Radical Readjustment Proposed in New York City (1921)

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Electric Railway Journal · Vol. 58, No. 14 · October 1, 1921 · pp 557-560.

Radical Readjustment Proposed in New York City. Transit Commission Suggests, Among Other Things, Unification of Entire Transit System, Ownership by City, Operation by Three Operating Companies Under Management of One Holding Company, Surrender of All Existing Franchises of Whatever Nature.

Recommending municipal ownership of all New York City's transportation agencies but at the same time recommending private operation, the New York Transit Commission has filed its plan of readjustment for New York City street railroads, the report being given to newspapers at 5 p.m., Thursday, Sept. 29, for Friday morning publication. The commission consists of George McAneny, chairman; LeRoy T. Harkness and John F. O'Ryan, appointed by Governor Miller under authority of an act passed by the New York State Legislature last spring. (See Electric Railway Journal, issues of April 2, 16 and 23.)

Ever since its appointment the commission has been making studies of the situation and the present report has been awaited with keen interest, particularly in New York City, where the traction situation is apparently the principal political issue.

The commission has stated its conclusions of the principles upon which any satisfactory solution to the New York situation can be based under fourteen headings. These are given in the panel on page 560.

The Transit Commission was organized the early part of this year and succeeded to the powers and duties of the former Transit Construction Commissioner. Within a week of taking office, it organized a bureau of valuation and through its bureau of accounts has made a comprehensive analysis of the finances of the operating measures of each of the roads. It will hold a series of public hearings at an early date to determine in particular the attitude of the companies toward the plan proposed, and opportunity will be afforded for criticism and constructive suggestion.


The early part of the report of the commission describes the situation of the transportation lines in New York City, as well as the financial condition of the companies. It declares that on June 30, 1920, the aggregate of the net assets of all the companies was $55,908,893 while the aggregate of the current liabilities was $111,044,653. These included arrears of taxes unpaid, interest on underlying bonds, rentals overdue, and accounts and bills payable. The report says that the spectacle of the city depending on the present embarrassed and generally ill-equipped agencies for a service essential to its daily existence is a sorry one. Moreover, if the roads were fully restored tomorrow, there would be no promise against a recurrence of the conditions of today.

In the judgment of the commission a complete change both in the organization and in the methods of financing the system, as well as its relation to the public, must be effected. To bring about such a change was frankly the purpose of the legislation under which the commission is acting.


It is the further conclusion of the commission that until there has been ample demonstration of the general results of operation of the new plan and until the changes and economies the plan has in view are tested fully, there should be no change in the present rate of fare. The commission will require, therefore, that the rate for the first year following the initiation of the plan shall remain at 5 cents.

In any consideration of the rate of fare to be charged there should be taken into account the fact that one result of the past three years' policy of inaction has been to hide a substantial increased fare in the present disintegrated and depreciated service. Through the doubling of fares and the elimination of free transfers the net return per ride for each passenger carried on the surface lines in Manhattan and the Bronx has been increased from 3.674 cents in 1918 to 4.342 cents in 1921; in Brooklyn the average of 3.341 cents in 1918 has been increased to 4.415 cents in 1921. In other words, the surface lines in Manhattan, Brooklyn and the Bronx are already receiving a net increase of about one cent per passenger over the net return of 1918.

There has been no such direct increase upon the subway and elevated lines where continuous rides are the rule. There the added cost to the passenger has been in discomfort and loss of time. But even there the payment of the city's deficits through taxation is adding almost exactly one cent to the subway fare. In short, increased fares have not been avoided. They have been secured through indirection.

The commission appreciates that if proper and necessary service is to be restored, and the revenues gained through charging of double fares and the cutting out of transfers given up, this hidden increase must be first absorbed. In other words, savings must be effected that will offset the hidden rate. The commission appreciates as well that various fixed charges must be eliminated, and many costs reduced, to offset further burdens placed upon the present system.

If the* present situation were accepted as the basis of fare fixing a solution the commission declines to consider without allowance for profits of any nature, preferential or otherwise, the following deficiencies would have to be overcome :

(a) The gross revenues of the operating companies for the year ended June 30. 1921, was in round numbers $133,000,000. and the costs of operation, taxes, rentals and interest, $150,000,000. The deficits, heretofore cited, are therefore $17,000,000

(b) The deficits in the interest and sinking fund account of the city which in 1921 amounted to $9,500,000 will advance in 1922 to approximately $10,000,000; the total to be provided from revenue for the city's account, therefore, will be $10,000.000.

(c) The cost of eliminating double fares, and of restoring free transfers upon the surface lines will be for each year not less than $9,000.000.

(d) And one-third of the cost of neglected repair work and incidental rehabilitation, If this expense can be spread over three years, would add not less than $5,000.000.

The total thus required (without allowance for the cost of restoring full train and car service, which cannot be estimated with any exactness, and without provision for the full replacement of worn-out and obsolete equipment) would be $41,000.000.

Against this sum there may be counted a reduction of $5,000,000 to be secured through the wage adjustments of a month ago. This will bring the net additional indicated need on the present basis approximately to $36,000,000.

$36,000,000 OBSTACLE

It is true that the above figures are based upon the present accounts and financing of the companies. In a rate case the intensive scrutiny of accounts undoubtedly would result in heavy cuts. But the net figure of $36,000,000 indicates the size of the obstacle to be overcome after three years' policy of drift to re-establish and maintain the 5-cent fare.

It will appear that if the only method of relief was upon the basis of present organization and financial structure, the prospect for maintaining the 5-cent fare would not be hopeful.

But it is the opinion of the commission that if the reorganization plan it presents be adopted, with (a) the rearrangement and more effective co-ordination of the transit system, (6) the reduction of rentals and interest charges that it has in view, (c) the elimination of taxes and other public charges, from which the municipalized lines naturally would be free, (d) the reductions of cost effected through consolidation of power plants and of other facilities used in common, and (e) the material savings that will occur in the reduction of overhead and operating charges, the indicated deficiencies may be substantially overcome and the 5-cent fare continued beyond the year of trial.

While naturally every endeavor will be made to attain this end, the question finally can be determined only by a demonstration of the results of operation of the consolidated system such as the plan proposes.

The commission thinks that the enforcement of a plan based upon the principles cited, beyond securing the economies and benefits of consolidation and ending a condition of financial chaos and paralysis, will clean out the separate, special, private interests with their persistent friction and conflicting policies and substitute a new basic organization in which the interests of the city and of private investors would be common. If these principles be recognized and given effect, it will follow that while opportunities for the making of money through the speculative manipulation of transit securities will cease, bona fide investors, on the other hand, assured of adequate protection, should not hesitate to lend as further funds are required. The advantages that will flow to the traveling public from the plan are obvious. Nor does the commission see in it any unfairness either to the operating companies or to the present owners of their securities.

In readjusting securities on the basis of honest value which the commission has in view, it declares it will insist upon the elimination of "water" of every description and the frank recognition of a depreciation that investors have long since discounted. In requiring that existing "preferentials" be given up, as a part return for the stability the plan would give to real investment, the commission says it again seeks to cut out whatever has become unstable or artificial in transit finance. Preferential allowances held to be fair and necessary when the dual contracts were negotiated ten years ago are not fair under the conditions of today. If the subway operators argue that their preferentials should be continued, and that a fare should be fixed sufficient to cover them, they would claim in effect that they alone are entitled to 100 per cent protection against the losses and shrinkages of the war, while the city, the private investors and every other party to the old agreements have been required to carry very substantial losses, direct and indirect.

The elimination of inter-company leases will put an end to another form of abuse in transit finance and avoid the continuance of undue favor to any particular class of security holders. Under the plan all such leases would be discontinued and the lines of lessor companies merged with the unified system upon the same terms as to the recognition of actual value and the allotment of interest-bearing securities that apply to all others.

In accordance with the foregoing findings the commission submits the following general outline of its plan and of the mechanism through which it is to be put into effect:


The plan provides for the valuation, consolidation and municipal ownership of all transportation facilities deemed by the transit commission to be useful and essential. Such facilities are to be acquired without cost to the city by amortizing out of earnings the valuations fixed by the Transit Commission. All existing corporations and their franchises, inter-leases and securities are gradually to be eliminated or extinguished, except such underlying liens carrying a low rate of interest as the commission deems it advisable not to disturb. Existing securities, with such exceptions, are to be replaced by an issue of bonds of a consolidated company representing a fair and honest valuation of the properties. Payment of these bonds with interest, and a sinking fund charge sufficient to retire them within a reasonable period, which will be less than the term of the present subway leases, is to be secured by a purchase money mortgage and assured by a rate of fare based on cost, automatically determined by the condition of a contingent reserve or barometer fund.

Valuations according to existing security issues and present capitalization will be disregarded and the entire financial structure of the consolidated company will be based upon a new valuation, which, under the rapid transit legislation of this year, is rapidly being completed. By this means the "water" in present financing and capitalization will be eliminated and the new valuation will represent the real values in the transportation properties.

In view of the large investment of the city in and its ownership of the existing subway lines, the benefits of a unified system can best be secured through the immediate municipal ownership of all transportation facilities deemed useful and essential in a comprehensive system, and their operation, under effective public control by company agencies to be created for the purpose, if the city authorities shall oppose immediate municipal ownership of the transit system, with its present opportunity to reform completely the existing situation, the commission is prepared to consider the alternative course of vesting title to all properties not now owned by the city, including the subway leases, in the consolidated company, with provision for deferred ownership by the city. Such a course will permit the general features of the plan to be carried out, but will add to the difficulties and tend to impose a higher fare.


Under the plan, ownership will be acquired by the city without financial outlay on its part. Existing companies will turn in to the consolidated company, and through it to the city, all properties and rights in return for new leases which will provide for amortization out of the earnings of the consolidated system of the valuation fixed by the commission.

The existing, separate systems to be consolidated at the start into three new operating groups to be made up as follows:

Group No. 1: The subway and elevated railroads now operated by the Interborough Rapid Transit Company and leased by it from the city and the Manhattan Railway Company.

Group No. 2: The subway, elevated and surface railroads now or formerly in the Brooklyn Rapid Transit system.

Group No. 3: The surface railroads of the Boroughs of Manhattan and the Bronx.

The surface railroads in Queens and Richmond, in whole or in part, to be allocated to Group No. 2 or Group No. 3, as may be determined.

Bus lines necessary for the logical development of the unified system to be created and allocated as feeders to the foregoing group. Where necessary or desirable, some of the existing surface lines may be transformed into bus lines.

All existing power facilities to be consolidated and operated for the common benefit of the entire system.

To pave the way for the eventual, complete consolidation into one system, and to secure the benefits of private operation under public control, the Transit Commission will cause to be organized four corporations "A," "B," "C" and "D" companies each with a nominal number of capital shares.

"A" company will be the controlling and financial company, and general supervisor of the affairs of "B," "C" and "D" companies, which will be exclusively operating companies. The shares of stock of the operating companies will be owned by "A" company, whose shares in turn will be held in trust by the Transit Commission, or by whatever body may succeed it.

"B" Company will operate under lease the properties embraced in Group No. 1, "C" Company the properties embraced in Group No. 2 and "D" Company the properties embraced in Group No. 3.

General financial control and supervision of the entire system will be lodged in a board of control, which will also constitute the directorate of "A" Company. It will consist of seven members, to be chosen as follows: One each by the board of directors of the three operating companies, "B," "C" and "D," three by the Mayor of the city, and the seventh member by vote of the other six, or, in the event of their inability to agree, then by the Transit Commission or by whatever body may succeed it.

The powers of the board of control are to be those of a financial nature, as above indicated, together with such other powers cf supervision and direction as may properly be conferred upon it by the contracts to be entered into. It will be responsible for the distribution and management of all the surplus revenues of the operating companies after payment of their own operating expenses, will have sole charge of the issuing of all securities, will make all payments for interest, and have the custody and management of the amortization, contingent reserve, and other funds.

The functions of the Transit Commission in respect to construction should be vested in the board of control, and from time to time, as experience warrarts all the remaining functions of the Transit Commission, except those involving exercise of the police power, to which the Public Service Commission will succeed, should be vested in the board of control, permitting the abolition of the Transit Commission. Legislation to this end will be recommended by the commission.


To provide for the eventual consolidation into one operating company, the board of control will have the power, after a specified number of years, to consolidate further the groups and operating companies provided for under this plan into one or two operating companies, as it may deem best.

It may be noted not only that this control differs from past methods, in that it is placed where it can be exercised most efficiently and economically, but that the city's participation is placed on an equality with that of the private investors, giving the city for the first time real and substantially complete home rule with respect to transit.

If, as expected under the plan, selfish and antagonistic interests are eliminated, and the interests of the city and the company investors made common, it should be possible to have a large part of the detail work now done by the staff of the Transit Commission performed by the staffs of the operating companies, and thus cut down the large force of public employees necessary under present conditions. In view of the base of the interests of the city and the company investors being common, the expenses of the board of control should be treated as an operating expense and paid out of railroad earnings.

The operating management of "B," "C" and "D" companies shall be vested in their respective boards of directors under the terms of their leases. The board of directors of "B" Company shall be elected by the holders of the bonds issued in exchange for the securities and properties constituting Group No. 1. Similarly, the directors of "C" and "D" companies will be elected by the holders of the bonds issued in exchange for the securities and properties constituting Group No. 2 and Group No. 3 respectively. Management will thus represent investment instead of speculation


The present subway leases to be reformed or superseded by agreement, so as to abolish all preferential payments and place company and city investments on a parity. Ownership of all subway equipment not already owned by the city to be vested in the city without outlay by the city in return for a new lease.

The reformed subway leases, comprising the Interborough System, together with the lines constituting the Manhattan Elevated Railroad System, to be assigned and transferred, with the consent of stockholders, or, failing that, by means of foreclosure sale, to "A" Company in exchange for "A" Company bonds, equal in amount to the valuation of the properties of the Interborough and Manhattan Companies, made by the Transit Commission pursuant to Chapters 134 and 335 of the laws of 1921.

These bonds to be exchanged for outstanding securities issued against the properties transferred on terms to be fixed in the final statutory plan and contract, reached if possible by agreement between protective committees of security holders, but otherwise to be determined by the Transit Commission. Pursuant to the terms of the final statutory plan and contract, "A" Company will forthwith, by appropriate instrument, vest in the city all of its right, title and interest in and to the properties acquired, in return for a lease of the properties transferred, comprising Group No. 1, to "B" Company for operation, under the general terms hereinafter stated.

The bonds of "A" Company, issued in exchange for the properties transferred to it and by it vested in the city, shall be secured by a purchase money mortgage which shall be a specific lien upon the properties transferred and a general lien upon all of the property of "A" Company, including its interest in the leases to the operating companies. These bonds shall bear interest at the rate of five per cent per annum, with an additional one per cent set aside to amortize the valuation as fixed by the Transit Commission. The bonds will be further secured by provision in the final statutory plan and contract for the maintenance of a rate of fare automatically determined to meet at all times cost of operation, bond interest, and one per cent for amortization.

Under conditions hereinafter stated, in order to provide an incentive to efficient and economical management, it will be possible for the bonds to earn an additional one and one-half per cent of interest.

In similar manner the lines now or formerly comprising the Brooklyn Rapid Transit System, surface, subway and elevated (and if it is finally deemed best, the surface lines in Queens and Richmond), will be transferred to "A" Company in exchange for its bonds, equal in amount to the valuation of said properties, as determined by the Transit Commission, which properties shall be by "A" Company vested in the city in return for a lease to "C" operating company upon terms similar to those provided in the case of "B" Company. In a similar manner the lines now comprising the various surface lines in Manhattan and the Bronx, or such of them as shall be deemed by the Transit Commission to be useful and essential, shall be transferred to "A" Company in exchange for its bonds equal in amount to the valuation of said properties as determined by the Transit Commission, which properties shall be by "A" Company vested in the city in return for a lease thereof to "D" operating company, upon terms similar to those provided in the case of "B" and "C" Companies.

Upon the completion of the amortization period of the purchase money bonds issued by "A" Company, the city's title to all the transit lines will be free and clear of such liens, but the city shall have the right to extinguish the bonds underlying any line or lines at any time after ten years, upon payment of the then unamortized portion of the bonds.

"A" Company shall raise by the issue of notes, or other form of short term securities, sufficient funds for financing the unified system and providing necessary working capital during the early period of its development. Such funds shall be utilized, among other things, for the establishment of the contingent reserve or barometer fund hereinafter provided for. Such additional capital as may be needed for transit construction or equipment, other than that furnished by the city, shall be raised by the sale of new bonds to be issued by "A" Company, as may be determined upon by the board of control.


There shall be no increase in the 5-cent rate of fare, unless, after one year's demonstration of the results of operation of the consolidated system, with its new and many opportunities for substantial economies, an increase is demonstrated to be necessary. Then and at the conclusion of each succeeding fiscal year the rate of fare will be determined automatically by the status of the contingent reserve or "barometer" fund, and shall be put into effect by the board of control. During each year of operation under the plan the rate of fare shall be adequate to provide for cost of operation and interest and sinking fund upon the bonds and other current obligations of the consolidated system, including provision for the maintenance of the contingent reserve or barometer fund. This will operate as follows: After payment of operating expenses and fixed charges (the fairness of the amounts of which is insured by the valuation of the properties by the Transit Commission and the control over expenditures by the board of control), the surplus moneys are to be paid into a contingent reserve or barometer fund. If the available surplus keeps this fund above a specified maximum, the fare is to be automatically lowered; if the fund falls below a specified minimum, the fare is to be automatically increased until the reserve is restored.


For example: Assume that the normal amount of the barometer fund is fixed at $25,000,000. If it rises to $35,000,000, the fare is to be decreased; if it falls to $15,000,000, the fare is to be increased.

In short, the purpose of this is, after fixing the base of proper valuation and determining the operating expenses and fixed charges, to make the decision as to the rate of fare as automatic as is humanly possible. Upon the new basis the public can be assured that all money expended is properly expended for necessary cost, and the rate of fare, therefore, will reflect the actual and necessary cost of the transportation that the public gets, uninfluenced by any opportunity of private gain based upon stock ownership.

Transfers on all of the lines of each of the three operating systems will be established at proper points as rapidly as financial conditions will permit.

Each operating company will pay its own operating expense and retain its own maintenance and depreciation reserve as authorized by the terms of its lease, and turn over all surplus funds to "A" Company. "A" Company will pool the moneys so received and distribute same as follows:

(a) It shall pay to the holders of its securities the fixed return prescribed, and to the city the interest upon its rapid transit investment.

(b) It shall pay into an amortization fund the specified rate for the amortization of its bonds, and to the Comptroller of the city of New York a specified rate for the amortization of the corporate stock of the city issued for rapid transit construction.

(c) It shall make good any deficit in the cost of operation in any preceding year sustained by any one of the three operating companies.

(d) It shall out of the remaining surplus maintain the above mentioned contingent reserve or barometer fund.


In order to provide an incentive for efficient and economical management, there shall be set aside each year by the board of control out of the surplus earnings of the unified system, after the payment of all obligations and the maintenance of the barometer fund, a sum to be distributed or used for the joint benefit of the operating personnel of the unified system and the holders of the consolidated company's bonds. This fund, within the limits of the available surplus, shall, for the purpose of computing allotments prescribed, equal three per cent interest on the purchase money bonds issued by the consolidated company. When the amount so available has been determined by the board of control it shall be allocated, one-half for the benefit of the operating personnel as hereinafter indicated, and one-half for the payment of additional interest upon the outstanding purchase money bonds, but subject to the condition that with any increase or decrease of fare above or below the rate of 5 cents, such funds shall be decreased or increased, as the case may be, on the basis of one per cent interest on the bonds with each cent of fare variation.

In similar manner, out of the remaining one-half of the fund referred to, there shall be allocated under the contingencies mentioned a like amount for the benefit of the operating personnel of the unified system, which allocated sum shall be expended under the direction of the board of control for the collective benefit of the operating personnel.

If, however, the board of control so determines, the said sum may be expended under the direction of the board of control to provide benefits, such as insurance and pensions, for the operating personnel and to reward employees who in various groups have, during the preceding year, rendered conspicuously efficient service.

There will be included in the contracts for the transfer of the several lines to the consolidated company provision for obligations to contract and to creditors and to holders of receivers' certificates of indebtedness, employing for this purpose, so far as can be agreed upon, the bonds and short term securities of the consolidated company, due allowance therefor being made in the price at which the respective properties are to be taken over.


The term of the leases shall be for so long as is necessary to amortize the valuation as fixed by the Transit Commission.

All leases to be subject to extinguishment or recapture by the city at the end of ten years upon payment of the then unamortized part of the valuation of the leased properties.

As the amortization funds will be managed by the board of control, on which the city will be adequately represented, their proper and conservative management in the city's interest will be assured. In order, however, to meet the objections to the past management of sinking funds, the final statutory plan and contract will require the adoption of the more clean-cut method of buying or calling in each year a part of the outstanding securities and canceling them. This will wipe out a definite part of the debt each year and, although its cost is somewhat greater than on the compound interest basis, the commission believes that it possesses many advantages. After some years the debt should sufficiently be reduced to ease greatly the cost of meeting fixed charges and thereby pave the way for bettered service or possibly decreased fares.

Fourteen Conclusions of Analysis of Transit Commission on Which Readjustment Plan Is Based

It is the conclusion of the commission that the plan of reorganization should be based upon tlie following principles:

1. That all existing: lines subway, elevated and surface should be unified for purposes of future operation, and placed under control of a single supervisory authority in which the operating companies and the city shall participate upon equal terms.

2. That the railway properties still held in private ownership, whether under direct title, franchises, contracts or leases, should, so far as required for the purposes of the unified system, be transferred to the city, their owners receiving in return new securities, based upon the actual value of the lines for operating purposes.

3. That the continued possession of any of the roads for purposes of operation be conditioned upon the acceptance from the city of new leases, granted for restricted periods, and that the revenue derived from such operation be used only for the payment of actual operating costs and the interest and sinking fund charges upon the new securities plus certain limited percentages of profit allowed when earned as an incentive to good management.

4. That the new securities be amortized in favor of the city subject to the right of the city to retake any specified one of the lines upon the payment of any then unamortized proportion of the securities.

5. That provision be also made from the revenue of the roads for payment in each year of the interest and sining fund charges upon the city's investment in the dual subways; as well as upon all subsequent rapid transit investments of the city.

6. That as a condition precedent in participation in the proposed reorganization the preferential allowance of profits granted to any one of the companies as a consideration for rights yielded under previous contracts or leases, as well as any claims based upon the unpaid accumulation of such preferential profits, be given up; and that all inter-company leases or other undertakings covering the use either of lines or equipment be canceled.

7. That the lines retained in the reorganized system be arranged so as to eliminate gradually all duplication of service so that the rapid transit roads will serve the long hauls and the suface cars or buses the local and connecting hauls.

8. That only such lines as in the judgment of the commission are adaptable to such as system be acquired, or accorded any value for purposes of such acquisition.

9. That as rapidly as may be possible financially, full and continuous service be restored upon all of the lines, free transfers re-established and postponed repairs given proper attention.

10. That all train and car schedules be so arranged as to provide adequately for the comfort and convenient service of the traveling public at all hours of the day.

11. That in order further to relieve present conditions, and to provide for the great increases of traffic certain to develop in the near future, immediate provision be made for the planning and building of additional new subways,

12. That provision be made for winding up the affairs of the present operating companies at the earliest practicable time upon the basis of the adjustment suggested, for the satisfactory settlement by them of their current liabilities before transfer of their lines to the city and for the termination of all receiverships.

13. That in order to preserve a unified rate of fare on all the lines, all surplus earnings be pooled and that a proper fund be established, to consist of such surplus earnings and such temporary borrowings as may be necessary, to cover current contingent needs.

14. That the rate of fare shall not be fixed, in any discretionary sense, either by the commission, or by any other authority but that it shall be determined from year to year automatically according to the actual costs of operation.


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

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