Electric Railway Journal · Vol. 58, No. 11 · September 10, 1921 · pp. 403-408.

Transit Tendencies in New York City. By LeRoy T. Harkness, Member of the New York Transit Commission.

The author first briefly recounts a history of the development of the electric railways in New York City and the conditions which brought about the depressed financial condition of these properties. He then outlines the purpose and powers of the present Transit Commission. In conclusion he says: "In meeting the governmental problems resulting from or brought to a focus by the World War, there is needed proper statesmanship that will not confine itself to measures of repression but will consider it its main and most important duty to search out and to relieve the underlying causes of public dissatisfaction and unrest. The situation of electric traction throughout the country furnishes not only the most immediate but also one of the biggest instances of the opportunity for the exercise of such statemanship." Abstract of a paper read before the Public Utilities Section of the American Bar Association, Cincinnati, Ohio, Aug. 30, 1921.

The New York City transit situation, with its many, varied and complicated problems, presents, in perhaps the extreme form, the crying need for the adoption and application of public utility policies that are in full accord with changed conditions.

Transit has long been a political football, and that condition will continue while old sores remain and there is continual friction between the traction companies and the public. The attempt is now being made in New York City to develop a comprehensive and thorough-going plan of readjustment that will remove the old sores and causes of friction and permit transit to be viewed in its true light as an economic proposition.

The general features of the New York situation are well known. Systems of transit lines aggregating 1,800 miles in single track mileage, with outstanding securities approximating at par a billion dollars, are either in or on the verge of receiverships. In other parts of the country the financial difficulties of traction companies growing out of the World War have been met partially or completely and in general the situations are not acute. In New York City no relief has been obtained by the transit companies except through a cutting down of the number of free transfer points largely through the separation of lines under receiverships.

In addition to the inflation produced by the World War, the New York conditions are exceptional because of the element of a tremendous suddenly added competition due to carrying out the 1913 program, which involved the more than doubling of the rapid transit lines within a period of five years. Through the abolition of free transfers a large part of the public is paying an increased fare and the congestion is becoming progressively worse. On most of the lines conditions in the rush hours are a physical and moral menace.

The condition of the companies as viewed by the investing public may perhaps most readily be shown by contrasting the market prices of certain securities in 1917 and 1921, which is done in the following table:

The question naturally occurs: If most of the cities in the country have relieved their traction situations by increases in fares, why has not New York City done so? To those who have examined the situation superficially a sufficient answer has been found in the hostility of the city administration. The city administration has been vigorously and bitterly opposing an increased fare. It has done nothing to relieve the situation except in so far as minor and isolated bus operation has served a few thousand people and a few localities. But the city administration would not have persisted in this course, nor would it have been sustained by public opinion, if the differences and difficulties had not gone far deeper than a mere matter of an increased rate of fare. The scandals connected with traction reorganization and speculation have probably been more flagrant in New York than in any other city in the country. The traffic congestion and poor service have been such as to cause real suffering. The past intolerance of public opinion on the part of railroad operators and their interference in politics and legislation have not been forgotten. This is the background of the transit fight in New York City, and because of it a very large part of the community has looked upon the company requests for rate increases with suspicion and considered them as attempts again to exploit the public for speculative and stock-jobbing purposes. It is this very strong feeling that the municipal administration has shrewdly appealed to, and its strength is perhaps indicated by the fact that in the pending municipal campaign the opposition parties are endeavoring to avoid the traction issue by also declaring for a continuance of the 5-cent fare.

The unfortunate part of the entire situation is that with traction in an admittedly deplorable condition and growing progressively more incapable of meeting the public needs, the local authorities have followed a drifting policy, have been guided by expediency and not principle, and have offered no real solution. What has been lost sight of is the fact that, even admitting all the alleged misdeeds of the past, transit in a city like New York is absolutely vital to the well-being of the community. It must be put upon a basis where adequate service can and will be provided. If the difficulty lies in the present character of the relationship of the companies to the public and the city, and in existing organization and financing, necessary changes must be made to put the companies in a position where they can meet the public needs. The policy of mere obstruction in the long run must prove disastrous to the city, to the public and to the investors alike.

It is this critical situation that led to the transit legislation of this year, which will later be considered at some length.

Properly to appreciate the real issues and the special problems to be solved it is necessary to go back and briefly outline the development of transit in New York and note the underlying causes of the present antagonisms.

GENERAL OUTLINE OF NEW YORK TRANSIT HISTORY

In the earliest days New York transit companies were directly chartered by special statutes. Some surface lines are still being operated under old steam railroad charters. Other lines are successors in ownership to old-time plank-road companies. In the main, however, the present surface lines grew out of the old horse-car companies that were developed during the period prior to 1890. The old horse car lines were projected during the times when the city was rapidly growing and, therefore, were in the main consistently profitable. Naturally, at that time, their value as an aid in the general development was appreciated and there was little or no objection to their perpetual franchises and the lack of financial returns directly to the city. Unfortunately, in certain instances notably the so-called "Jake" Sharp franchise for the Broadway line there was flagrant corruption and bribery and the public has since been led to believe that this condition was far more prevalent than it really was.

From 1865 to 1890 was the main period of elevated railroad development during which the Manhattan Elevated System and the Brooklyn Union and Kings County Elevated Systems were constructed. In the first stage of this development prior to 1875 the franchises were granted by special acts of the legislature, and afterward by separate commissions appointed under the rapid transit act of 1875. Here too, of course, the lines were privately-owned under perpetual franchises with practically an entire absence of provision for public control.

In 1875 an amendment to the state constitution was adopted which prohibited private or local bills granting railroad rights.

This stopped the evil of special legislative railroad grants. The attaching, by the municipalities, of conditions as to rates of fare in giving their consent has furnished an important element in the situation and presented the question whether the legislature under the reserved police power can over-ride the action of a municipality in attaching a fare limitation in its consent. It is on this question that the fare litigation of the past few years has largely turned. (Matter of Quinby vs. Public Service Commission, 223 N. Y. 244; Matter of International Railway Co. vs. Public Service Commission, 226 N. Y. 474; People ex rel. Garrison as Receiver vs. Nixon, 229 N. Y. 63.) In the Garrison case the Court of Appeals in effect decided that the legislature had the power to alter rates of fare in franchises or consents granted prior to 1875 and subsequent to 1907 (the date of the enactment of the public service commissions law) but left open the question as to the power of the legislature over the fare limitations in municipal consents granted between 1875 and 1907. Recently the Appellate Division of the Supreme Court in the First Department has sustained the validity of the transit legislation of 1921 which expressly gives the commissions power to raise rates despite provisions in local consents (City of New York vs. McAneny, decided July 1, 1921).

The decade from 1890 to 1900 marked in New York as in other parts of the country the development of electric traction. The prospects for its success were exceedingly bright but unfortunately it was in great part financed on a highly speculative basis and was attended with the then common practice of stock watering.

Looking back over this period we see that it was the time of company exploitation. The grants were all perpetual, in most cases without provision for any payment to the city and without control by the municipality over construction or operation.

The construction of the elevated railroads failed to keep pace with the growth of the city and the construction of additional lines was constantly agitated, finally resulting in the passage of the Rapid Transit Act of 1891. This act provided that the Rapid Transit Board could lay out routes without reference to whether they were connections or extensions of existing lines, and, after obtaining the necessary constitutional consents, should offer the franchise for sale at public auction. Acting under the broad powers conferred upon it by this act the new board promptly adopted a route and general plan for an underground railroad under Broadway with elevated extensions in the northern part of the city, but the franchise when offered for sale at public auction failed to elicit a satisfactory bid.

Then came the then revolutionary proposal that the city should build and own the new roads and lease them for terms of years to operating companies. The Rapid Transit Act was so amended in 1894 and the Rapid Transit Board promptly proceeded to take the necessary steps preliminary to making a contract, but the difficulties to be overcome were so many and so great that it was not until Feb. 21, 1900. that the board was in a position to enter into the first contract. It then contracted on behalf of the city with John B. McDonald (Contract No. 1) to construct, equip and operate the so-called Manhattan-Bronx Rapid Transit Railroad. The construction price was $35,000,000 with certain additions for real estate and terminals. The contractor was obligated to furnish the equipment. The lease was for fifty years with a twenty-five-year renewal. The rental was the minimum permitted by the act interest on bonds issued by the city for construction plus 1 per cent.

When this work was well under way the Rapid Transit Board also let, in 1902, to interests affiliated with Mr. McDonald, the contract (Contract No. 2) for the construction, equipment and operation of the so-called Brooklyn-Manhattan Rapid Transit Railroad, being an extension of the first subway to Brooklyn. The rental provision in this later contract was substantially the same, but the original lease term was shortened from fifty years to thirty-five years.

Realizing that the construction of the first subways was but a beginning and that extensive additional lines were necessary to keep up with the increase in traffic, the Rapid Transit Board, as soon as the first contracts were placed, proceeded with plans for new subways and continued negotiations for leasing them. As a result, it was finally possible in 1913 to enter into what are know as the Dual Subway Contracts, which involved a joint city and company expenditure estimated at that time at $335,000,000 and which, by reason of increased war costs, has gone well over the $400,000,000 mark.

In these contracts the companies would not agree to rental provisions similar to those in the first contracts. Looking at the situation from their standpoint, however, it must be said that there was justification for their insistence upon having a prior lien on the earnings. The Dual Subway plan involved the more than doubling within a period of five years of rapid transit lines in the city at a cost then estimated at about $335,000,000. This unparalleled expansion was necessary for the well-being of the city and for that reason it was thought that the city could afford to enter upon it even in the face of inevitable deficits during the early years of operation. On the other hand private capital had to look at the matter solely from a hard-headed dollar-and-cents point of view and could hardly be expected to enter upon the project unless its returns were amply safeguarded and it was protected from deficits almost from the start.

Under the new plan the city's returns were subordinated to the companies earning their existing income and 6 per cent upon the new money provided by them. The situation was somewhat akin to the city's taking a second mortgage. The various estimates used in forecasting financial results were all dependent upon certain assumptions as to increase of population, ratios of operating expenses and the like which were bound to be more or less colored by one's point of view. Even the most favorable estimates indicated that the city would have to bear deficits for a number of years to come and therefore be subjected to the experience of raising amounts to pay these operating deficits either from its tax levy or through some refunding operations. The allowance to the companies as part of their preferential payments of their then existing profits, $3,178,000 a year in the case of the Interborough and $1,500,000 in the case of the B. R. T., placed a heavy burden upon these roads, representing as it did the extraordinary profits swollen by the intense traffic congestion of the two years ending June 30, 1911. Naturally, as new lines were placed in operation they would relieve this congestion and thereby cut down, if they did not for a time destroy, these profits, but, unless the right of recapture were exercised, the new lines would have to bear this burden for half a century.

The foregoing very generally outlines the history of the development of transit in New York City. One tendency is very plain: municipal ownership is not a new thing in New York but represents a settled policy long in effect and steadily growing in popular favor and importance since its original adoption in 1894. From it flows two results that are setting in train tendencies that even now point rather definitely to certain conclusions. In the first place, the city in 1894 in effect decided to go into the railroad business and has already put into operation two great transit programs the subway expansions of 19001902 and 1913 with a city investment of over $250,000,000. As a railroad owner the city cannot stand still. It must not only continue to expand its own lines but the logic of events points to its also increasing and already dominant position in the transit field by swallowing private lines. In the second place, the city must take steps to protect its investment under the 1913 contracts and set up a new kind of participation that will insure its receiving a proper return so as to relieve its tax budget and also to provide funds for further subway extensions.

UNDERLYING CAUSES OF ANTAGONISM

Bad service is, of course, a continual irritant. But back of that there is in the mind of the public the remembrance of past transactions. To appreciate the public point of view and the difficulty that always besets any attempt to consider transit problems on their merits it will be helpful to consider a few of the more notable grounds of controversy.

In the early days there was flagrant corruption in obtaining, some of the franchises and the "Jake" Sharp manipulation of the Broadway surface line is the example most often referred to. The Metropolitan Street Railway financing, too, has left bitter memories in its wake.

In 1902 when the subway work was well under way the Interborough Rapid Transit Company, to which Mr. McDonald had assigned the operating rights under Contracts 1 and 2, leased in perpetuity the Manhattan Elevated System under a lease which provided that the lessee should pay the interest on approximately $45,000,000 of the lessor's bonds and pay 7 per cent per annum upon the $60,000,000 of the lessor's capital stock, together with taxes which amount to over $2,000,000 annually. This lease has been the subject of severe public criticism, especially during this period of increased costs when the operation of the combined elevated and subway system was burdened with paying what were in effect 7 per cent dividends to the Manhattan stockholders, while the net receipts from operation were so low as to threaten a receivership at almost any time.

The Manhattan Company also carried a heritage of public antagonism because of its past collisions with the public. One of the bitterest of these fights was the one for the reduction of the fare from 10 to 5 cents, which was finally forced by the enactment of Chapter 743 of the Laws of 1894.

Soon after the building of the first subways came the Interborough-Metropolitan combination. The competition between the Interborough Company's subway and elevated systems and the Metropolitan Street Railway's system reached the point where it was possible for certain financial interests to force a combination. There was, therefore, organized a holding company first known as Interborough-Metropolitan Company, which held practically all the stock of the Interborough Rapid Transit Company and of the Metropolitan Street Railway Company. This was most unfortunate for rapid transit, because, aside from the throttling of competition through combination it largely turned the control of the Interborough properties over to those interested in the street surface lines and thereby prevented the city's operator from considering the matter of rapid transit development solely from the standpoint of a rapid transit operator.

This also gave ground for public resentment because, without the city having any say in the matter, the city railroad, upon which approximately $50,000,000 of public money had been spent, was made one of the main points in a financial maneuver that was actuated primarily to throttle competition and raise the market value of the various securities.

During the period from 1890 to 1900 there also took place the consolidation in one form or another of the surface and elevated lines in Brooklyn to form the Brooklyn Rapid Transit System. The scandals connected with the Metropolitan Street Railway combination fortunately were not duplicated, but in some of the companies there undoubtedly was considerable water and the consolidation was attended with a burst of speculation, B. R. T. stock at one time being forced up to around 130.

Another matter, perhaps small in comparison but affecting a class of the community least able to bear a loss the tort creditors was the corruption of juries in accident cases. It is greatly to the credit of the present heads of the companies that in this respect they themselves cleaned house and did it with ability and thoroughness.

At the time the Dual Subway contracts were entered into there was, of course, no thought that shortly more than a year later a world war would break out. The prospective burden upon the city in carrying its investment was serious enough under normal conditions, but the effect of increased costs due to the war has completely altered the situation. The city has not yet received interest and amortization charges on its new investment. Even with preferential 'rights the Contract No. 3 company deficit now amounts to over $25,000,000 and the Contract No. 4 company deficit, to over $10,000,000. The extent of the city's burden is indicated by the fact that in its annual budget it is now including an amount approximating $10,000,000 to meet interest and sinking fund deficits on the rapid transit account. Having in view the large cumulative company deficits (and under Contract No. 3 the deficits are cumulative at compound interest), which must be wiped out before the city receives its fixed charges, it is probable that if the contracts are permitted to continue as at present the city will never receive any return under them. This not only subjects the tax budget to this enormous drain but also operates as a bar to needed further subway expansion because, until it is in receipt of sufficient current funds to carry the annual charges on this investment, the city cannot exempt equivalent amounts from the debt limit and use them for any new work.

The declaration of large dividends by the Interborough Company and its attitude in respect to changes in its contracts with the city had had an important effect in preventing a readjustment. The 1913 estimates indicated a number of lean years, due to putting the new lines in operation and the attendant heavy interest burden. Then came the World War and the consequent certainty of inflation. These factors should have dictated extreme prudence and the husbanding of resources. In spite of this, however, the Interborough Company declared dividends of 20 per cent in 1915, 1916 and 1917, and 17J per cent in 1918. When it felt the full effect of its interest burdens and war costs it applied to the city authorities for a modification of the subway contracts so as to provide for an increased rate of fare. The company, however, was averse to any other change in the city's interest. This had a most far-reaching effect on the working out of a solution of the transit problem. The public not unnaturally, in view of the fact that the company had so recently been declaring such unusually large dividends, was suspicious of its good faith and antagonized by the attitude of demanding something and conceding nothing.

Before considering possible measures of relief, it will be of assistance briefly to chart the underlying causes of the present unsatisfactory relationship between the companies and the public and the city.

PUBLIC GRIEVANCES

1. Service has been bad and a considerable part of the public has undergone real inconveniences and sometimes actual suffering twice a day for six days a week. Many of the roads are in badly depreciated condition; for example, some still using rolling stock thirty years old.

2. The public believes, in view of the enormous traffic in New York City, that transit is or should be very profitable. (The unduly large dividends paid in recent years by the Interborough Company are taken as strong confirmation of this belief).

3. With this belief the only explanation that accounts to the public satisfaction for the bad service is that the companies are really making large profits but are concealing them through excessive rentals and capitalization and using these excesses again as a reason for cheapened service to pay returns on water.

4. The very unsatisfactory situation of the city's great investment in the subways.

These are grievances and in so far as they are justified in fact constitute, of course, valid objections to increased fares.

Beyond this, and one of the main grounds of public antagonism, is the past interference of public utility interests in politics. The public's idea of the influence now wielded by those interests is exaggerated, but the enmity resulting from past struggles is lasting.

COMPANY GRIEVANCES

On the private side the investors, too, have their grievances. The transit properties, even though impaired, represent investments running into the hundreds of millions and furnish an indispensable service to which we have become so accustomed that we take it largely as a matter of course, and without any adequate realization of the extent to which the well being of the community is founded upon it. The securities of the companies are widely distributed, generally in small holdings, and the public interests, as well as good morals, require the protection of proper bona-fide investment.

For the past few years all the companies have been hard hit by the same trouble that has affected every individual and business in the country the decreased purchasing power of money. Operating expenses that before 1914 would run around 50 per cent of revenue have jumped to 85 or 90 per cent, or higher. As a result of this decrease in purchasing power, wages have had to be largely increased. The companies have, therefore, been in the position of having to meet the existing economic situation in paying bills, but have been unable (except partially in the case of abolition of or charges for transfers) to have that situation recognized in respect of payment to them for the services they render. With business generally meeting such a situation by raising charges, holders of utility securities are aggrieved by the refusal to let them follow the same economic law even in cases where returns will not pay operating expenses to say nothing of interest on bonds.

There are two other subordinate but nevertheless important grievances of the transit companies: Street paving and maintenance charges and taxation.

The companies are required by law to pave and maintain the paving between the tracks and for a certain distance outside the tracks. They claim that while these charges may have been proper in days gone by when horse car operation did damage the pavement, they are not proper now when the electric-car operation does practically no damage and when the great wear and tear is occasioned by heavy trucking. The paving expenses for the year ending June 30, 1920, were:

The burden of taxation has been steadily increasing. New York state and city taxes for the year ending June 30, 1920, were:

A large part of this taxation is imposed through the special franchise taxes, the theory of which is that the companies should be required to pay taxes commensurate with the value of the rights granted by the public. However just such a tax may be in principle, the burden on transit operation is exceedingly heavy. Moreover the adoption of the principle of regulation as exemplified in the Public Service Commissions law has worked a change from the situation as it existed at the time the special franchise tax was first enacted. The better view is that the return to the public should be in service and not in taxation and that if the revenues become more than needed for adequate service, the proper remedy is a reduction in rates. At the present time as the subway properties are owned by the city, the Interborough and B. R. T. are substantially free from taxation in connection with the operation of city-owned properties, while the elevated and surface lines bear an increasingly heavy burden.

The public and private attitudes may, therefore, be summarized as follows:

Public: Dislike and distrust founded on:

1. Bad service.

2. Belief in existence of excessive returns, rentals and capitalization.

3. Belief that rights and functions exercised by the companies are antagonistic to the public interest.

4. Unsatisfactory situation of the city's transit investment.

Private: Distrust and bitterness founded upon believed injustice

1. In not being allowed the same privilege as business generally of increasing rates to meet increased costs,

2. In unfair street paving and maintenance charges, and

3. In excessive taxation.

In working out any solution of the transit problem, these other elements must be considered.

The companies took franchises and contracts based on 5 cent fares with the expectation of large profits both from dividends and increases in the market value of securities. Most of the stocks were speculative to a high degree. The companies heretofore have insisted on the rigidity of the 5-cent fare American urban traffic was based upon it, franchises had been granted and contracts let in reliance upon it and, therefore, it could not be disturbed. This, before the war, was the companies' position. They, however, have changed their base and see now, not profit but loss and possible disaster in a fixed rate of fare. In short, they ask that the underlying basis upon which they entered the transit field be changed from risk to protection, their securities from a speculative to a stabilized character. With such a radical change it would seem that they themselves should recognize the entire justice of requiring the readjustment of their engagements with the public as expressed in outstanding franchises and contracts to accord with the new base.

Furthermore, a readjustment necessarily involves the element of consolidation, for otherwise a flexible fare does not seem practicable. Relatively, the surface lines are much worse off than the rapid transit lines and, therefore, more in need of relief. But an increased fare on the surface lines alone would drive the greater part of their traffic to the rapid transit lines and leave them worse off than before. A similar raise of fare on the rapid transit lines would give them more than they need and, therefore, amount to overcharging the public using them.

In the case of the surface lines, and to a much lesser and possibly negligible extent in the case of the elevated lines, the projection of the lines was originally on a competitive basis. There are even now existing a multitude of companies that were engaged in the building of these lines. Gradually the lines were absorbed in large systems, especially during the period of electrification. Despite this absorption and the substitution of virtual monopoly for competition, there was little or no attempt to revamp the lines to accord with the changed conditions. Furthermore, in 1900-1902 and in 1913, the city placed under contract great subway systems that radically altered the transportation map. Again, there was no attempt to revamp the surface lines to meet the changed conditions and this suddenly added great competition. The reason for this, in most cases, of course, is patent. The existing lines were covered by existing and generally blanket mortgages and the franchises and financial structure was too rigid readily to be changed. So that there is also involved the important element of revamping existing lines to meet present needs and conditions.

ELEMENTS OF A SOLUTION

This, then, in general was the situation and the "set-up" when the companies felt the full force of the increased prices growing out of the World War. In December, 1918, important companies of the Brooklyn Rapid Transit System went into the hands of a receiver, to be followed soon after by the New York Railways Company operating most .of the surface lines in the Borough of Manhattan. The Interborough Company has only avoided a receivership with extreme difficulty. The efforts of the companies to secure increased rates of fare were bitterly fought in the legislature and the courts. The disintegration of the big B. R. T. and the New York Railways systems began and was continued by sluffing off through the receiverships of important lines. Service became progressively worse and public resentment increasingly bitter. This condition continued for over three years before a real effort was made constructively to meet the situation.

Early in this year's session of the legislature Governor Miller, in a special message, directly faced the issue and recommended the delegation and concentration of all the powers the legislature could grant to a commission to be composed of three members. This precipitated one of the bitterest political fights in years and the legislation was vigorously attacked on the ground that it violated the principles of home rule for municipalities and was a "fare grab." Of course, the bill did not raise any rate of fare but merely empowered the new commission to raise a rate if necessary and the home rule argument largely lost its force because of the utter failure of the local authorities to attempt any constructive measures of relief.

The legislation (Chapter 134 of the Laws of 1921 as amended), however, bears upon its face proof of the endeavor to reach down and remove the underlying difficulties and causes of antagonism. It provides for the commission preparing a plan of readjustment that will accomplish as nearly as may be the following three main purposes:

1. The combination, rehabilitation, improvement and extension of existing railroads so that the service thereon may be increased and improved to the fullest extent possible.

2. The receipt as soon as practicable by the city of sufficient returns from the operation of the railroads so that the corporate stock or bonds issued by the city for the construction of rapid transit railroads may be exempted in computing the debt incurring power of the city under the constitution of the state, and

3. The assuring to the people of the city the continued operation of the railroads at the present or lowest possible fares consistent with the just valuations of the railroads and their safe and economical operation.

To carry out such a plan of readjustment the commission is vested with the broadest powers to vary rates (including the power to vary rates fixed in municipal consents and contracts), to revise existing contracts and to make new ones and to value and acquire railroad properties for and in the name of the city. Provision is made for submitting the plan and contracts to the local Board of Estimate and Apportionment, but if that board finally refuses to approve, the ultimate power to carry the plan into effect is vested in the commission.

An important and interesting feature of the legislation is that respecting valuation. This provision is:

In connection with the preparation of such plan the commission shall cause a valuation to be made of the property, other than franchise or going value, necessarily used in public service of the railroads it proposes to include therein. Such valuation shall be made with due regard to the estimated prospective earning capacity of the property necessarily used in the public service at the rate or rates of fare that the company prior to the taking effect of this act was entitled to charge in view of the provisions of the contract or franchise under which the property is operated or held or of any lawful order in force fixing or regulating rates of fare and of the competition of other lines and with due regard to all other pertinent facts and conditions

but such valuation shall not in any case exceed the fair

reconstruction cost of the property less depreciation. Such valuation shall be in such detail and shall include such elements of cost or values and shall be made in such manner as the commission may prescribe. Such valuation as finally determined by the commission shall be the basis for all allowances to the railroad companies under the plan and for thereafter fixing the return on the property so valued, anything in this chapter to the contrary notwithstanding.

The theory of this provision is that in approaching this subject the point of view would be largely that of a banking house considering the purchase of a transit property. Its natural first question would be: "What will the property normally earn considering any franchise or charter limitations and any other incumbrances?" So, if under the plan it be decided to take over any given road, the normal earnings would first be considered and capitalized. The earnings would, of course, be upon the basis of the present fare engagements-- almost universally 5 cents-- but the returns would be estimated during a normal period-- for example, averaged over the next ten years-- for present conditions are abnormal and taking over roads on present earnings would amount to virtual confiscation. Against the figure thus obtained would be checked a figure obtained on some reproduction cost basis. It will be seen that these provisions are very general and much more indefinite than formulas usually applied in rate cases. This is necessarily so, first, because a rigid formula could not be adopted that would be sure to meet the widely varying circumstances and conditions of the many different lines and second because if it were attempted to handle this valuation in the same manner rate case valuations usually are handled years would elapse before the work would be completed.

The practical aspects of making these valuations offer many interesting features. It is not purposed to duplicate the usual "nut and bolt" inventory where everything in the minutest detail has to be examined and counted. In general it should be possible to take the plans and records and compute quantities from them and check conditions by a field inspection. It is believed that in this way substantially the same results would be obtained without the usual large expenditure of time and money.

In a public letter dated Feb. 11, 1921, Governor Miller, in describing the purposes of the legislation recommended by him, outlined a possible plan of readjustment, as follows:

1. The value of the physical property used in the public service, without reference to the present capitalization, should be determined. The data for such valuation of many of the lines must already be in the possession of the present commission. It should not take long to make a valuation of the others.

2. Eliminate all outstanding inter-company leases.

3. Retire outstanding securities, except such underlying liens as cannot readily be retired, for which provision looking to eventual payment must be made.

4. Vest in the city title to all lines not already owned by the city, free and clear of all incumbrances, except such underlying liens.

5. Make a lease to a new company which shall provide for amortization of the determined valuation and for adequate reserves for depreciation, contingencies, and the like.

6. Mortgage such lease to an amount approved by the commission, and issue stocks and bonds not in excess of the valuations determined by the commission, in exchange for the securities retired.

7. To promote prompt reorganization and revamping of lines without assessing security holders, defer interest and dividends for one or two years, as might be determined by the commission, and at the end of such period prescribe a rate of fare sufficient to pay all charges provided for in the lease.

8. As an incentive to efficient management provision could be made for increased return on capital as fares are decreased, and a reduced return as they are increased.

9. Looking to the eventual transfer of general regulatory powers to the single state-wide public service commission. provision could be made for a board of control, on which the city and the company should have proper representation. The alternative to that would be representation by the city on the board of directors of the company. The board of control plan is probably preferable, and that board might well have the powers of the present Transit Construction Commission.

10. As all approved charges will adequately be provided for under the plan, the provisions of the dual contracts for preferential payments could be eliminated and such other changes made as will fit these contracts into the plan, and as may appear to be in the public interest.

11. Provision for the imperative and immediate needs of the city for further transit facilities should be made promptly.

To many a plan involving these fundamentals would seem extremely radical. The situation in New York City, however, is acute. Palliatives will not do. The case has gone beyond that and calls for surgery. So that the unusual scope and nature of the plan to be adopted must be considered in relation to the most unusual conditions that imperatively call for a remedy. Having set out at considerable length the general history of transit and some of the underlying difficulties and having indicated the fundamentals of a plan of readjustment, it should be helpful if in conclusion the endeavor is made very briefly to attempt to forecast the advantages that might be expected to flow from the adoption of such a plan.

ADVANTAGES TO THE CITY

Ownership. The city would get the ownership of the transit lines. They would be subject to a lease or leases, but the value of the lines would be amortized by the earnings and at the end of the term the city would own the entire transit system free and clear. Furthermore, as time passes the city through the mounting up of the amortization funds could terminate the leases and acquire possession on increasingly easy terms.

Division of Profits. If it should be decided that the parties in interest should divide any surplus, instead of having it applied either to reduction in rates or improvement in service, the city's present investment would furnish ample consideration for the city insisting on a large or possibly a predominant percentage of the profits. On the basis of proper capitalization with preferential profits eliminated and with the main existing obstacles to fare readjustment removed, the transit system should be profitable and on the return of normal conditions, if that course should seem preferable, the city should receive substantial profits from its transit lines.

Receipt of Fixed Charges on Subway Investment. Through the revision of the dual contracts and the elimination of preferential profits, the city would get out of its present unsatisfactory position and would receive presently interest and sinking fund payments on its investment in the new subways. Expressing it in another way: If the city does not take advantage of this opportunity to adjust the situation it would have to continue to pay out of taxes about $10,000,000 a year as interest and sinking fund payments on city bonds. Therefore, by this adjustment the city would insure the receipt of the fixed charges on its bonds.

Exemption of City Bonds. Such an arrangement would put the city bonds issued for transit purposes on a self-sustaining basis and permit of their exemption in computing the debt limit. This would increase the city's debt incurring capacity for transit improvements by more than $200,000,000.

Indirect Advantages. Of perhaps less material return to the city directly, but very material to its citizens, would be the revamping and rehabilitation of the transit lines that is a necessary element of the readjustment. This would permit of the substitution of good service where it is bad and would not only substantially ease, if not eliminate, the existing dissatisfaction, but would be reflected in all the varied business and financial activities and social and living conditions affected by the character and extent of transit service. The results should be especially apparent in the increased value of real estate the city's main source of revenue.

ADVANTAGE TO THE PRIVATE INVESTORS

While the profit making and speculative elements would be eliminated the real values in the transit properties should be protected and securities stabilized by the official valuation findings and a proper provision for secured returns. The big profit making and speculative days have gone in transit in New York City and most investors realize that fact. A reasonable, assured return on a fair valuation seems to be the only basis on which the consolidated systems can permanently be financed.

Although it may be felt that with the transit companies under the present circumstances it is a case of "any port in a storm," nevertheless, considering such a readjustment from their standpoint broadly and fairly, it would not only give them a very good port but one in the long run better for their security holders than the pre-war one.

Nor are the immediate or proximate financial results of operation the only factors to be considered. Transit conditions on many of the lines are nothing short of disgraceful because of depreciation in structure and equipment and of cutting down of service, both to save expense. The roads and their equipment must be rehabilitated and adequate service must be restored. To do this new money in substantial amounts will be needed and more and better service must be given with consequently increased operating costs. Under the present circumstances the companies cannot meet these requirements. A continuance of present conditions, therefore, means a continuance of impaired service. That the public cannot be expected to submit to, especially if the companies are offered and refuse a fair plan of adjustment. The result would be that the companies would engage in intensified differences with the public, in which they would be bound to lose in the long run. Instead of this, under the plan proposed the main causes of friction would be removed; the companies would be assured of a fair return on actual values and their securities would be stabilized.

ADVANTAGES TO THE PUBLIC

It remains to consider such a readjustment from the standpoint of the third party in interest the public as distinguished from the municipality. Taking up the public grievances as already listed:

1. Bad Service. The rehabilitation of lines and the modernization of equipment would physically fit the lines for giving proper and adequate service. The question of how intensively those facilities are operated would thus become a matter of the traffic available and the cost of operation with the determination of how much service is to be rendered in public control.

2. Excessive Returns. This fear on the part of the public should be disposed of by the determination of the real values of the transit properties and the elimination of "water" of every description.

3. Antagonistic Rights. A part of the community will probably never be satisfied with anything less than complete municipal operation. Generally, however, the elimination of perpetual franchises and other private rights and the restricting of the companies to the roles of lessees or operators should satisfy any reasonable objection to present conditions.

4. The unsatisfactory situation with respect to the present city's transit investment would be remedied.

The transit situation, and especially the present public resentment, should be considered from a far broader viewpoint than that of merely a settlement of an increased fare question of local nature. The dissatisfaction and unrest caused by the present ownership arid operation of public utilities is acute. The effect politically is apparent and political success often goes, not to the deserving, but to the one who can damn railroad interests the loudest. In meeting the governmental problems resulting from, or brought to a focus by, the World War, there is needed proper statesmanship that will not confine itself to measures of repression but will consider it its main and most important duty to search out and to relieve the underlying causes of public dissatisfaction and unrest. The situation of electric traction throughout the country furnishes not only the most immediate but also one of the biggest instances of the opportunity for the exercise of such statesmanship. On the one hand is involved the proper protection of an investment running into the billions in one of the country's major industries and, through protecting that industry by readjusting it to meet modern conditions and policies, to reduce or eliminate one of the most prolific and important causes of public dissatisfaction and unrest.

Sources

Electric Railway Journal, McGraw Hill Company, Digitized by Microsoft, Americana Collection, archive.org.