PANAMA CANAL FINANCES TUESDAY, APRIL 6, 1976 HOUSE OF REPRESENTATIVES, COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D. C. The subcommittee met. pursuant to call, at 10 a.m., in room 1334 Longworth House Office Building, Hon. Ralph H. Metcalfe (chairman of the subcommittee), presiding. Mr. METCALFE. The Subcommittee on the Panama Canal will now come to order. Madam Chairman, fellow members, ladies and gentlemen, during the next 2 days we shall have an opportunity to study in a very comprehensive fashion the finances of the Panama Canal. From an array of distinguished officials and experts that will come before this panel, we hope to have imparted a knowledge of what the financial problems of the Panama Canal have been in the past, what they are today, and what they are expected to be tomorrow. The Panama Canal Subcommittee will be acting here as the subcommittee with the key oversight role with respect to the finances of the Panama Canal. The subcommittee will also be acting in our legislative role in order to ascertain whether the financial maladies of the canal merit any particular type of legislative prescription. The focus of hearings in the next 2 days will likely go to the financial problems that the canal apparently has as of today. But this focus should not blind us to the fact that the canal enterprises has in many respects been a very successful one over the years. The success of the canal enterprise can be attributed to the great people who built the canal, the Corps of Engineers that has supervised it, the employees, both U.S. and Panamanian, who have operated it, the shippers who have used it, and the leaders who have legislated for it. We should feel fortunate that hearings on the finances of the canal have not been a pressing matter until recently, and we should understand that the canal has paid its way in a better fashion than many other Government enterprises. We are all pretty well aware of the problems which have arisen with respect to the canal finances in recent years. Large increases in users fees, cutbacks in services for employees and residents of the Zone, and financial losses for the canal organization which will ultimately affect the taxpayers and Government of the United States have all occurred. (1) As a result of these problems, we will probe to find some very basic truth in these proceedings. To what degree are the financial difficulties of the Panama Canal due to external uncontrollable factors and to what extent are they due to internal decisions? Are the financial problems of the canal temporary or permanent in nature? Who should have the power, and in what manner, to deal with the canal's financial problems? And, given the nature of the problems, what type of legislation or administrative solutions are optimum? These questions are very important ones and they require an understanding of the canal operation if they are to be answered. During the next 2 days we will hear about a wide range of specific financial policies: accounting policies, debt collection, toll sensitivity, wage proposals, and equity for canal users and employees. It would be useful if in the discussion of these specific policies we understand how they contribute to the overall problems and remedies as respects the canal. In addition to promoting a wide range discussion of canal finances, these hearings were also convened for the purposes of receiving testimony on one possible alternative solution to the problems as embodied in H.R. 12641. Study of this legislation, which provides for interest credit for Panama Canal Company deposits with the U.S. Treasury, and which allows the deferral of the interest payment on the net direct investment in the canal company and the addition of such an amount to the investment debt, will help us to evaluate alternative approaches to solving the canal financial problem. I ask unanimous consent at this time that the bill and such executive agency reports as we have received or will receive on this matter be inserted in the record at this point. [The bill, H.R. 12641, and agency reports follow:1 [H.R. 12641, 94th Cong., second sess.] A BILL Providing for the temporary deferment of payment to the Treasury on the net direct investment of the Government in the Panama Canal Company Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That subsection (e) of section 62 of title 2, Canal Zone Code (76A Stat. 8), is revised to read as follows: "(e) In order to reimburse the Treasury, as nearly as possible, for the interest cost of the funds or other assets directly invested in it, the Panama Canal Company shall pay interest to the Treasury on the net direct investment of the Government in it as defined by subsections (a), (c), and (d) of this section, and shown by the receipt described therein, at a rate or rates determined by the Secretary of the Treasury as required to reimburse the Treasury for its cost. For purposes of the computation of interest cost of the net direct investment of the Government in the Panama Canal Company, the cash of the Company on deposit with the Treasury shall be subtracted from the net direct investment of the Government in the Company as defined in subsections (a), (c), and (d) of this section, and the interest cost shall be computed only on the balance of the net direct investment less the aforementioned cash balance. Payments of the interest charges shall be made annually to the extent earned, and to the extent not earned shall be added to the net direct investment of the Government in the Panama Canal Company." Hon. LEONOR K. SULLIVAN, EXECUTIVE OFFICE OF THE PRESIDENT, Chairman, Committee on Merchant Marine and Fisheries, House of Representatives, Longworth House Office Building, Washington, D.C. DEAR MR. CHAIRMAN: This is to offer the comments of the Office of Management and Budget on H.R. 12641, a bill, "Providing for the temporary deferment of payment to the Treasury on the net direct investment of the Government in the Panama Canal Company." With two changes, we would agree with the report on the bill recently transmitted to the Congress by the Treasury Department. We would agree with the provision in the bill which would allow deferral of interest payments to the Treasury Department by the Panama Canal Company. We would not object if the decision as to whether interest may be deferred would continue to be made by the Company, rather than the Treasury Department. We agree with Treasury that any deferred interest should bear interest itself, and with its proposed wording for the determination of the applicable interest rate. These provisions would put the Company on the same basis as many Federal agencies. In addition, we would suggest the deferral of interest be limited to no more than 5 years; this is a reasonable limit which would satisfy the requirements of the Company and the Federal government. This position has been agreed to by the Panama Canal Company and the Department of the Army. Subject to these changes, OMB would support enactment of H.R. 12641. Sincerely, JAMES M. FREY, Legislative Reference. Hon. LEONOR K. SULLIVAN, COMPTROLLER GENERAL OF THE UNITED STATES, Chairman, Committee on Merchant Marine and Fisheries, Dear Madam CHAIRMAN: This letter is in response to your request for our comments on H.R. 12641, 94th Congress, a bill which, if enacted, would provide for the temporary deferment of payment to the Treasury on the net direct investment of the United States Government in the Panama Canal Company. The enactment of H.R. 12641 would affect the Panama Canal Company in two ways. The first change would authorize the deduction of Panama Canal Company cash on deposit with the United States Treasury from the net direct investment figure which is used to compute the interest due annually to the Treasury. At present, substantial sums must be maintained for contingency purposes in noninterest-bearing accounts with the Treasury to the fiscal detriment of the Company. The proposed change is one of several alternatives recommended by this Office to deal with this problem. Although this change would reduce the Company's interest payments to the Treasury, it might also reduce any incentive to return the United States Government's investment in the Company. Therefore it might be advisable to consider coupling the proposed change with a requirement for a systematic return of the Government's investment. The second change proposed by H.R. 12641 is the authorization of the deferral of interest on the Government's net direct investment to the extent not earned by capitalizing the interest and adding it to the amount constituting the net direct investment. Although the bill's title indicates that the deferral is temporary, we feel that the bill should clarify whether the deferral is meant to be a permanent addition to the net direct investment. We feel that the bill should also specify whether the deferrals are meant to be recognized as operating costs for the purposes of setting toll rates. An increase in the net direct investment, to the extent that such interest is not earned and not included as a portion of the Company's operating costs for setting toll rates, results in an immediate subsidization by United States taxpayers in an amount equal to the increase in the net direct investment. The Committee might wish to consider the inclusion of some mechanism whereby deferred payments could be recognized as operating costs for the purposes of setting toll rates. Sincerely yours, ELMER B. STAATS, Comptroller General of the United States. Hon. LEONOR K. SULLIVAN, PANAMA CANAL COMPANY, Balboa Heights, Canal Zone, April 8, 1976. Chairman, Committee on Merchant Marine and Fisheries, DEAR MADAM CHAIRMAN: This is in response to your request for a report on H.R. 12641, a bill, "Providing for the temporary deferment of payment to the Treasury on the net direct investment of the Government in the Panama Canal Company." The bill would amend section 62(e) of Title 2 of the Canal Zone Code as follows: 1. The first sentence of the subsection is unchanged from present law. 2. The second sentence of the subsection (page 2, lines 3-10) is a new provision for subtraction from the interest base of the amount of cash of the Company on deposit with the Treasury. The effect of this provision relieving the Company from the payment of interest on the cash the Company keeps on deposit in the Treasury would reduce the cost of operation of the Company by approximately $1.6 million a year. 3. The first phrase of the last sentence of the subsection in the bill, “Payments of interest charges shall be made annually to the extent earned" is the same as the language of the existing law. The last phrase reading “and to the extent not earned shall be added to the net direct investment of the Government in the Panama Canal Company" is substituted for language in the existing law reading "and if not earned shall be made from subsequent earnings unless the Congress otherwise directs." The effect of this change is to remove from the costs of the Company to be recovered from tolls the amount of interest that has accrued but not been paid in prior years. Instead, interest on the unpaid interest becomes an operating cost to be recovered from tolls, and this situation will continue until the Government's investment is repaid by liquidating "dividend" payments made pursuant to section 70 of Title 2. The Panama Canal Company favors amendment of section 62(e) providing for deduction from the interest base of the amount of the Company's funds on deposit with the Treasury. Such a provision recognizes the value to the Company of this part of its assets and in no way compromises the underlying theory of the statute that the Company should recover all its costs from revenues. The rationale and advantage of the amendment of the last sentence is less clear. In an accounting sense, the addition of the amount of unpaid interest to the investment base creates an "asset" that has no value on which the Company must pay interest until the investment base is proportionately reduced. The provision eliminates from the costs required to be recovered from tolls the amount of unpaid interest and substitutes a lower cost-the amount of interest on the unpaid interest. On balance, the Panama Canal Company considers that the present language of the last sentence of section 62(e) is preferable to the amendatory language proposed. The Office of Management and Budget advises that there is no objection to the submission of this report to your Committee. Sincerely yours, H. R. PARFITT, President. Hon. LEONOR K. SULLIVAN, THE GENERAL COUNSEL OF THE TREASURY, Chairman, Committee on Merchant Marine and Fisheries, House of Representatives. DEAR MADAM CHAIRMAN: Reference is made to your request for the views of this Department on H.R. 12641, "Providing for the temporary deferment of payment to the Treasury on the net direct investment of the Government in the Panama Canal Company." Section 62 of Title 2, Canal Zone Code, requires the Panama Canal Company to pay interest to the Treasury on the net direct investment of the Government in the Company at a rate or rates determined by the Secretary of the Treasury as required to reimburse the Treasury for its cost. Section 62 also provides that payments of interest charges shall be made annually to the extent earned and if not earned shall be made from subsequent earnings. H.R. 12641 would amend section 62 in two respects. The first amendment would provide that cash of the Company on deposit with the Treasury shall be subtracted from the net direct investment before computing the interest to be paid to Treasury. On July 15, 1975 the Company initiated, with the Department's concurrence, the use of interest offset for funds deposited with the Treasury. We understand that the General Accounting Office holds that legislation is necessary to continue this practice of interest offsets. The second amendment would provide that any deferred payments of interest shall be added to the net direct investment. The effect of this amendment is to make clear that any deferred payments shall bear interest. We would recommend two amendments to correct technical deficiencies and to conform the proposal to current Administration policy: (1) on lines 1 through 3 on page 2 delete "at a rate or rates determined by the Secretary of the Treasury as required to reimburse the Treasury for its cost." and insert "at a rate determined by the Secretary of the Treasury, taking into consideration the average market yield during the month preceding each fiscal year on outstanding marketable obligations of the United States of comparable maturities." (2) delete the last sentence on page 2 and insert "Interest payments may be deferred with the approval of the Secretary of the Treasury, but any interest payments so deferred shall themselves bear interest." These amendments would put the interest rate determination and interest deferral provisions on the same basis as those which apply to a large number of Federal agencies. The Congress applied a similar interest rate formula to borrowings by the Panama Canal Company from the Treasury in Public Law 93-607, approved January 2, 1975. In view of your request for the expedition of this report, it has not been possible to obtain the customary clearance by the Office of Management and Budget prior to its submission. Sincerely yours, RICHARD R. ALBRECHT, Mr. METCALFE. At this point in the record I would also like to have inserted a series of questions which the subcommittee has addressed to the Panama Canal Company and the General Accounting Office on the subject of the amendment to vessel measurement rules and the general finances of the Panama Canal, and the answers to those questions. If I can get unanimous consent to put these questions and answers in the record, I believe they will be particularly helpful to those who may be reading and analyzing our proceedings. Hearing no objection, the correspondence will be entered in the record at this point. [The information follows:] |