Pt. II-B (2) Indicate those factors internal and external to the Canal organization which can be correlated with the variability of Canal costs and revenues (e.g., U.S. and world inflation, population in the Canal Zone, ship transits). Discuss in particular the problem of inflation and the presence or absence of automatic stabilizers in the economy of the Canal organization. Answer: Some of the factors, internal and external to the Canal organization, which can be correlated with the variability of Canal costs and revenues, are: a. Legislatively imposed costs, e.g., extension of U.S. minimum wage standard to non-U.S. citizen employees, OSHA, contribution to health insurance, employment practices, freedom of information, Privacy Act, National Environmental Policy Act, etc. b. Economic and/or political events-these may best be seen from two examples; the long closure and recent opening of the Suez Canal; and the nationalization of mines by Peru following which shipment of Peruvian ore through the Canal ceased. c. Variation in the economy of Japan, a major user of the Canal, is a factor that impacts and must be correlated in projecting tolls. d. World inflation, particularly of the runaway double-digit variety, is a factor that adversely affects both costs and revenues. e. The Canal has been successful, absent double-digit inflation, by using various indices and evidences of Congressional intent, to correlate its revenues and rates to inflationary changes in cost of labor, material and supplies. f. Population in the Canal Zone, and eligibility to use Canal Zone facilities are factors in developing estimates of anticipated workload. Inflation in recent years has become a major factor to the economic wellbeing of the Canal. The Committee is well aware of the impact of double-digit inflation on all costs-the Canal was not exempt from this impact. In areas other than tolls Canal management was able to react to these increases through, for example, price increases. However, administrative restraints make the obtaining of an increase in tolls, in reaction to an adverse inflationary situation, extremely difficult. There is, I believe, some merit in having an automatic stabilizer in toll rate structure that would rise or fall with inflationary changes. An action, of this type would require detailed study and evaluation and then specific legislation. Pt. II-B (3) List the variable costs of the Canal which are deemed controllable and those which are deemed uncontrollable. Answer: Other than productivity the variable type costs are uncontrollable. Wage rates are generally legislatively imposed and materials, supplies and transportation are purchased in the competitive market. Pt. II-B (4) Are there any costs in the present Canal organization budget which are related to defense? What projects in recent years are related to defense of the Canal? Does the Canal organization have any financial responsibility for these? Answer: There are no net costs in the Canal organization operation budgets that are exclusively related to defense. However, certain costs are incurred to provide services to the military and other U.S. Government agencies in the Canal Zone. These include operation of schools, fire protection, hospital and clinic services to personnel and dependents, and utilities. The costs, with certain exceptions, are fully recovered in billings to the agencies and individuals. The exceptions include education of uniformed and civilian personnel over 21 years of age of military agencies at the Canal Zone's College, and education of dependents of foreign instructors at the Military schools, the cost of which is borne by the Company. The amount of unbilled tuition at reimbursable cost rates is about $450 thousand a year. The Military agencies advise that they have no authority to reimburse the Canal Zone Government for these costs. There have been no projects within the Panama Canal Company/Canal Zone Government in recent years relative to the defense of the Canal. Pt. II-B (5) What is the effect of prevailing market interest rates on the finances of the Canal organization? Answer: The effect of prevailing market interest rates on the finances of the Panama Canal organization is unmeasurable except possibly for the interest paid into the U.S. Treasury on the next direct investment of the United States in the Panama Canal Company. The Treasury's prescribed interest rate for the latter is based on average cost of coupon bonds outstanding. To the extent coupon bonds are issued and their interest rate relates to the prevailing market, there would be some impact on Company costs. The rate paid by the Company has increased over the last ten year period from 3.60% in 1966 to 4.649% in 1975. Thus, the interest cost to the Company for fiscal year 1975 was $3.2 million more than it would have been at the 1966 rate. The current rate of 5.199% for 1976 is well below current interest levels. Otherwise, the effect of prevailing market interest rates is on suppliers of goods and services to the Panama Canal and on Panama Canal customerstransiting vessels and cargo, the impact of which as it might affect the Panama Canal is not measurable. Pt. II-B (6) How has the interest-bearing investment of the United States in the Panama Canal Company changed in recent years? What decisions have affected the change and how much of a financial impact has this had on the Canal? Answer: The interest-bearing investment of the United States in the Panama Fiscal year 1966 through fiscal year 1975: Transfers of property to other U.S. Government agencies.. Total decreases__ Reactivations of plant Transfers of property from other U.S. Government agencies. Total increases__ Net decrease of investment_ (Millions) $15.0 2 15. 2 3. 4 .9 4. 3 10.9 This decrease in investment impacts on financial operations through a reduction in interest cost. As a result of the above $10.9 million decrease, the 1975 interest cost to the Company was some $500 thousand less than it would have otherwise been. Pt. II-B (7) The Canal organization has imposed a series of austerity measures in recent months to curb Canal expenses. What austerity measures have been imposed, how effective have they been, and who has been affected by the measures? Answer: The tabulation below identifies in broad terms the austerity measures imposed by the Panama Canal Company: Austerity measures were initiated to partly offset the Company's projected operating losses for 1976 and 1977. To that end, the austerity measures have been successful. The actual loss realized through February 29, 1976 was $5,283 thousand as compared to a budgeted loss for the period of $8,278 thousand. With possibly few exceptions, employees and dependents have been affected by the austerity measures. They were affected through job elimination, reduced paid working hours, reduction in services available to them, e.g., reduced retail store hours, reduced retail outsets, reduced postal services, reduced cafeteria services, etc. Pt. II-B (8) 2 C.Z.C. 412 states that Canal tolls shall be prescribed at rates to cover, among other things, "an appropriate share of the net costs of the agency known as the Canal Zone Government." The section further states that the determination of the appropriate share shall take into account various factors in Company finances. Does the Canal organization believe that tolls revenues must completely cover the net costs of the Canal Zone Government? Have tolls revenues always covered the costs of the Canal Zone Government? Answer: These questions, directed to the construction of Section 412, were considered in detail by the Merchant Marine and Fisheries Committee during the 86th Congress as shown in the following summary: In 1955 certain steamship lines using the Panama Canal filed a complaint in the United States District Court for the Southern District of New York alleging that rates of tolls were excessive and praying for judgment to require the Panama Canal Company to prescribe new tolls on the basis of certain accounting changes proposed by the General Accounting Office and to refund the allegedly excessive tolls collected in the past. The District Court dismissed the complaint for lack of jurisdiction, holding that sections 411 and 412 of Title 2 of the Canal Zone Code conferred discretionary authority on the Panama Canal Company to determine the time when, in its judgment, new tolls should be prescribed. The court also ruled that, inasmuch as any new tolls determined by the Company had to be approved by the President, the Company's action in reference to tolls constituted advice to the President, not subject to judicial review. Finally, the District Court stated that, in any event, the plaintiffs lacked standing to sue because the Canal Zone Code did not confer upon them any private legal right. In reference to the demand for a refund of tolls, the court held that the action was in effect against the United States and was precluded by the doctrine of sovereign immunity. On appeal, the U.S. Court of Appeals for the Second Circuit affirmed the decision of the District Court to the extent that it denied the demand for a refund of tolls, but in all other respects reversed the District Court and directed that summary judgment be entered for the plaintiffs. The Court of Appeals accepted the position of the General Accounting Office in reference to the effect of section 412 of Title 2 on the accounts of the Company; the court concluded that tolls were out of line with costs and that the failure of the Panama Canal Company to prescribe new tolls constituted an arbitrary refusal to comply with the statutory tolls formula. 66 ... On certiorari, the Supreme Court reversed the Court of Appeals, holding that the controversy was not appropriate for judicial action in that the decision to act or not to act to prescribe new tolls was left to agency discretion. The court stated that, where the duty to act turns on matters of doubtful or highly debatable inference from large or loose statutory terms, the very construction of the statute is a distinct and profound exercise of discretion," and ruled that the decision to act or not act to prescribe new tolls was a matter left to the expertise of the agency burdened with the responsibility for decision. Following the decision of the Supreme Court in the Grace Line case, a bill was introduced in the 86th Congress "To require Panama Canal tolls to be prescribed in accordance with the tolls formula provided in section 412 of Title 2 of the Canal Zone Code and pursuant to the provisions of the Administrative Procedure Act." At the hearing on the bill, one of the attorneys for the plaintiffs in the Grace Line suit testified that the bill was an outgrowth of the decision of the Supreme Court in that suit and that the objective of the bill as to authorize the courts to enforce the tolls formula of section 412 of Title 2 of the Canal Zone Code on the basis of the construction of the statute urged by the plaintiffs in the Grace Line suit. At the hearings before the Subcommittee on Panama Canal of the Committee on Merchant Marine and Fisheries, House of Representatives, 86th Congress, on H.R. 8983 and H.R. 10968, the Panama Canal Company again presented fully its construction of the tolls formula in the light of the issues and decision in the Grace Line case. The General Accounting Office concurred in the validity of the Company's policies but recommended amendment of section 412 in such manner as to expressly adopt the Company's construction of the statute. Following the hearings on H.R. 8983, that bill was tabled and H.R. 10968 was introduced to ratify the accounting policy of the Company as recommended by the General Accounting Office. In the hearings on H.R. 10968 the Committee again explored with a representative of the Company the legal and accounting implications of the Company's construction of the statute and in a report dated June 9, 1960, the Panama Canal Subcommittee reached the conclusion that: "After examining the language of section 412 (b) of Title 2 of the Canal Zone Code (of 1934), which establishes the formula for imposition of tolls, and after considering its legislative history and the views of the General Accounting Office, the Subcommittee is of the opinion that the present practice of the Panama Canal Company in allocating the major part of overhead of supporting services to the account of tolls is proper and is in full compliance with the law as it now reads. "Accordingly there is no need for enactment of this bill since it would merely spell out in greater detail what is in the Subcommittee's view the present requirement of law." The construction of the statute adopted by the Panama Canal Company before the Grace Line suit and approved by the legislative subcommittee after full hearings in 1960 has been adhered to by the Company continuously since its adoption. With reference to the two specific questions, tolls do not "completely cover the net cost of Canal Zone Government." This cost is recovered in part from other U.S. Government agencies, and others using the various services of the Company. Toll revenues have always contributed to the net cost of Canal Zone Government. Pt. II-C(1) Have the marine services (transit and repair related) and the jurisdictional services of the Canal organization increased or decreased in recent years? What services have been added or eliminated? Answer: Marine services have generally remained constant during recent years, rising or falling with changes in traffic levels. Other services, too, have remained relatively constant adjusting to changes in workload, e.g., schools, hospitals, terminals, etc. There have been reductions or elimination in other services e.g., Tivoli Guest House was closed, retail laundry and dry cleaning facilities have been phased out, the number of retail outlets, service centers, production plants, theaters, bowling alley's, and post offices has been reduced, passenger carrying service on the CRISTOBAL was curtailed. However, additional requirements with related costs have been placed on the agency relating, for example, to equal opportunity, OSHA, freedom of information, privacy act, national environmental policy act, etc. Pt. II-C(2) What types of services cause the more serious financial problems for the Canal organization. Answer: The varying number and size mix of ships transiting the Canal causes the most serious financial problem. The Company's revenues rise and fall with economic and political factors beyond its control and, since many of its costs are fixed, rapid reaction is hindered. The time restraints of required administrative procedures to effect a change in toll rates further complicates financial problems. In contrast, the Company is able to react more quickly to changes in workload and costs in other rate areas not subject to administrative restraints. Pt. II-D (1) What proportion of the Canal budget is allocated for personnel costs? Answer: The tabulation below identifies, by year, the proportion of personnel costs to total operating costs from 1966: Pt. II-D (2) Does the turnover of personnel in the Canal organization cause serious financial problems? What has been the trend of personnel turnover in recent years? Answer: Up to this time, employee turnover has not caused serious financial problems. Employee turnover trends are as follows: |