In 1974, for the first time in the history of the Panama Canal, we found it necessary to raise tolls. That 19.7 percent toll increase, heavily opposed by shippers, was not sufficient to offset the impact of inflation and reduced shipping which resulted from the depressed world economic situation.

I should note also that we have recently modified the rules for measuring vessels which transit the canal. These rule changes were implemented to more equitably reflect the earning capacity of vessels by either increasing or decreasing measurable space upon which tolls are based.

On March 23, 1976, President Ford approved eight of the nine changes we had proposed. Although the President did not approve the deck cargo proposal, the net result is an increase in tolls paid by transiting vessels amounting to about $6 million a year.

Even with these revenue increases and cost reductions, we are still unable to balance our books. It now appears that an additional increase in tolls will be required sometime during the latter part of this year. The Company board of directors will be dealing with this issue in the very near future.

As modifications of the company structure and policy are opposed by employees, the increase in tolls will be opposed by world shipping and officials of port cities.

Now I would like to discuss modification of accounting procedures. The third approach, and one which is attractive because it has no constituency-other than us taxpayers-to protest any changes, is to modify the method of Company accounting. It is my view we should use this option to the minimum extent possible, and as an emergency measure only, always keeping in mind the long-term impact of such solutions.

I believe that the Panama Canal Company should be credited with interest on the substantial cash balance maintained in the Treasury. One could question the fact that these funds, generated by world shipping, are now used to gather interest for the U.S. Treasury. Interest produced by this cash should become an asset of the Panama Canal Company and thus it would continue to serve world shipping. I do not believe that the American taxpayer should be called upon to support the canal except in a last resort situation. The canal is truly an international utility, the cost of which should be borne by world shipping. Large sums of U.S. tax funds are already required to provide appropriate canal defense forces. No increased burden should be considered.

Because of depressed world trade, it would seem appropriate that we allow the company, this year, to prorate, over a suitable period of time, deficits which may occur. In this manner we do not immediately add the total amount of a deficit to the toll base. Later profitable years would then offset periods of financial loss.

I believe that through the careful application of all three of these approaches, the best interests of world shipping, our country and the Panama Canal Company can be served. To achieve the most appropriate balance is, of course, the crucial task.

Now, Mr. Chairman, I would like to turn to the changes which have been explained to you by Governor Parfitt: the wage structure and tropical differential proposals.

As chairman of the Canal Zone Civilian Personnel Policy Coordinating Board I would like to address the recent wage structure and tropical differential proposals.

In August of 1974, the former chairman of the subcommittee requested that the General Accounting Office conduct a thorough evaluation of the personnel practices of the Canal Enterprise. The results of that study have served as the basis for many actions which management is now taking in the personnel field.

After reading the GAO study, I directed that the Executive Office review all observations made in order to determine which fell under cognizance of the Personnel Policy Coordinating Board. Observations concerning the wage base cutoff and tropical differential were within that category and were therefore placed on the agenda of the Board for consideration and possible action by the Secretary of the Army.

The initial views of all agencies in the Zone concerning these two GAO observations were solicited. Those views were discussed at the Board meeting in January and from these comments a proposal was developed.

All agencies in the Zone were to evaluate in detail the proposal and comment to the Board by April 15, 1976. Thus, adequate time was allowed for input from employee organizations. In the announcement of this proposal by the Panama Canal Company it was clearly identified as a proposal on which consultation would continue to take place until April 9, 1976.

Let me now review the rationale for the Board's proposal.

Our 1955 treaty commitment with the Republic of Panama requires that a basic wage, whether a U.S. rate or a local rate, applies alike to the U.S. citizens and citizens of Panama occupying identical Canal Zone positions, without discrimination.

The U.S. statute authorized, and the implementing regulation provides, that rates of pay for positions at a skill or grade level for which employees must be recruited from the United States will be derived from rates paid counterpart U.S. Government employees in the United States-that is the U.S. pay base.

Rates for positions below the level for which stateside recruitment is necessary will be established in relation to rates outside the continental United States-that is the Canal Zone pay base.

In 1957, after analysis of their recruitment experience over the preceding years, the Canal Zone agencies concluded that the local labor market at the time was not adequate to satisfy agency needs from nonmanual grade (NM) 4 and higher and from what is now manual grade 10 and higher. Accordingly, the rates of pay for these levels were fixed as "U.S. pay base" and the rates of pay for the lower grades were fixed as "Canal Zone pay base."

During the past years there has been significant improvement in the level of education and skills available in the local, that is the Panama labor market. Several of the U.S. grades are no longer recruited on the U.S. market. Despite this, the so-called cutoffs between NM-3 and NM-4 and between MG-9 and MG-10 have remained unchanged, thus in effect paying a recruiting premium which is not needed.

We now feel obligated to open the "cutoff" issue for reassessment not only because of sound management considerations but also becans of the General Accounting Office observations on the subject. Now let us turn to the tropical differential.

The tropical differential is designed "to furnish a suitable incentive for the recruitment of qualified personnel and to provide pay benefits substantially equal to those accorded U.S. citizens employed by the Federal Government in comparable foreign areas." The Secretary of the Army is obligated to review the differential periodically and to adjust it as necessary.

In its report, the General Accounting Office stated that "continued payment of the tropical differential for grade levels or occupational series not filled through CONUS recruitment appears questionable when the intent of the differential is to serve as a recruitment and retention incentive."

The proposal to limit the grant of the differential to future hires recruited for U.S. pay-base positions is an effort to bring the criteria for the grant of the differential into line with its stated objectives as a recruitment incentive and into closer alignment with the criteria governing the grant of allowances to U.S. Government employees in other overseas locations.

Mr. Chairman, I would like to have entered in the record here the exact proposals which were for forwarded on 16 February 1976 by the personnel policy coordinating board for Canal Zone agency comment and union consultation.

Mr. METCALFE. If there is no objection, it will be so ordered.
[The documents follow:]

CANAL ZONE CIVILIAN PERSONNEL POLICY COORDINATING BOARD,
Balboa Heights, Canal Zone, February 16, 1976.
MEMORANDUM

To: Director of Personnel, Panama Canal Company
Area Manager, Federal Aviation Administration
Regional Engineer, Federal Highway Administration
Director, Smithsonian Tropical Research Institute
United States Attorney, Department of Justice
Civilian Personnel Advisor, USSOUTHCOM,
agencies.

representing

CZ DOD

Subject: Proposed changes in wage base cutoff lines and tropical differential eligibility.

1. There is attached a statement of proposed changes in the Canal Zone compensation regulations that has been developed by the Board as a result of its meeting of January 29, 1976. The Board has directed me to obtain comment from all agencies before any final decision is made. It is understood that consultation with labor organizations will be initiated on these proposals and their views will be fully considered in preparation of the agency reply to the Board.

2. The proposals basically would raise the so-called cut-off line between positions paid on the Canal Zone wage base and those paid on the United States wage base. Also, the eligibility for the tropical differential in the case of future appointments or transfers would be limited to positions on the U. S. wage base and the meeting of other criteria. These proposals by the Board are based on a comprehensive study of Canal Zone personnel policies made in 1975 by the U. S. General Accounting Office. The GAO report on the study, among other points, contained observations and possible courses of action respecting wage base concepts and application of the tropical differential.

3. The following timetable has been established by the Board:

a. Agency release to labor organizations and employee groups to be made at 1:30 p.m. on 17 February 1976;

b. Agency consultation process to begin with release of information, and to terminate (with finalized labor organization input due) no later than close of business 9 April 1976;

c. Agency input to be sent to this office no later than close of business 15 April 1976;

d. Board meeting to consider action on the proposals tentatively scheduled for 4 May 1976.

4. Please contact this office if you have any questions on these matters. RICHARD M. CONOVER, Executive Director.

Attachment.

CANAL ZONE CIVILIAN PERSONNEL POLICY COORDINATING BOARD,
Balboa Heights, Canal Zone.

The following proposals are under consideration. If adopted they would be effective the first day of the first pay period beginning on or after July 1, 1976.

A. DERIVATION OF BASE RATES OF PAY

1. Rates of pay for positions at grade levels NM-4 through NM-6 and at MG-10 would be changed from the United States pay base to the Canal Zone pay base. Rates of pay for positions at grade levels NM-1 through NM-3 and at MG-1 through MG-9 would continue on the Canal Zone pay base.

2. Security positions at or below grade levels NM-6 and MG-10 would be on the Canal Zone pay base.

3. Any specific occupation and grade at or below grade level NM-6 or MG-10 for which the Canal Zone Civilian Personnel Policy Coordinating Board determines that recruitment from the United States is required will be included in a special United States pay base schedule established by the Board. These occupations and grades would be reviewed periodically to determine the appropriateness of continued coverage under the special pay schedules.

4. Employees occupying positions changed from a United States pay base to a Canal Zone pay base will be provided indefinite pay savings in accordance with 2 CZC 150 and 35 CFR 253.156.

5. All positions at the following levels and above would be paid on the United States pay base: Non-Manual-NM-7, Manual-MG-11, Manual Leader-ML-10, Manual Supervisory-MS-10 and CS-10, Production Facilitating-FN-8, CF-4, and FS-4.

6. Pay policies, formulas, and schedules that would be necessary to implement the above changes are being developed.

B. THE TROPICAL DIFFERENTIAL

1. A United States citizen who is hired on or after the effective date of the revised regulations would be eligible for the tropical differential only if reIcruited or transferred from the United States (the 50 states, the District of Columbia, the territories and possessions of the United States not to include the Canal Zone) for employment in the Canal Zone in a United States pay base position.

2. A United States citizen hired from the Canal Zone or the Republic of Panama for a United States pay base position after the effective date of the revised regulations would be eligible for the tropical differential only if he or she was initially recruited from the United States (the 50 states, the District of Columbia, the territories and possessions of the United States not to include the Canal Zone) for a United States pay base position by another government agency and accepted on local transfer or a United States citizen separated locally from the United States military service to accept, without a break in service, a United States pay base position in the agency.

3. Each United States citizen who is receiving the tropical differential immediately prior to the revision of the regulations would continue to receive it for so long as he or she is continuusly employed by a Federal agency in

the Canal Zone. Each United States citizen who is on the rolls on the effective date of the revised regulations and who meets the criteria specified in Bi and B2 above would be eligible for the differential under the new regulations.

4. An employee eligible for the tropical differential in accordance with paragraph B3 above but whose differential is rednced in amount or entirely withheld pursuant to 35 CFR 253.135(d) would retain eligibility for the differential under the revised regulations.

5. The present rule, prescribed by 35 CFR 253.135(b), which limits or withholds the differential under certain circumstances, would be retained.

Mr. VEYSEY. Let me stress that these are only proposals. They are subject to modification in any number of ways depending upon the comments and recommendations of employees organizations.

The personnel board will review the comments and reach consensus as to recommendations which should be forwarded to the Secretary of the Army.

Only after a thorough evaluation of all aspects of the proposal would this decision be made, and the regulation changed as needed. I appreciate very much, Mr. Chairman, having been invited to appear before you today to discuss these matters of great current interest, many of which have been the subject of extensive misunderstanding.

This concludes my prepared statement.

I will be glad to answer any questions which you or other Members of the subcommittee may have.

Mr. METCALFE. Thank you very much, Mr. Veysey.

Before I yield the floor to the other members, I do want to raise one question with you.

In regard to your statement on page 3 in which you indicated that in 1974, for the first time in history the tolls were raised, you arrived at a percentage of 19.7 percent toll increase. Then, on the following page, in the first paragraph, you indicated that it now appears that additional increases in tolls will be required during the latter part of this year.

Now, does the Company Board of Directors feel as though they have to have more expertise in this area of tolls increases.

In other words, in 1974 you did not anticipate and you did not take into consideration the need to raise tolls more and now in 1976 we are talking about an additional increase.

Are we going to be making the same mistake then in evaluating what the percentage is going to be?

What did we learn from that?

Mr. VEYSEY. Mr. Chairman, I think you raise a very good question. I think conditions have changed. Conditions of world trade have changed between the present time and 1974 when the initial toll increase was undertaken. What has happened, of course, is there has been a world recession which has caused a very substantial decline in the tonnage transiting the canal. This in turn has resulted in a very clear fall-off in the revenue of the canal.

Since, in the experience of the Governor and the President of the Panama Canal Company and of the Board, it is impossible to cut costs in the operation of the canal proportionate to a fall-off in revenues, the only recourse is either a tolls adjustment or some other action to handle the short fall.