The CHAIRMAN. That has been the continuing trend. Even Congress now pays for bookkeeping purposes, for all the services other departments would render us. It is transferred bookkeepingwise. Even a congressional frank is not a frank anymore. We actually appropriate money to pay the Post Office Department for the amount of mail that is delivered."

Mr. MAYER. We think it conforms to general Government practice. The CHAIRMAN. It doesn't save any money one way or another in the Treasury. But it is for good bookkeeping and accounting purposes.

Mr. MAYER. It shows where the costs are.

The CHAIRMAN. Yes, sir.

Mr. MAYER. If it will save the committee time, we will skip the discussion of the rest of that question.

(The portion of the statement referred to above is as follows:)

REIMBURSEMENT OF CANAL ZONE GOVERNMENT

In general, the usual United States Government agencies which operate in the continental United States are not present in the Canal Zone. The Canal Zone Government, therefore, furnishes such services. We are speaking of such things as narcotics enforcement, which is the job of the Narcotics Division of the Treasury Department, the operation of a Federal prison, which is the function of the Bureau of Prisons, the enforcement of a broad range of Federal statutes, which is the function of the FBI, a postal service, customs services, et cetera. These, and other similar activities, all of which are not known to us, are performed by the Canal Zone Government. Under present accounting, tolls are paying for over 80 percent of the cost of the Canal Zone Government. Therefore, tolls are paying for services normally provided by the other Government agencies. Within the continental United States the general revenue of the Treasury finances such services. In other United States Territories, such as Guam and the Virgin Islands, the Federal income tax collected from American citizens residing in such areas is remitted back to the local governments to be used by them to finance their activities. Such is not the case in the Canal Zone. Therefore, to equalize the situation here with others, there either should be such an income tax plowback, or a provision for reimbursement of the Canal Company for services it performs which are the job of other agencies. It has been suggested to us by Government offices that the interagency reimbursement method would be preferable to the income tax plowback method in the Canal Zone because of a difference in nature of the Government activities here.

We therefore urge such reimbursement, as well as reimbursement for certain other items, as is evident from the language from line 17, page 3, to line 18, page 4 of the comparative print before you. These provisions would reimburse the Canal Zone Government for the following:

(1) The providing of immigration and customs service for the Republic of Panama.

(2) The service of other Government agencies performed by the Canal Zone Government.

(3) That portion of the cost of Canal Zone Government and Panama Canal Company as are represented by use by the military.

(4) The use of the Canal Zone schools by children of certain citizens of Panama, not employed by the Company or Government.

With respect to the first item, it is our understanding that the Canal Zone Government provides some of the immigration and customs service for the Republic of Panama. We do not know to what extent that continues at the present time, but if it does, the Canal Zone Government should be reimbursed by the Republic of Panama, by some other Government agency, or by means of a credit to the expense of the Canal Zone Government. Total net immigration and customs expenses in 1954 were $393,000, some portion of which presumably arose out of this service to the Republic of Panama.

Reimbursement for services of other agencies we believe requires no further comment. We believe, however, that if the committee acts favorably on the

legislation the legislative record should make it clear that it is not the intent of the Congress that each of the various Government agencies who would normally provide these various services, establish offices there. We believe that for economy reasons, as well as for some important policy reasons which the Zone Government might put forth, these functions should continue to be performed by the Canal Zone Government. In all of this area of the legislation we are seeking economy and not added expense which inevitably results from the establishment of more governmental units.

The military uses many services of the Canal Zone Government, including police, schools, hospitals, post office, sanitation, and public health; as well as Canal Zone streets and roads, which are maintained by the Company. We do not mean to indicate that the military makes no contribution. Tuition revenue for 1954 is shown as $1 million, which presumably comes partly from military and partly from Panamanians. But the GAO audit report for the same year indicates that if just the Canal Zone Government had collected its full cost from the military for that year, its revenues would have been increased by $2 million. We understand the need for close Canal Company and Zone Government liaison with the military, but do not think that it should extend to the point of a $2 million annual subsidy. We understand that the Company and Government do not necessarily agree with this subsidy conclusion, but it is a definite conclusion of the GAO, which is the official accounting arm of the Congress, and if their conclusion is not correct, then it would seem that this committee should have an explanation to the contrary from the Company. With respect to the furnishing of education to children of Panamanian citizens, the industry of course agrees that where the parent is an employee of the Company or Government and resides in the Zone, then education should be supplied free as it is to our own people there. However, in those cases where for some reason or other Panamanians not employed by the Company or Government are nevertheless permitted to send their children to zone schools, they should pay tuition on a full cost basis. We do not object to their attendance at the schools, so long as the numbers are not so great as to cause undue expansion of the facilities, since presumably there is a diplomatic consideration involved. However, there seems to be no reason why a subsidy should be added to the privilege accorded a few but not all of the people of Panama. Following is the tariff of school charges as we understand them to be presently in effect:

We have been informed, though we have been unable to confirm it with the Company, that it did at one time adjust the rates upward for nonresident, noncitizen children, but that it was later prevailed upon by some other Department of our Government to reduce them again.

3. SELF-SUPPORT FORMULA FOR BUSINESS ACTIVITIES

This has already been covered in the statement by Mr. Sinclair.

We are attaching for the information of the committee a statement of the losses from business activities in 1954, according to the GAO audit report. They total $5.3 million for the year, or $14.8 million for the first 3 years of the reorganized operation.

Of the $5.3 million loss in 1954, about $3.2 million could have been saved under a self-support formula, since about $2.1 million of the loss for that year was in goods and services to employees, which activities are specifically exempted in the bill from the self-support requirement.

Mr. MAYER. There is a provision also that certain citizens of Panama would be required to pay full tuition for their children. S. 2167 as originally framed would have required more citizens to pay tuition than those we intended. We only mean that those citizens of Panama who are not employed by the Company or the Zone Government, and don't live in the zone, should pay tuition. But those who work there should be given free schooling just as in the case of our own children.

The CHAIRMAN. That takes us then to page 8, the self-support formula.

Mr. MAYER. We are attaching to my statement a statement by the General Accounting Office as to what the losses have been in the various business activities. They average $5.3 million for 1954 and $14.8 million for 3 years and of the $5.3 million loss in 1954, we believe that about $3.2 million could have been saved under a self-supporting formula since about $2.1 million of the loss for that year was in goods and services to employees, which activities are specifically exempted from the self-support requirement.

That takes us then to the BLS pricing formula for employees on page 9, in which there are some important observations that I would like to offer at this time.

The language by which the BLS pricing formula is established is found on page 7, line 17 to 25 of the comparative print. It has been carefully considered by representatives of the steamship industry, the employees at the canal and officials of the Bureau of Labor Statistics in Washington, D. C. It is the result of two conferences at the latter's office. Its phraseology has been dictated by the methods employed by the Bureau of Labor Statistics in arriving at consumer

price indices, and officials of that service have assured us that the language will have the result that is intended by both the employees groups who must live under the consumer index, and those who must pay through tolls the general cost of operation of the canal. For that reason, we as representatives of industry feel that it is necessary that we state very clearly in this record what was intended by the language. We hope that representatives of the employees will make a similar statement and that if they do, and the proposal seems proper, your committee in reporting this bill out can make a clear statement of the legislative intent.

It is our intent to accomplish through this language that employees in the Canal Zone should live with a consumer price index equal to that in Washington, D. C. By that, we mean that assuming the Bureau of Labor Statistics in its method of operation indicates a typical family in Washington, D. C., living on a certain middle bracket salary and finds that that family is required to spend X dollars per week to provide itself with all of the things that is in its so-called market basket, our intent is simply that after the BLS survey, the language of this proposed legislation would require the Administrator/Governor to establish a consumer price index in the zone, which would permit the same size, so-called typical family in the zone to provide itself with a typical zone market basket for the same number of dollars per week that the other family provided itself with in Washington, D. C.

By way of elaboration, we might point out, for instance, that certain commodities might be more expensive in the zone and others cheaper than in Washington, D. C. We would expect that the result of this BLS survey would, under the terms of this proposed legislation, indicate to the Administrator that he must so adjust the price of the cheaper commodities in the canal and the more expensive commodities in the canal on some basis so as to provide the employee with the same total gross living cost as if he were residing in Washington, D. C.

The CHAIRMAN. Do you mean by that the same X number of dollars?

Mr. MAYER. Yes, sir.

The CHAIRMAN. Suppose he bought more of the expensive commodities in the canal and less of the cheaper commodities. Wouldn't it have to be higher?

Mr. MAYER. We would agree that the balance should be assumed in the tolls formula. In other words, we don't feel the employee should be penalized. I think the next paragraph might answer it.

In other words, as we do not feel that the employee should be penalized because he must purchase certain commodities which are more expensive in the Canal Zone because they are not produced there; similarly, we do not feel that he should expect to profit by the fact that certain other commodities are available much cheaper there than they would be in Washington, D. C. We are seeking a rounding off of all of the commodities in his market basket so that he will pay just as much to live in the Canal Zone as does the same man living in Washington, D. C., but no more.

The mechanics of accomplishing that are the only major difficulty according to BLS, and they think that this language about does it. They may have by now some slight proposals for changes.

The CHAIRMAN. I don't quite understand. You put the same items in the market basket for one living here as one living there and then you determine the average price in both places. That wouldn't necessarily come out the same.

Mr. MAYER. The trouble is that there is no such thing as an identical, as they call, market basket. I am new at this market basket thing as regards BLS. There is no such thing as an identical one in Panama and Washington, because obviously a person's purchases in Panama differ from those in Washington. So they will balance them back and forth and they will so adjust all of the prices in Panama so that the man with this same family on the same job as his counterpart in Washington, will spend the same dollars.

The CHAIRMAN. That is if he buys from the Canal Zone.

Mr. MAYER. That's right, which they do in most of the commodities.

The CHAIRMAN. You couldn't do that with outside buying.

Mr. MAYER. No.

The CHAIRMAN. You are talking about purchases

Mr. MAYER. At the commissary.

Mr. BOURBON. There will be a statement later on, Senator, from the Bureau of Labor Statistics.

The CHAIRMAN. Very well.

Mr. MAYER. The next item of importance in the bill of a fiscal nature is that limiting retained income to the needs for 1 year. The proposal in this item is to limit, to the needs for 1 year, the extent to which the Company may retain profits for working capital, plant replacement, and expansion. This is Recommendation No. 1 in the GAO Audit Report for the year ending June 30, 1953. (H. Doc. 473, 83d Cong., 2d Sess., page 30.)

The GAO recommendation follows:

(1) Cash requirements for capital expansion. We recommend that section 253, title 2 of the Canal Zone Code be amended by adding the words "for the ensuing year" after the phrase "reasonable requirements for authorized plant replacement and expansion" in the first sentence. This would limit the Company to retention of only such funds considered necessary for capital expansion for the ensuing year.

The board of directors has not paid a dividend since 1950. The main reason for retaining large amounts of cash has been to finance major long-term capital construction and replacement programs. Hence cash has been accumulated over a period of several years prior to the time that actual payments are required. At present the most important construction programs are those for housing replacement, largely completed, and converting the electrical system from 25- to 60-cycle, requiring several years for completion.

The Company's charter provides for obtaining appropriations for capital needs and operating losses. Thus it is not necessary to retain funds for financing long-term construction programs; funds can be obtained as needed.

The payment of dividends reduces the Company's interest base. Nonpayment of dividends thus increases the Company's interest expenses and places an unnecessary burden on the Company's customers, mainly ship operators. The CHAIRMAN. Does the Company retain a certain reserve? Mr. MAYER. Yes; they do.

The CHAIRMAN. And they don't pay those into the Treasury?

Mr. MAYER. Yes, they do at times, periodically. In November 1954, after this GAO recommendation was issued, I mean in fairness some time afterward, they declared a $10 million liquidating dividend, which reduced the capital base upon which tolls must earn interest by $10 million.