals of PROJECT INDEPENDENCE, there must be a greater\nuse of coal. More than three quarters of all coal shipped from the\nU.S. mines moves by rail. PROJECT INDEPENDENCE calls for the doubling\nof coal production by 1985. As this goal is mett, the railroads must\ndouble their coal-carrying capacity. The present financial condition\nof the rail industry will not permit that needed capital expansion.\nDRAFT: 3/24/75\nRail Industry Problems and the Principles of Our Program\nThe rail industry in the United States is in a deeply troubled\nfinancial and physical condition. Rate of return on investment for\nthe industry as a whole in a \"good\" year (such as 1974) is less than\n4%. Excluding the bankrupts, rate of return rises to only 5%. The\nindustry will show a loss for the first quarter of 1975.\nBecause of its low earnings, the rail industry is unable to\ngenerate sufficient funds for an adequate program of plant maintenance\nand rehabilitation. Funds from outside sources are virtually unavailable.\nAs a consequence of its perilous financial condition, the railroad\nindustry has not been able to put sufficient funds into its plant and\nthe rail plant is in a badly deteriorated condition. Over 50% of the\nrail plant is operating under so-called slow orders. During the first\nten months of 1974 there were a total of 6,961 derailments, up 15%\nabove the same period in the previous year.\nThe plant deterioration which characterizes the Northeast is\nspreading to the rest of the country at an accelerating rate. Because\nof inflation, a dollar's worth of improvement today will cost much more\nin the future. Moreover, failure to do necessary repairs now will\nnecessitate total rebuilding of lines in the future. Despite their\ndeteriorating condition and financial troubles, railroads remain the\nbackbone of the nation's freight transportation system, handling about\n38% of the ton-miles. In addition, the rail industry is an absolutely\nessential part of the solution to our environmental and engery problems.\nRails themselves are an energy-efficient mode of transportation.\n- 2 -\nMoreover, rails handle over 75% of all coal movements in this country.\nIf we are to lessen our dependence on imported oil, it is essential\nto have an adequate and efficient rail plant. Because of its deterio-\nrating condition, we are reaching a point where the rail industry's\nability to provide adequate service is increasingly being called into\nquestion. In addition, due to the disrepair of the rail system, much\nof the long-haul traffic which should be moving by rail is now moving\nby truck. A major rebuilding program of the rail system would move\nmuch of this long-haul traffic from less energy-efficient trucks to\nmore energy-efficient rails.\nCongress is becoming increasingly disturbed about the rail industry's\nproblem and there is a growing feeling in Congress that the only answer\nlies in nationalization or creation of a Rail Trust Fund. Legislation\nto nationalize the railroad rights-of-way has been introduced by\nSenators Hartke and Weicker. Brock Adams, a leading spokesman on rail\nmatters in the House, has publicly stated that serious consideration\nshould be given to such a proposal. Privately, many congressmen are\nsaying that the only solution to the rail industry problems lies in\nnationalization. They see themselves increasingly vulnerable to attack\nfor not solving the problem and for having applied band-aids in the form\nof emergency financial assistance to deal with it. Faced with the\nprospect of continuing financial crises in the railroad industry and\nthe need to pour more Federal money \"down the rathole,\" and in the\nabsence of a constructive alternative, Congress could seize nationalization\nas an easy out.\n- 3 -\nThe Department of Transportation has a program which we believe\nwill meet the railroad industry's problems with minimum Federal involve-\nment and will assure a viable private sector rail system in the United\nStates capable of meeting the commerce, energy and defense needs of\nthe country. The overall program we are proposing involves:\n1. Removal of a number of outmoded and inequitable regulations\non railroads. Changes in the regulatory system are an essential\ncondition to preventing future Penn Centrals and restoring the vitality\nof the railroad industry. They are also essential to assuring the\nviability of the railroad or railroads which emerge from the Northeast\nrail restructuring process.\n2. A consolidation and restructuring of the national rail system\nutilizing financial incentives and a new mechanism to bypass the\nregulatory impediments to rail acquisitions and joint use of facilities.\n3. Financial assistance to rehabilitate the essential elements\nof the national rail system including the Northeast.\n4. Bringing the Northeast rail restructuring planning process to\na successful solution consistent with the national program. This will\nresult in a paring down and rehabilitation of the bankrupt railroads\nin the Northeast.\n5. Recognition of the need for rail passenger service in certain\ncorridors and the public (and congressional) demand for such service in\nother markets.\nThis program is built on a number of unifying principles. First,\nrunning through the program is the notion that railroads are a vital\n- 4 -\nnational asset which are being poorly utilized. The first principle\nthen is the essentiality of recreating a healthy, progressive rail\nsystem.\nA second unifying element of the program is the recognition that\nrail plant deterioration is a major problem which the industry is unable\nto solve fully alone. The cost of rehabilitating the six bankrupt\nrailroads in the Northeast could be as much as $3 billion. The cost\nof rehabilitating a rationalized rail plant for the nation as a whole\nto a minimum level of adequate service is estimated at $7-9 billion.\nThe rail industry is simply incapable of generating either from internal\nor external sources all of the funds required to upgrade the plant to\neven minimal acceptable standards. The Regional Rail Reorganization\nAct, the financial assistance package of the Rail Revitalization Act,\nand the proposed Public Works Rail Employment Program are designed to\nassist the industry in rebuilding the plant to acceptable standards.\nWe do not propose that the Federal Government should fund all of the\nrailroad maintenance and rehabilitation expenditures. The financial\nassistance provided through the Revitalization Act and the Public\nWorks proposal, coupled with the regulatory reform, will provide the\nfoundation for the industry to become self-financing. Thus while the\nFederal financial assistance is only a portion of the overall expenditures\nrequired, it is a critical prerequisite for the industry to become self-\nfinancing.\nThe ICC is a major impediment to this disinvestment and plant\nrationalization. The interest subsidy and the \"ICC bypass\" of the\n- 5 -\nRail Revitalization Act provide incentives for the industry to rational-\nize the rail plant. The Act promotes this objective by encouraging\nrailroads to come forward with restructuring proposala, thus meeting\nthe Administration's goal of maximum reliance on private sector\ninitiative.\nFinally, another unifying principle running through the DOT program\nis the need for regulatory reform. The Act is designed to remove a\nnumber of regulatory restraints on carrier management. The present\nregulatory system has contributed enormously to the present railroad\nmalaise. Regulatory reform and the restructuring provided for in the\nAct are essential to avoid the spread of that malaise and to assure\nthat the railroads which emerge from the Northeast restructuring process\nand the Rail Revitalization Act restructuring process will be able to\noperate as viable private sector concerns.\nDRAFT: 3/24/75\nRail Revitalization Act Financial Assistance Provisions\nSubsidizing the Interest Rates on Guaranteed Loans\nOBJECTIVE: The proposal serves a twofold objective: (1) providing the\nrailroads access to the private capital market for funds to rehabilitate\nand improve the essential portions of the national rail system, and (2)\nincorporating an incentive to the industry to consolidate and restructure\nduplicate trackage, yards, terminals, and other facilities to produce\nover time a more efficient and rational national rail system.\nALTERNATIVE APPROACHES\nAlternative #1: Provides $2 billion in loan guarantees for obligations\nincurred to modernize and rationalize rail facilities. Before making\na guarantee, the Secretary would have to make certain findings which\nwould ensure that the loans were properly secured and were used to\ncreate a more efficient national rail system. The Secretary would\nalso have to ensure that the interest rate was reasonable, taking into\nconsideration loans of comparable risk.\nAlternative #2: Federally guaranteed loans with provision that the\nSecretary could pay whatever part of the interest he deems appropriate,\nwithin an authorization of $200 million per year for three years. He\nwould be required to make findings similar to those under the loan\nguarantee proposal in alternative #1. Further, as a condition for\nreceiving either a guarantee or payment of interest, the Secretary\ncould require applicant railroads to enter into joint agreements for\n- 2 -\ntracks, terminals, and other facilities and into agreements for purchase\nor sale of other assets and for mergers. Such agreements would not be\nsubject to ICC approval, but the Secretary would be required to hold a\nhearing before approving such an agreement. In addition, the Secretary\ncould not approve an agreement unless it achieved the transportation\nobjective in the least anticompetitive way.\nDOT RECOMMENDED APPROACH\nAlternative #2 should be chosen for the following reasons:\n1. Loan guarantees without incentive interest subsidies will not\nbe used by the rail industry. The industry simple cannot absorb any\nmore debt; it presently has $4.4 billion in outstanding debt with\ncurrent annual interest charges of approximately $184 million. Very\nshortly this debt will have to rolled over, and there will be an\nincrease in the interest rate. As a result, the annual interest will\nrise to $440 million with no added debt. This last interest figure is\napproximately equal to one year's earnings for the industry.\n2. Without the financial incentive provided by the interest subsidy,\nlittle consolidation and restructuring of the duplicative physical plant\ncan be achieved. Similarly, without a bypass of the ICC, there is little\nprospect for such rationalization occurring. The financial package\nproduces a means whereby the Secretary can, with financial incentives,\nshape the future restructuring of the industry to produce a rational and\nefficient system which will remain financially viable in the long term.\n- 3 -\n3. The immediate financial difficulties of the industry (probably\na large deficit for calendar year 1975) dictate the need for interest\nsubsidy. Without such subsidy, railroads will not use the financial\nprogram and we lose the opportunity to encourage and participate in\nthe needed restructuring. Without restructuring and additional invest-\nment, the rail system will continue to deteriorate at an accelerating\nrate, accidents will increase, and service efficiency will decline.\nInterest subsidy is the minimum required to prevent further financial\ndecline of the industry which could lead to eventual nationalization\nof the entire system.\n4. In the absence of an interest subsidy, the loan guarantee\nprovision will be described as useless by railroad management and labor\nalike.\nDRAFT: 3/24/75\nRail Rehabilitation and Employment Program\nOBJECTIVES: Program has a twofold purpose, (1) to stimulate employment\nof maintenance-of-way workers on the rail system and (2) to begin\nimmediately to rehabilitate the nation's rail system which is in a\nstate of accelerating deterioration.\nAlternative #1: Submit immediately the rail rehabilitation and employ-\nment program without relating it to other employment proposals.\nAlternative #2: Hold submission of a rail rehabilitation and employment\nprogram until we can determine (1) how it relates to (or could be used\nto defeat or decrease) other proposed employment programs and (2) the\nimpact of the Federal budget deficit.\nAlternative #3: Do not submit a rail rehabilitation and employment\nproposal.\nDOT RECOMMENDED APPROACH\nSubmit program proposal immediately to Congress as Administration's\nlegislative initiative for the following reasons:\n1. The program initiated by the Administration is a responsible\nalternative to the various public works type employment programs which\nmay be initiated by the Congress to meet the unemployment problem; in\nfact, the Department's proposal ties closely to similar bills intro-\nduced by Republican Congressmen recently and can serve as a rallying\n- 2 -\npoint for the Administration and the Republican members of Congress in\npresenting an imaginative and effective approach to the unemployment\nproblem.\n2. The program will add 20,000 direct jobs and 35,000 indirect\njobs to the work force during 1975, and 40,000 direct jobs and 70,000\nindirect jobs during 1976.\n3. Even without the national unemployment problem, there is a\ndesperate need for an immediate program to rehabilitate the main line\ntracks and essential yards of the nation's rail system. The rail\nsystem is in a state of accelerating deterioration which is crippling\nits ability to provide essential rail services. Because of the\nindustry's inadequate earnings, it has been unable to make needed\nimprovements and maintenance in the rail plant. Approximately $1.1\nbillion of annual catch-up maintenance is required simply to arrest\nfurther deterioration. An additional $1 billion per year annually\nis required to bring the system back to efficient operating condition.\n4. To fail to take action at this time simply ignores the\ndesperate need for rail rehabilitation and the present unemployment\nproblems, leaving the initiative to forces outside the Administration.\n[April 1975]\nRAILROAD PROPOSAL\nAs a part of our consideration of the proposal to revitalize\nthe Nation's railroads prepared by the Department of Trans-\nportation, the President should focus on the near-term and\nlong-range implications of additional Federal involvement\nwith the railroads. The following questions are intended\nto apply to all freight railroad operations (including the\nbankrupt railroads of the Northeast Corridor but excluding\npassenger rail service).\n1. What is the nature of the railroad problem?\nA. Short-term\nDefine dependency of Nation's commerce on the\nrailroads.\nState with particularity their current financial\nproblems, with emphasis on their ability to raise\ncapital.\nOther aspects of short-term\nB. Long-term\nDetail the competitive impact of other modes which\nare Federally subsidized.\nDetail impact of Federally economic regulations\nDetail impact of archaic work rules\n2. What is the proper Federal role?\nDefine Federal role in supporting competing modes\nCan the Federal government allow the railroads to be\nliquidated?\nWhat are the risks of nationalization or partial nation-\nalization (e.g., Federal ownership of rights-of-way)?\nWhat are the proper State and local government roles?\nCan we rationalize Federal aid to private corporations?\nWhat will the impact be of additional government involve-\nment on the Federal budget?\n2\n3.\nWhat will be the condition of the railroads if Congress\nenacts the following additional railroad legislation:\nA. Regulatory reform\nB. $2 million loan guarantee\nC. User charges on other modes to equalize impact of\ntaxes on competition\n- motor carriers\n- barges\n4.\nAssuming Congress enacts the above listed additional legis-\nlation, is there still a need for additional Federal help?\nIf yes, what are the options? (See options paper being\nprepared by DOT.)\nTo:\nOfficer-in-charge\nAppointments Center\nRoom 060, OEOB\nPlease admit the following appointments on Tuesday, April 1\n, 1975\nfor\nmeeting in Roosevelt Room Jim Canofon Domestic Council\n(Name of person to be visited)\n11:45 AM\n(Agency)\nThe Vice President\nSecretary Coleman\nJohn Barnum\nAsaph Hall\nRobert Binder\nRichard Walsh\nCharles Swinburn\nEric Bershirs\nBarrs Lewis\nRodney Eyster\nJohn Snow\nWilliam Hamilton\nMichael Browne\nLawrence McCaffrey Jr.\nLt. Commander W.T. Leland\nJames Cannon\nDick Dunham\nMike Duval\nBill Seidman\nFrank Zarb\nSecretary Lynn\nEdward Schmults (Treasury)\nJack Marsh\nMEETING LOCATION\nRequested by Jeanne McLean\nBuilding White Hosue West Wing\nRoom No.\nTelephone\nRoom No.\nDate of request\nAdditions and/or changes made by telephone should be limited to three (3) names or less.\nDO NOT DUPLICATE THIS FORM.\nAPPOINTMENTS CENTER: SIG/OEOB - 395-6046 or WHITE HOUSE - 456-6742\nFORD i LIBRAR\nTHE WHITE HOUSE\nWASHINGTON\nApril 7, 1975\nMEMORANDUM FOR\nJIM CANNON\nVIA:\nDICK DUNHAM\nJIM CAVANAUGH ART\nFROM:\nMIKE DUVAL\nWhe\nSUBJECT:\nRAILROAD INITIATIVE\nIn following up with DOT staff on the meeting you chaired\nin the Roosevelt Room with Secretary Coleman, et al., I\nfound out that you and the Vice President met with Coleman\nand his staff late last week.\nAccording to DOT's staff, the Vice President and you indicated\na strong desire to see if we could reprogram highway funds\ninto rail rehabilitation projects. Because this approach is\nsubstantially different from the ideas discussed in the Roose-\nvelt Room, I thought I'd better come back to you for additional\nguidance prior to moving forward with the memorandum to the\nPresident.\nI hope to go over a draft memorandum tomorrow or Wednesday\nwith DOT staff and would appreciate some guidance from you\nas soon as possible.\nTHE WHITE HOUSE\nINFORMATION\nWASHINGTON\nApril 9, 1975\nMEMORANDUM FOR\nJIM CANNON\nDICK DUNHAM\nWALLY SCOTT\nFROM:\nMIKE DUVAL\nMake\nSUBJECT:\nCOLEMAN'S RAILROAD PROPOSAL\nI had a meeting in my office yesterday evening with the DOT\nstaff to go over their draft decision memorandum to the\nPresident on the railroad issue. See the attached outline\nwhich lays out the alternatives they are considering.\nI pointed out that, even under their Option 1, the railroad\nfunding ($1.2 billion) would constitute a net increase in\nexpenditures in FY '76. Although these would come out of\nrescinded highway funds, it is an amount that the President\ndid not include in his highway budget but instead, requested\neither rescission or deferral by Congress. In short, the\nDOT proposal (realistically) assumes that Congress will not\nbuy the President's $5.2 billion highway level for FY '76.\nColeman's people are assuming that the Congress will defer\nand rescind a lesser amount than the President has requested,\nand that difference is the amount they hope to make up in\nrailroad expenditures.\nI felt it was important that the Department put before the\nPresident an honest option which would contain a new railroad\ngrant program but not result in increased DOT expenditures\nover the President's FY '76 Budget. I also felt it was\nimportant that the Department consider a direct highway-\nrailroad trade-off option.\nAccordingly, the DOT staff is re-doing their paper with four\noptions. They will include:\n1. A $1.2 billion railroad grant proposal which would\ncome out of the $5.2 billion highway funds proposed\nin the President's FY '76 Budget. This will result\nin no budgetary impact for FY '76 but one heck of\na controversial proposal.\n2\n2. DOT's Option 1.\n3. DOT's Option 2.\n4. Flexible use of the current highway program funds.\n(This is an idea that I have not had an opportunity\nto think through fully, but I will describe further\non in this memo.)\nOnce the four options are put together, DOT will call a meeting\nof the following principals to discuss the ultimate decision\npaper for the President: Jim Cannon, Jim Lynn, Secretary\nColeman, and appropriate staff.\nA decision memorandum should be ready for the President early\nnext week. I have asked Warren Rustand to see if there would\nbe an hour on the President's schedule during the middle or\nend of next week to discuss the DOT decision paper once we\nget it.\nObviously, if the President goes to Congress with a proposal\nto spend $1.2 billion (or any like amount) on railroads and\nrescind an equal amount from highways, this will be met with\na stir of controversy and, in my judgment, a strong likelihood\nof failure. It might be better to simply attempt to modify\nthe eligible uses of highway funds along the lines of the\n1973 Federal-aid Highway Act, which permitted the use of\nsome of the urban systems money for mass transit projects.\nI would envision a proposal which will permit the States to\nuse their highway apportioned funds for capital railroad proj-\nects. Interstate, urban or rural funds would be eligible. If\nthe State is working on a main line (trunk trackage) it would\nbe eligible for 90/10 funds and, for other lines, 70/30 money\nwould be available. I would recommend consideration of a\ncouple of incentives. First, to encourage the States to opt\nfor railroad projects, perhaps we could state that, for every\ndollar apportioned to a State used for railroad projects, the\nState would actually get $1.20, thereby increasing its State-\nwide apportionment. Second, there could be some arrangement\nwhereby the Secretary of Transportation could allow 100% grants\nif the project selected is energy critical. This might encour-\nage the rehabilitation of spurs into the coal mining areas, etc.\nThis proposal could be consistent with our highway legislative\nproposal because it would not matter whether the railroad proj-\nect was liquidated out of Trust Fund revenues or general revenues.\nThis whole matter is on a very fast track (sorry!) and I think\nwe should get together and discuss this today or tomorrow at\nthe latest.\nOptions for a Railroad Unemployment Program\nI. The Department's Original Proposal\nA. Amount\n-\n$3 billion\nB. Length of Time - 27 months\nC. Energy Emphasis -\nConcentrates on mainline routes - 81% of which\nhandle coal\nD. Rescission\n- None\n1.2\nII. Option 1\n1.2\nA. Amount\n- $1.2 billion\n1.2\nB. Length of Time -\n15 months\nC. Energy Emphasis -\nConcentrates on mainline routes plus gives\npriority to projects on mainline routes used\nfor coal haul\nD. Rescission\n-\n$1.2 billion of highway funds\nIII. Option 2\nA. Amount\n- $1.2 billion\nB. Length of Time -\n15 months\nC. Energy Emphasis - Same as Option 1\nD. Rescission\n- None\nOptions 1 and 2 above have been developed to meet the primary concerns\nexpressed at the March 31 meeting. These were:\n4/8/75\n2\n1. That the program would have a substantial budget impact and,\ntherefore, violate the President's policy of no new initiatives;\n2. That much of the employment effect of the proposal would come\nat a time when the additional job creation effect would not be\nneeded because the economy would be on the road to recovery,\nand\n3. That the proposal should result in actions to meet the nation's\nurgent need for moving ever increasing amounts of coal.\nOption 1 has these advantages:\n(a) It offsets the new authorizations. with an equal amount of existing\nauthorizations and thus over the long term does not add to Federal\nspending. (There is, however, a short term increase in outlays.)\n(b) It permits the Administration to initiate an urgent national pro-\ngram by moving funds from a lower priority to a higher priority\ntransportation program.\n(c) It is tied to three Administration objectives:\n(1) assist the railroads;\n(2) reduce unemployment, and\n(3) meet our energy requirements.\nThe disadvantage of this option is that it will be difficult to sell a\nhighway authorization rescission on the Hill.\nOption 2 has all the advantages of Option 1 plus removes its principal\nCongressional obstacle. On the other hand Option 2 violates the President's\ndictum of no new spending programs.\nFORD i GERALD LIBRARY\n95%\nof\nthe\nTHE WHITE HOUSE\nservice\n1,\nWASHINGTON\nApril 12, 1975\npn\nthe\ncountry.\nMEETING WITH AMERICAN RAILROADS\nASSOCIATION BOARD OF DIRECTORS\nMonday, April 14, 1975\n2:00 p.m. (30 minutes)\nCabinet Room\nFrom: Jim Cannon June\nI.\nPURPOSE\nThe meeting was requested by the Railroad Association\nand Secretary Coleman so that the railroad presidents\ncan brief you on the critical condition of American\nrailroads. They will present specific recommended\nprograms to correct the problems they face.\nII.\nBACKGROUND, PARTICIPANTS AND PRESS PLAN\nA. Background\nOn February 18, you met with two of the railroad\npresidents present at this meeting (Ben Biaggini,\nSouthern Pacific, and Graham Claytor, Southern\nRailroad) at a meeting here in the Cabinet Room\nwith six transportation industry leaders on the\nsubject of your energy program.\nCritical Need for the Railroads\nMost freight is transported by the railroads.\nThe following is a breakdown for all freight\nin ton miles transported:\nRailroads\n38%\nMotor carrier\n23%\nInland waterways\n16%\nPipelines\n22%\nAir\n1%\nRailroads carry the following amounts of selected\nproducts produced in this country:\nLumber and wood\n78%\nPulp and paper\n71%\nAutomobiles\n70%\nFood\n668\nPrimary metals\n608\n2\nRailroads transport 70 percent of the coal\nproduced, utilizing 81 percent of the Nation's\nmainline tracks. If coal production doubles,\nthe railroads will have to triple the ton miles\nof coal they carry because of increases in the\nneed for western coal. This will involve over\n90 percent of the railroad mainline network.\nCritical Problems\nOver one-half of the trackage in the country\nis unfit for high-speed operations. For safety\nreasons, trains are operating under Federal\n\"slow orders\" on nearly 50 percent of their\ntracks and at speeds under 10 mph for 20 per-\ncent of the tracks.\nAccidents and derailments have nearly doubled\nsince 1967.\nBecause of inefficient equipment and operating\nmethods, a typical freight car moves loaded only\n23 days a year.\nThe railroads are in very bad financial condition.\nEight Northeast and Midwest railroads are bank-\nrupt (including Penn Central), the so-called\nGranger roads in the Plains States are in pre-\ncarious financial condition; average, industry-\nwide rates of return are 3 percent or less; and,\nthey just had the largest quarterly deficit in\nrail history. This dismal financial condition\nis the result of:\n1) Outdated government regulation\n2) Archaic work rules\n3) Government subsidies to competing\nmodes\nThese have resulted in the critical problem of\nredundant facilities and excess competition.\nCongressional Reaction\nSenators Hartke and Weicker have introduced legis-\nlation to nationalize the railroad rights-of-way.\nHumphrey and Brock Adams have indicated interest\nin this approach.\nSenator Randolph plans to introduce a bill to\nprovide $1 billion to upgrade the rail rights-of-\nway and there are similar bills (e.g., Buckley --\n$2 billion) which have already been introduced.\n3\nAdministration Plans and Proposals\nThe Regional Rail Reorganization Act is being\nimplemented by DOT, ICC and the United States\nRailway Association (USRA) This is designed\nto salvage the Penn Central and the other bank-\nrupt railroads.\nYou will soon send to the Congress the Rail\nRevitalization and Energy Transportation Act\nof 1975. This proposal is in your FY 1976\nbudget and only a few details need to be\nresolved. It is nearly identical to legisla-\ntion proposed last year which nearly passed.\nIt contains:\n- $2 billion in loan guarantees for\nstreamlining and plant improvements.\n- significant regulatory reform.\nSecretary Coleman has proposed a $1.2 billion\nrailroad rehabilitation program. This is under\nactive review by Domestic Council and OMB. A\ndecision paper should be ready for you in about\na week.\nSee Tab A for additional background provided by\nSecretary Coleman.\nB. Participants\nTwenty railroad presidents, comprising the Board\nof Directors of the American Railroads Association.\nSecretary Coleman will be present. See Tab B for\nlist of participants.\nC. Press Plan\nMeeting to be announced; press photo.\nIII. AGENDA AND TALKING POINTS\nAfter thanking the railroad presidents for coming,\nyou may wish to turn the meeting over to Secretary\nColeman.\nSecretary Coleman will also welcome the railroad\npresidents and will then ask Ben Biaggini to pre-\nsent their recommendations.\nBiaggini will cover the problems and potential\nremedies for the railroads. This will include\n4\nthe costs imposed on the railroads by government\nregulation and policies. He will seek financial\nassistance, tax and regulatory reform.\nWe recommend that you advise them that you will\nsoon be sending to the Congress the Rail Revitaliza-\ntion and Energy Transportation Act, containing the\n$2 billion in loan guarantees and regulatory reform.\nWe recommend that you make no commitment at this time\non the $1.2 billion railroad rehabilitation program\nunder consideration within the Administration.\nDIRECTMENT OF TRANSPORTATION\nTHE SECRETARY OF TRANSPORTATION\nWASHINGTON, D.C. 20590\nUNITED STATES OF AMERICA\nApril 11, 1975\nThe President\nThe White House\nWashington, D. C. 20500\nDear Mr. President:\nAttached in this package is material intended to help\nyou prepare for our meeting with the 20 railroad\npresidents who comprise the Association of American\nRailroads and their president, Stephen Ailes. Included\nin this package are:\n1. The Outline for Discussion prepared by the staff\nof the Association of American Railroads. Mr.\nBen Biaggini, President, Southern Pacific Railroad,\nwill talk from the points outlined here.\n2. Questions intended to stimulate discussion.\nHowever, I doubt seriously that you will have\nto use them.\n3. A backgrounder which I call \"The Crisis of the\nNation's Railroads\" which briefly brings us up to the\npresent time in our current initiatives.\nRespectfully,\nBut\nAttachments\nOUTLINE FOR DISCUSSION OF THE PRESIDENT\nWITH THE RAILROAD PRESIDENTS\nMONDAY, APRIL 14, 1975\nThis discussion paper was developed by the Staff of the American\nAssociation of Railroads.\nI. The railroad freight system has an important role to play in the\nlong-term future. The basic technology remains relevant and is\nimproving rapidly; in an unbiased economic environment, it can survive\nand prosper. Expansion of rail capacity to meet expanding national\nneeds is much cheaper than is the case with trucks and water carriers.\nFinally, energy, environmental, safety and land use considerations\nstrongly argue for a national policy of increased reliance on rail in\nthe years ahead.\nII. The rail system will be with us -- the issue is will it continue\nim private operation or will it have to be nationalized to be preserved.\nThe costs of nationalization are so large, the administrative burdens on\ngovernment are so severe, and the probability that operating efficiency\nwould seriously decline is so great that almost everyone agrees that the\nsystem should remain as a private enterprise.\nIII. Railroads face one major overriding problem -- inadequate earnings.\nThe earnings are depressed by:\nA. The main burdens placed on the railroad system by the\ngovernment include:\n(1) Cost of rate regulation ($500 million per year)\n(2) Losing branch line operations ($130 million a year)\n(3) Remaining passenger deficit ($107 million a year)\n(4) Property taxes paid on rights-of-way ($203 million a year)\n(5) Grade crossing costs ($173 million a year)\n(Estimated rail revenue losses -- $1.1 billion\nper year)\n- 2 -\nB. Effects of subsidy to rail competitors\n(1) Inadequate user charges on large trucks ($2 billion a year)\n(2) No user charges on water carriers ($500-$750 million\na year)\n(Estimated rail revenue losses -- $2.5-$2.75 billion\nper year)\nIV. Inadequate earnings over a long period have meant deferral of\nrailroad expenditures for track maintenance, new equipment and plant\nmodernization. These deferrals, in turn, have meant a deterioration of\nservice, a decline in the ability to compete, and a further decline in\nearnings -- a vicious circle.\nV. Remedy --\na. Immediate\n(1) Usable financial assistance to break the vicious circle\nand improve plant, improve service and improve the\nability to compete.\n(2) Regulatory reform - particularly in ICC rate powers.\n(3) Termination of state taxation of rights-of-way with\nFederal payments to states to replace revenues lost\nthis way.\n(4) Effective abandonment machinery, except where subsidy\nis available to keep branch lines in operation.\n(5) Immediate initiation of independent analyses to determine\nextent of subsidy to rail competition, plus measures to\nlessen subsidy in interim -- at least to halt its\nincrease.\n(6) More favorable Federal tax policies on investment tax\ncredits, accelerated amortization and depreciation of\nexisting rail grading and tunnel bores.\nb. Longer Range\n(1) Correction of the competitive imbalance -- by imposition\nof adequate user charges or by offsetting subsidy or both.\n- 3 -\nVI. Once, with Federal assistance, present difficulties are overcome,\nonce the regulatory climate is made conducive to successful operation,\nonce the competitive situation is brought in balance, the railroad\nsystem, privately owned and operated, already the world's most efficient,\nwill play an increasingly important role in the national transportation\nsystem.\nQuestions Concerning Railroads' Materials\nfor Meeting With President Ford, April 14, 1975\n1. The Administration proposed a regulatory reform bill\nin the last Congress, and the House passed a comprehensive\nmeasure. The Senate failed to act on the bill, in part,\nbecause of a lack of interest by the railroad industry.\nWill the railroad industry actively support the Administration\nin an effort for regulatory reform?\n2. A request is made for \"usable financial assistance\" to\nimprove plant and service. What type of assistance is\nusable, i.e., grants, loans, loan guarantees, deferred interest?\n3. Can you detail the revisions in tax policies requested\nand the revenue cost to the Government?\n4. To correct \"competative imbalance\", what are the scope\nand extent of user charges that should be imposed?\n5. Will the railroad industry cooperate in a program to\nlessen unnecessary capacity in the industry through joint\nuse of facilities and mergers?\n2\n6. Present subsidies to competeting modes are for public\nfacilities. For direct subsidies to the railroad industry,\nis it necessary that the government own and maintain the\nrai lroad right-of-way?\n7. If Federal tax policies are made more favorable, how\ncan we insure that the resulting monies are put into rail\nproperty investments?\n8.\nShould user charges be designed to promote intermodal\ntransportation services such as piggy-back services?\n9. Should user charges be tied to intercity freight service\nsuch as long haul trucking and waterways services.\nOF\nDEPARTMENT\nTHE SECRETARY OF TRANSPORTATION\nWASHINGTON, D.C. 20590\nUNITED\nAMERICA\nSTATES\nof\nMEMORANDUM FOR THE PRESIDENT\nSUBJECT:\nThe Crisis of the Nation's Railroads\nMr. President, as your principal advisor on transportation matters,\nI feel compelled to convey to you my sense of the desperate plight\nof the Nation's railroads. The state of the rail industry today\nnot only endangers any prospect of economic growth in this country\nbut also imperils our important national objective of energy\nindependence. There is a growing mood in Congress that the only\nanswer to the crisis of the railroads is some form of nationalization.\nI believe that a private sector solution is possible -- if we move\nquickly. There is an urgent need for action. Therefore, I respect-\nfully urge you to undertake a dramatic, coordinated program to\nrevitalize the Nation's private enterprise railroad system.\nThe crisis of the American railroad industry presents this Administration\nnot only with a grave problem but also with a great opportunity. If\nyou can put into effect, Mr. President, a program to save the rail-\nroads, it will have an historic significance equal to that of any other\nendeavor upon the domestic scene. From a political standpoint, I\nbelieve it provides an unparallelled opportunity for the Administration\nto seize the initiative from Congress.\nThe Importance of the Railroad Industry\nFor more than a century the railroads have been the backbone of this\nNation's transportation system. Even after years of decline, railroads\nstill carry 38 percent of all freight (in ton miles), easily exceeding the\n23 percent transported by motor carrier and the 16 percent moved via\ninland waterway. Railroads carry 70 percent of the automobiles\nproduced in this country, 66 percent of the food, 78 percent of the\nlumber and wood, 60 percent of the chemicals, 60 percent of the\n2.\nprimary metal products, and 71 percent of the pulp and paper. If\nthe Nation is to realize its economic growth potential during the\nremainder of the twentieth century, the railroads must be in a\ncondition to move quickly and safely significantly increased freight\nvolumes.\nMoreover, a healthy railroad industry is crucial to the energy needs\nof this country. The railroads must play the predominant role in\nsupplying the Nation with coal during the remainder of this century.\nThe railroad industry transports 70 percent of the coal produced in\nthis country, a task involving approximately 81 percent of its\nmainline network. Your Project Independence, to make the Nation\nself-sufficient in energy, envisions a doubling of domestic coal\nproduction by 1985. To meet this goal, railroads will be required to\ndouble their coal-carrying capacity. Actual ton miles of coal\ncarried by rail, however, must triple due to changes in origin from\neastern coal to low-sulphur western coal. This would necessitate coal\nshipments over 90 percent of the railroad mainline network. Greatly\nimproved railroad service is, therefore, essential to the development\nand use of coal for energy. In addition, rail transportation is the\nmost energy efficient of all the modes, both freight and passenger.\nWith regard to freight transportation, our research indicates that\nrailways are significantly more energy efficient than trucks, their\nubiquitous competitor, or airlines, and slightly more efficient than\neven barge movement. As for passenger service, our research\nindicates that railroads, when properly utilized, are substantially\nmore energy efficient than either autos or airlines in moving\npassengers and are approached in efficiency only by intercity bus.\nIn summation, a healthy, progressive, strengthened railroad system\nis absolutely essential to our national objective of energy independence.\nThe Problem Facing the Railroad Industry\nGiven the paramount importance of the railways in both the past and\nfuture of this country, it has been alarming for me, during my first\nmonth on the job, to discover the dilapidated state of the railroad\nindustry. The facts are startling. Over one half of the present rail\ntrack in the country is unfit for high-speed operations. It is not\nuncommon for train operations on mainline tracks to be limited to\nspeeds of 10 to 20 miles per hour. Accidents and derailments have\nnearly doubled since 1967. Because of outdated equipment and methods\n3.\nand the resultant inefficiency, a typical freight car moves loaded only\n23 days a year. It is becoming increasingly apparent that the rail\nindustry, as presently constituted, will be manifestly unable either\nto support the traffic our economy generates or to meet the challenge\nof increased coal carriage which energy independence demands.\nFor many years now the income generated by the American railroads\nhas been insufficient to meet the requirements of plant maintenance and\nrehabilitation, and with rates of return of 3 percent or less, funds from\noutside sources are virtually unavailable. The deferred maintenance\nin the industry is now estimated to range as high as $7.5 billion.\nAlthough the problems of railroads are most severe in the Northeast\nand Midwest (where eight carriers are bankrupt), numerous other\nrailroads, especially the so-called Granger roads that operate in\nthe Plains states, are in precarious financial condition. The massive\nproblems of the railroad industry are most recently aggravated by the\nlargest quarterly deficit in rail history. Today the United States is\nconfronted wi th the grim reality that a major breakdown of our rail\nfreight system is a distinct possibility.\nIt is important that the underlying causes of the railroad problem be\nclearly understood. A great deal of the discussion on this subject is\nfocused on the poor condition of mainline track and on the bankruptcies.\nThese are symptoms but not the underlying causes of railroad difficulty.\nThe principal factors underlying railroad difficulty are: (1) Redundant\nfacilities and excess competition; (2) Outmoded regulation; (3) Archaic\nwork rules; (4) Lack of capital to finance rehabilitation; and (5)\nPreferential treatment of other modes.\nPerhaps the principal factor underlying railroad problems is the\nredundancy of plant and the excess competition which exists within\nthe industry. This is especially true in the Northeast and Midwest\nand, as a result, these are the areas where railroad problems are the\nworst. There are simply more facilities of all types -- yards, mainline\ntracks, and branch lines -- than are required to provide economical\nand efficient service. In many instances, two or more railroads\ncompete for traffic sufficient only for the survival of one carrier.\nSecondly, slow and cumbersome regulatory procedures impede\nresponses to competition and changes in market conditions and at\ntimes result in traffic being handled at non-compensatory rates. These\nprocedures also have created a serious impediment to needed\n4.\nrestructuring. Regulation that was necessary when it was enacted\ndecades ago is simply unresponsive to today's needs. This\ninflexibility stemming from Interstate Commerce Commission\nprocedures and rules is a major deterrent to railroad efficiency\nand viability. For instance, after 12 years, the attempt to restructure\nthe Rock Island Railroad through merger with other carriers is still\nincomplete.\nThird, the existing work rules in the industry are a major obstacle\nto achievement of economic potential in the railroad system. Archaic\narrangements regarding the size of the crews that man trains and\nproviding for crew payment on an illogical basis weigh heavily upon\nthe industry and severely limit productivity.\nFourth, lack of capital and the resultant deferred maintenance has\ncaused widespread deterioration of mainline track and other parts of\nthe railroads' physical plant. Clearly there is a need to rehabilitate\nthe essential portions of the industry's physical plant -- but that\nrehabilitation will be effective in revitalizing the railroads only if\nthe burdens of redundant facilities, regulatory constraints, and\ncostly work rules are also alleviated.\nFinally, there has been, over the years, preferential treatment of the\nother transportation modes by the Federal Government. Only the\nrailroads (with the exception of the pipeline companies) own their own\nrights-of-way and have to carry the fixed charges of ownership and\nmaintenance of this extensive plant.\nThe Congressional Reaction\nThere is a great deal of pressure building in Congress for a solution\nto the railroad problem, and there is growing feeling on the Hill that\nthe only answer lies in some form of nationalization. Faced with the\nprospect of continuing crises and the necessity of providing more and\nmore Federal money, there is an understandable desire to ensure that\nthe American public receives something in return for its heavy investment.\nIn the absence of a constructive alternative, Congress may indeed turn to\nnationalization. Senators Hartke and Weicker have introduced legislation\nto nationalize the railroad rights-of-way, as has Senator Humphrey, and\nBrock Adams, a leading spokesman on rail matters in the House, has\npublicly stated that serious consideration should be given to such a\nproposal. Privately, many other Congressmen and Senators are\n5.\nsaying that the only solution to rail industry problems lies in\nnationalization. In any event, Congress has already seized upon the\nobvious problem of deteriorating track and roadbed as an interim\nmeans of improving the railroad situation as well as an opportunity\nto take the political initiative. Senator Randolph intends to introduce\na bill to provide for a $1 billion program for upgrading rail rights-of-\nway. Congressman Heinz and Senator Buckley have each introduced\nseparate bills to spend $2.5 billion and $2. 0 billion, respectively, to\nupgrade deteriorating trackage through employment programs.\nIt is highly unfortunate that Congress has been allowed to take the\ninitiative on the railroads. It is even more unfortunate that some\nsolutions receiving serious consideration in Congress are excessively\nexpensive, inappropriate responses to the real problem, and bad for\nthe country. The Congressional proposal of nationalization of the\nindustry, or, at least, of the rights-of-way, would mean not only an\ninjection of unnecessary Federal control into another area of our\nnational life but also unnecessary rehabilitation and maintenance\nexpenditures on excess railroad plant. Total physical rehabilitation\nof the existing rail system is not only prohibitively expensive but also\nundesirable. What is needed is a major rationalization of the rail\nfacilities of the country and an elimination of redundant capacity through\nmergers and joint use of facilities. Only the components of a\nrationalized rail plant should be rehabilitated. Moreover, rehabilitation\nof track will be of little benefit to the railroads or to the Nation unless\nthe other difficulties of the railroads can be overcome as well. A track\nrehabilitation program should only be commenced as a part of a broader\nprogram to overcome other industry problems such as regulatory\nrestraints and work rules.\nA Program to Rebuild the Railroad Industry\nThe Department of Transportation has a comprehensive program which\nI believe will assure the United States of a viable private enterprise\nrail system capable of meeting the commerce and energy needs of this\ncountry. Moreover, it provides the Administration with the means of\nseizing the political initiative. The program involves: (1) A\nconsolidation and streamlining of the national rail system utilizing\nfinancial incentives and relief from impediments to rail mergers and\njoint use of facilities; (2) Removal of a number of outmoded and\ninequitable regulations on railroads; (3) As an important first step\nto nationwide rail consolidation, the forging of a successful conclusion\n6.\nto the current Northeastern rail restructuring process in a form\nconsistent with the national program of consolidation; (4) Measures\nto reduce preferential treatment of competing modes and; (5)\nRecognition of the indispensability of rail passenger service in\ncertain corridors and the public (and Congressional) demand for\nsuch service in other areas.\nImplementation of the Program\nThe cost of rehabilitating even the streamlined rail plant that I have\nproposed will be high. On the other hand, I am keenly aware,\nMr. President, of your dedication to fiscal responsibility. Therefore,\nthe Department of Transportation has already developed two concrete\nlegislative proposals which will not only take great strides in\nfurthering the program I have outlined but also be consonant with\nyour opposition to any new spending programs.\nFirst, we have proposed a bill called the Rail Revitalization and\nEnergy Transportation Act of 1975 to provide $2 billion in loan\nguarantees to railroads to finance the rationalization and streamlining\nfacilities. The $2 billion in the bill is already a part of your budget\nproposals, and the proposal is awaiting White House approval. As a\ncondition of receiving assistance, the Secretary of Transportation will\nbe able to require railroads to enter into agreements for the joint use\nof tracks, terminals, and other facilities and to enter into agreements\nfor mergers to further rationalize the rail system. The proposed bill\nalso provides significant regulatory reform by amending the Interstate\nCommerce Act to permit increased pricing flexibility, to expedite\nrate-making procedures, to outlaw anti-competitive rate bureau\npractices, and to improve the procedures for dealing with intrastate\nrates.\nSecond, I have proposed a $1. 2 billion Emergency Railroad\nRehabilitation Program to attack forthwith the accelerating deteriora-\ntion of the railroad physical plant. The proposal carries with it\nsignificant immediate benefits for employment in the country. The\nmoney for this bill could, as one alternative, come from rescinding\n$1. 2 billion of the $9. 1 billion for highways currently being impounded.\nAs a result, it would not increase Federal funding authorizations but\nrather reallocate funds from lower priority to higher priority transpor-\ntation programs. I believe that public reaction, except for the die-hard\n7.\nsupporters of expanded highway programs, would be positive.\nThis proposal also is awaiting White House approval. The primary\nemphasis of the proposal is to rehabilitate and maintain mainline\nroutes and major terminals that will be included in any restructured\nand streamlined railroad system. This legislation will significantly\nassist the Nation's energy goals by giving priority to those projects\nwhich will aid in the movement of coal.\nThe financial assistance provided through the proposed Rail\nrevitalization a nd Energy Transportation Act and the Emergency\nRailroad Rehabilitation Program, coupled with the regulatory\nreform contained in the former, will provide the foundation for a\nviable private enterprise railroad industry. Moreover, these two\nlegislative proposals will announce the Administration's determination\nto deal with urgent national problems even while simultaneously\nmaintaining a commitment to fiscal responsibility. At the least,\nthe Emergency Railroad Rehabilitation option of using highway\nmoney would put pressure on Congress to consider trade-offs rather\nthan add-ons to the budget as the means for financing the railroad\nprograms it is considering.\nIn conclusion, Mr. President, I believe that the two legislative\nproposals I have outlined are important initial steps in constructing\na comprehensive program to save the American railroads. Of course,\nit is also essential that we deal appropriately with the Northeast\nrail restructuring problem. By the 26th of this month, the Economic\nPolicy Board Task Group on Northeast Rail Restructuring, of which\nI am Chairman, will present you with its specific recommendations.\nWilliam T. Coleman, Jr."
}