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Since that reorganization, the canal has been subject to annual audits by the General Accounting Office. There have been three such audits by GAO, which have resulted in numerous recommendations for changes at the canal. Some of those, administrative in character, have been accomplished. Those that have been legislative in character have not yet been acted upon by the Congress. On December 31, 1954, the Senate Committee on Government Operations released its Staff Memorandum No. 83–2–34 entitled “Major Deficiencies in the Organization and Operation of the Panama Canal Company and Canal Zone Government, as Disclosed by Audit Reports of the Comptroller General of the United States.'

. While it carries only GAO recommendations in its title, it also comments on recommendations by the Bureau of the Budget.

The bill we have before us is related to the GAO and Government recommendations in that the bill follows those recommendations in part. Where the bill does not follow them, it is not in conflict with the policies of the GAO.

I would like to state also that S. 2167 is the result of numerous conferences with representatives of the GAO. The "clean bill" suggesting but a few changes over S. 2167 is the result of additional conferences with GAO, with representatives of the Company, with representatives of the canal employees, and with representatives of the Bureau of Labor Statistics.

Outside of the “clean bill,” there are areas wherein the steamship industry, canal labor, and GAO may differ, but within the framework of the bill now before you, we believe that these hearings will show that these three interests are in basic agreement. The bill.we think represents the widest possible area of agreement of toll payers, employees, and the General Accounting Office, all of whom have contributed to bringing before your committee a bill which we believe has some reasonable amount of support.

The proposed bill, the effect of which is probably most plainly shown to you in the comparative print before you, proposes these things: (1) placing Panama Canal Company and Canal Zone Government under the supervision of the Secretary of Commerce; (2) reimbursement of Canal Zone Government by other Government agencies for work performed by that Government which would otherwise normally be performed by other Government agencies; for certain work performed for the Republic of Panama and for services provided to individuals not employed by the Company or the Government; (3) requiring that business activities at the canal (other than transit function) be self-supporting according to a regular business formula; (4) exempting the sale of goods and services to employees from the self-support requirement, and establishing a pricing formula at the canal on the basis of the BLS Consumer Price Index in Washington, D. C.; (5) limiting retention of canal profits to an amount equal to capital and expansion and replacement needs for 1 year; (6) establishing a form of management at the canal identical with that established in 1954 by the Congress for the St. Lawrence Seaway; and (7) providing for a court review of tolls rate decisions.

SUPERVISION BY SECRETARY OF COMMERCE

This subject has been covered by testimony of Mr. James Sinclair, president, Luckenbach Steamship Co. and † do not propose to add to that other than to comment on a Defense Department report recently filed with your committee opposing this transfer on the ground of the military importance of the canal.

The Defense Department report is significant in the light of the long effort of our industry to have same national defense value of the canal recognized in the tolls formula.

In 1951, the industry proposed that one-half the capital base be written off to national defense. The Congress compromised on forgiving interest during construction.

In 1954, we suggested that in recognition partly of national defense value, and partly in conformity with Government policy, the interest on construction costs up to the 1951 reorganization date be forgiven. Congress declined to act.

This comment by the Defense Department is an endorsement of the fact that the canal is an important defense weapon. Its savings to the military in World War II alone have been estimated at several times the total construction cost.

The industry's proposal in S. 2167 for transfer to the Secretary of Commerce does not ignore the military importance of the canal, nor would such a transfer be inconsistent with that aspect of the canal. It suggests closest liaison with military in peacetime, and complete military control in emergency or war period, the latter fully within the power of the President under already existing law, according to the staff memorandum of the Senate Committee on Government Operations.

The Defense Department report on S. 2167 offers no compelling reason for maintaining military control in peacetime. The operation of the Canal Company and Zone Government have no direct bearing on the military in peacetime. The Military Establishments at the canal are entirely separate and apart from the Company and Government. Except for its locality outside of the United States boundaries, the canal is no different from other major utilities. Its locality of course requires added continuous defense efforts. But as to the actual operation of the canal, there is no apparent necessary function of the military there in peacetime, outside of close liaison for security purposes.

The second item sought to be accomplished

The CHAIRMAN. I think we can put that in the record and skip it, because that is common practice in all Government agencies. That is what you point out.

Mr. MAYER. Reimbursement?
The CHAIRMAN. Reimbursement.

Mr. MAYER. We think it is. We think that in main the analogy is in Guam where the income tax in Guam is collected from the people and then remitted back to run the Guam Government. No such thing happens in the Canal Zone. We therefore propose that each of these Federal agencies whose job we do down there, because we pay for 80 percent of the government, simply reimburse the Canal Zone Government.

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:

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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.

Losses from business activities other than transits1954"

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Allied maritime operations:

Marine terminals.
Vessel repair

Hotel Washington..
Supporting services:
Transportation and utilities:

Railroad
Motor transportation.
Steamship line
Power system.
Telephone system.

Water system.
Employees' services:

Commissaries
Service centers.
Housing:

United States rate (including furniture and garage rental

and other miscellaneous services).

Local rate.
Other supporting services:

Engineering and maintenance.
Supply
Tivoli Guest House
Printing plant.

Grounds maintenance.
Unallocated-nonrecurring corporate expense.

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1 Excerpt from page 24, GAO audit report, 1954.

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

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