Municipal Indebtedness

PRIOR to the war of the rebellion the people of the United States, whether in their general collective capacity as a nation or in their more limited aggregations by States, counties, or local municipalities, scarcely knew either debt or taxation in the proper sense of those terms, as they were understood elsewhere, and as they are now understood by ourselves. The American statesman had little need to occupy himself with problems into which in other civilized countries these horrible factors entered, bringing in their train difficult and perplexing incidents of administration. For a long series of years the duties on imports furnished a more than ample revenue to the national treasury. The state governments generally found the means of covering their moderate expenditure by some special method of indirect taxation ; at least this was the case in Massachusetts, where the “bank-tax,” as it was called, an assessment of one per cent, on the amount of the capital stock of the incorporated banks in the State, collected as an equivalent for the privilege granted to those institutions of issuing notes for currency, was found in most years sufficient for the purpose. The ordinary sources of internal taxation were thus left at the exclusive disposal of the local municipal bodies, and the lightness of the burden of local taxation, resulting from the comparative insignificance of the sums necessary to be raised, allowed the crudities of the system to pass without attracting special attention.

The period of fifteen years since the outbreak of the war has almost wholly changed this state of things. The people of the United States have submitted, with an alacrity which has been the wonder of the world, to a burden of national expenditure of enormous magnitude. This expenditure involved the creation of an immense national debt. Within the last ten years more than five hundred millions of the capital of the debt has been extinguished. Within the same period three times this sum has been paid in interest on the debt. We have in these two items an aggregate exceeding two thousand millions of dollars required from the people of the country within the last ten years for national purposes, and this is almost precisely the amount which in the same period has been contributed to the national treasury by taxation within the country. With so heavy a strain placed upon sources of revenue formerly applicable exclusively to purposes of local taxation, we need not be surprised to find that to meet these latter (the necessary expenditure for which has at the same time been very largely enhanced) recourse has been had somewhat freely to financial expedients but little practiced previously, when the need for them was lightly felt.

It is not strange, therefore, that local debts have arisen in many of the cities and towns of the United States, most of which before the war of the rebellion had never found occasion to obtain money for municipal purposes by borrowing. Moreover, the process of borrowing, once resorted to under a pressure of seeming necessity, is by a wellknown law of human nature easily repeated. From these causes has resulted an aggregate municipal indebtedness of formidable proportions. The frequency and light-heartedness with which cities and towns now resort to the expedient of borrowing, on occasions for which debts are unnecessary or improper, deservedly excites remark, and it is desirable that the disposition should be checked.

Perhaps in no other matter is there greater danger in dealing with aggregate sums. The debts of all the cities and towns of the country, as we have said, amount to a very formidable sum. So also is the aggregate wealth of the country, subject to taxation, very large; and so also is the facility with which this property responds to taxation very great. It is only by a just comparison of these three elements, namely, the debt, the valuation, and the tax levy in any particular city or town, that a correct idea of the subject can be obtained. When these elements are aggregated, the proportions which they may bear to each other in particular cases are lost from view.

The aggregates, however, must be stated as a natural introduction to our discussion of the subject. But it is exceedingly difficult to obtain trustworthy figures for this purpose. The compilers of the national census of 1870, admitting this difficulty to the full, presented their statements with candid hesitation; according to their best information, they represented the three elements at that date by the following figures: —

Assessed valuation of the property of cities and towns, subject to taxation $14,178,986,732

Which they increased by estimate to allow for undervaluations to the sum of 30,068,618,507

Tow n and city annual taxation 134,794,108

Town and city aggregate indebtedness 40,233,534

There are no later figures which can be safely made the basis for any serious consideration of the subject, but it is necessary to admit that the aggregate municipal indebtedness has augmented out of all proportion to the other two elements with regard to which it should maintain a certain relation. According to one statement which has been put in circulation, this aggregate is now $687,342,570; according to another, affecting less precision, it is $823,000,000. Meantime the valuation of the cities and towns has probably not increased more than one quarter or one third; while the annual taxation has perhaps doubled on the whole, although in several of the great cities it has been increased in a larger proportion. These estimates are of course crude, but we use them as a basis for comparison. We assume, then, as the figures for the present time: —

Assessed valuation $20,000,000,000

Corrected valuation 40,000,000,000

Annual taxation $270,000,000

Municipal indebtedness 823,000,000

With these figures it will be seen that the aggregate municipal indebtedness is now about four per cent. of the assessed valuation, or two per cent, of the true valuation, and that it is little more than three times the annual yield of municipal taxation. Moreover, assuming the whole of it to have been contracted since the outbreak of the war of the rebellion, it is considerably less than half the sum which has been contributed by the people in internal revenue and direct taxes to the United States government within the same period.

Those who propose to limit municipal indebtedness to a fixed proportion of the valuation generally admit that five per cent., or certainly three per cent., is a safe margin. Whether we adopt this criterion or, what is certainly more logical, that of fixing a proportion between the debt and the revenue annually derivable from taxation, the preceding figures, notwithstanding the crudeness of the estimates on which they are based, are enough to show that, so far as aggregates are concerned, the indebtedness of the cities and towns of the United States, although very large, is not so large as necessarily to cause alarm. It would be a mistake to assume as permanent the high rate of increase in the proportion of debt to valuation. The increase may be explained by the growing proneness among the cities and towns to adopt the expedient of borrowing. The enormous percentage of increase in the rate of population which a thriving town shows in the successive years of its infancy is not. maintained afterwards; the population may continue to increase, but not at the same rate as at first.

Passing from the figures of the indebtedness of all the cities and towns in the United States, taken together, to examine those of the single State of Massachusetts, we find ourselves in possession of more exact statistics, of which we present a brief review, although this again illustrates the unsatisfactory nature of any consideration of the subject based upon aggregates. An attempt to obtain a statement of the indebtedness of the several cities and towns of the State of Massachusetts was made by a legislative committee in 1865; and since 1870 an annual return has been required by law. These returns, at first, were probably somewhat incomplete and inexact, but those for the last two years have been more full and trustworthy. Each city and town now returns its debt according to a prescribed classification intended to show the objects for which the debt was incurred, and also returns a table of its assets according to the same classification of objects. Although the aggregate of these assets exceeds that of the indebtedness, it would be a mistake to suppose that the difference is a true statement of the surplus of the value of the municipal property of the cities and towns above their respective indebtedness. By including a valuation of property obtained before the system of borrowing was resorted to, the aggregate of assets would appear larger. This, however, is not material, as such assets for the most part are not available for the payment of debt. Meanwhile, beginning with the year 1861, every city or town in the State has made a return of its valuation of both real and personal property, the amount of money raised by taxation, and the rate of taxation in each year. There are means also of ascertaining the exact sums raised by taxation in each year for state and county purposes, and by deducting these it is easy to perceive what has been the precise burden of taxation for strictly municipal purposes in each city or town. These statistics possess a high degree of interest for the inhabitants of Massachusetts, and by reason of their completeness for a series of years might be studied with advantage by those of other States desirous of obtaining thorough information on the kindred subjects of municipal expenditure and municipal indebtedness, with the latter of which we are at present occupied. We must refrain, however, from crowding our pages with the mass of figures which would be necessary for a complete view,1 and content ourselves with presenting some aggregates in which for the two years last past the classification of municipal assets and indebtedness is preserved.


1874. 1875.
Valuation 1,831,601,165 1,840,732,706
Amount raised by Taxation 28,700,605 27,712,396
School-Houses 17,612,657 20,613,789
Public Library 1,557,465 1,583,865
Other Public Buildings 12,866,404 15,270,427
Public Grounds and Park 1,914,720 1,875,650
Cemeteries 2,518,576 2,728,840
Other Real Estate 1,919,152 1,809,289
Water Works 21,777,018 27,690,245
Sewerage 1,784,527 2,508,796
Fire Apparatus 2,155,496 2,293,839
Trust Funds 1,677,845 2,438,099
Other Assets 23,393,831 23,015,680
$89,177,691 $101,828,519
School-Houses 6,201,855 5,589,354
Public Library 142,400 78,000
Other Public Buildings 4,098,061 3,871,778
Public Grounds and Park 503,875 737,475
Cemeteries 74,846 129,058
Other Real Estate 388,073 96,941
Water Works 19,408,055 20,786,774
Sewerage 87,086 275,086
Fire Apparatus 191,651 221,925
Trust Funds 880,109 1,879,510
Other Debts 48,529,392 54,396,507
$80,505,403 $88,062,408
1874. 1875.
Towns having no indebtedness 48 51
Debt less than 1 per cent, of valuation 63 56
Debt over 1 and less than 2 per cent. 58 63
2 “ 3 “ 59 56
3 “ 4 “ 36 24
4 “ 5 “ 30 32
5 “ 6 “ 13 26
6 “ 7 “ 17 15
7 “ 8 “ 10 9
8 “ 9 “ 3 7
9 “ 10 “ 3 0
12 “ 13 “ 0 1


1865. 1875.
Valuation $991,841,901 $1,840,732,706
Taxation 16,800,332 27,712,396
Debt 34,691,348 2 88,062,408

The amount of indebtedness as thus stated is excessive in the respect that it makes no allowance for the sinking funds, which in some of the cities and towns (and notably in the city of Boston) are maintained in a method expected to provide for all the indebtedness as it matures, and of which the present value at least might fairly be offset against the present amount of debt. The amount also includes water debts. Taking it, however, without deduction, it appears that the indebtedness of all the cities and towns in Massachusetts is four and eight tenths per cent. of the valuation, and that it represents something more than three times the amount raised by taxation in a single year. This result corresponds very nearly with that already obtained (from data much less exact) with reference to all the cities and towns in the United States. If allowance were made for sinking funds and water debts, the proportion of debt to valuation would be considerably reduced.

Although the figures for Massachusetts show an increase in aggregate indebtedness from the year 1874 to the year 1875, it appears from an examination of the separate particulars, for the details of which we have no space, that an absolute reduction was effected within the year in more than half the towns having debts at the former date; and this reduction, in many cases, was made in a proportion which if maintained will wipe out the whole municipal debt in a very short interval of time.3 Indeed, in many cases the speedy extinction of the whole town debt is a mere question of increasing the rate of taxation to a degree by no means excessively burdensome. For a single illustration we may mention the little town of Westhampton, in Hampshire County, a town not growing in either population or wealth. This town had a debt of $3492 on the first of March, 1872. By the first of March,

1874, the debt had been reduced to $2700, and by the first of March, 1876, to $500. The valuation of the town for the year

1875, in which a reduction of the debt amounting to $1400 was effected, was $303,169, and the rate of taxation in that year was $1.40 in the hundred dollars.

It is held to be the law of Massachusetts that cities and towns, without any special authorization of the legislature, may incur debts for any purposes of public expenditure for which they may lawfully raise money by taxation, and that the individual inhabitants of each city and town are liable for the city or town debt. That this is the law has never been questioned within the State, and there has accordingly been no occasion for judicial decision to establish it. For the satisfaction of foreign capitalists, when resort to London has been had by the city of Boston in the negotiation of some of its larger loans, use has been made of the following opinions, to which we give place as appropriate to the subject: —}

BOSTON, May 18, 1852. Office of the City Solicitor.

In the opinion of the undersigned, the private estates of the citizens of Boston are liable for debts lawfully contracted by the city, and whenever judgment is rendered against the said city, on account of any such debt, the execution may be levied upon the property of any inhabitant.

[Signed] P. W. CHANDLER,

City Solicitor.

[Indorsed on the preceding.]

The foregoing opinion of Mr. Chandler, the city solicitor, is undoubtedly in conformity with the law of Massachusetts.


BOSTON, October 16, 1869. } City Solicitor’s Office, 46 Court Street. )

I certify that, by the laws of the Commonwealth of Massachusetts, all debts of any city or town in said commonwealth are a lien upon all the estate, real or personal, of every inhabitant of the debtor city or town; and all such estate may be levied upon to satisfy such debts if the city or town fail to make payment when it is due.

[Signed] JOHN P. HEALY,

City Solicitor.

It is, of course, the easiest thing in the world to lay down the general principle that debt is a thing to be avoided by communities as well as by individuals; that “Pay as you go ” is in all respects a safe maxim. This principle is simple and safe, and most people readily give it their assent as a general rule.

But it cannot escape the most ordinary observation that the principle admits of very great qualifications. In the first place, it is one that certainly is not insisted upon in the transactions of private individuals. However loudly young men on their start in life are exhorted to avoid debt, nobody pretends that it is inconsistent with the highest prudence for a young man who has laid the foundation for a family by marrying, if he has accumulated only a very little money, to buy the house in which he lives, putting mortgages upon it for the greater part of the purchase-money. If he pays the installments of interest as they fall due, and succeeds at regular intervals in making deductions from the principal of his indebtedness, the transaction does not impair his character for integrity or for wise financial management, but the reverse. So in matters of business; if the dictum were to be insisted upon that no enterprises should be undertaken until the capital required in carrying them out bad first been accumulated, the country would not show the wonderful progress it has made in material growth. W hen the proprietors of a newspaper find their circulation increasing, they may wisely borrow the money to buy the faster printing-press which will enable them to satisfy the public demand. It would be Superfluous to multiply illustrations of the obvious exceptions which must be admitted in private affairs to qualify the general principle that debt is to be avoided.

This, however, is the smallest part of the argument. Although inferences from the analogy of private affairs, in treating of methods of dealing with public business, are so apparently conclusive that resort is constantly had to them, it is certain that such inferences are not always safe. The present case affords a good illustration. When an individual borrows money, it is the same man (or his heirs) who must pay the money, and that within a limited time. The credit of no individual is so strong as to enable him to make a loan for a long series of years, except by giving a permanent security, and a loan thus secured after all scarcely falls within the proper definition of debt. But when a city or town government creates a debt, at any rate under the system existing in Massachusetts, the term of payment may be deferred for a considerable interval, and the rate of interest is certainly no higher than that which individual tax-payers must pay in private transactions. If within this interval the city or town grows in population and in wealth, whether as a consequence of public improvements made by the expenditure of the money that is borrowed, or otherwise, the payment of the debt falls upon a more numerous as well as a more wealthy community than that which incurred it.

This is a consideration of no insignificant importance. If we are forced to recur to an analogy taken from private affairs, we might instance the case of a club having a reading-room or library. An addition to the conveniences of the club might be made within a single year of such a nature as would double the membership. The expense of this addition might be unduly heavy if borne by the present members exclusively; but if, as we have supposed, a twofold augmentation of the membership results from making the improvement, the borrowing of the money necessary to make it would reduce by one half the cost to the original members.

The extraordinary growth in population and in wealth of our American towns and cities is a fact so conspicuous that it cannot be left out of sight in considering this subject of municipal indebtedness. It is scarcely safe to illustrate it by statistics, since the figures in many cases go far in advance of the inference which reasonable men would dare to ground on them. This is especially true with the growing towns at the West. Even in the older and more densely settled parts of the country, although, as is well known, there are great inequalities in this respect, the prosperous cities and towns show a rate of increase in population and in wealth that should tend in large degree to remove apprehensions on account of their local debts, if they adhere to sound principles in the management of such debts.

If we take as an illustration the city of Boston, the figures are certain and accessible, and the comparison is easy. The report of the auditor in that city, for several years past, contains each year a statement prepared by the assessors, showing the valuation of real and personal property in the city, taken as the basis of taxation on the first day of May in each year, from the year 1835, arranged in a table to show the amount and percentage of increase by periods of ten years, beginning with every successive year. A table thus constructed has the advantage of showing permanent averages, and is not subject to any uncertainty resulting from accidental or temporary circumstances. It is demonstrated that in the great majority of the decennial intervals thus exhibited, from 1835 to 1867 (in which latter year the annexations of adjoining cities and towns were begun), the increase in the old city was at a greater rate than fifty per cent.; in many of these intervals exceeding eighty per cent., and often approaching one hundred per cent,; while in a few only (those ending in the successive years 1861, 1862, 1863, and l864) is the average shown less than fifty per cent., and in these it is but little less than that rate. Since the annexations, partly of course by reason of the actual addition of territory, the increase in property has been at a rate always exceeding one hundred per cent, for each decennial period. It rose as high as one hundred and forty-seven per cent. for the ten years from 1862 to 1872. It. appears, therefore, that (excepting a period of four years in which the rate of increase was slightly less) the wealth of the city in each year has been twice as much as it was twenty years previously; and the burden of any expenditure was accordingly reduced one half by the expedient of borrowing the money for the usual term of twenty years. In saying this of course interest is left out of the question, on the assumption that the rate paid by the city was a fair one, and lower than the rate at which individuals in the community could borrow separately for themselves.

The figures are not easily accessible for so exact a comparison with regard to the other growing cities and towns in Massachusetts, but we believe it to be quite within bounds to infer twenty years as a maximum average term for doubling the valuation of those cities and towns of which the growth in population and wealth has not already been arrested. It is frequently much shorter. In one of them (Somerville) the valuation has doubled in the short space of four years, from 1872 to 1876. It is not necessary for our present purpose to maintain that the increase of wealth in these places is due to particular improvements, whether carried out with borrowed money or otherwise. We merely call attention to the circumstance that the probable growth in the wealth of a prosperous city or town is an element deserving of weight in considering its ability to create or maintain a debt; cities and towns whose future growth is doubtful should hesitate to incur new debts, and should be seriously concerned to take due measures for the extinguishment of debts now outstanding.

On the other hand, of course, it must always be borne in mind that to those citizens whose taxes are paid out of current earnings, taxation for a payment deferred is augmented by the taxation meanwhile for interest. The taxes of such citizens, however, form an inconsiderable item in the whole contribution to the fund raised by taxation even under the present system, and under an improved system the proportion would be less.

It is obvious that it is a matter of the greatest possible consequence whether municipal debts are incurred for productive or unproductive purposes. We have already intimated that debts of the former class, undertaken to provide money for genuine public improvements, the expenditures for which are carefully measured, can scarcely be considered as properly included within the designation of debts. To this class, it is almost universally admitted, belong debts created for the construction of water works. An ample supply of pure water is not so much a luxury as a necessity of modern civilized life; and for people living in cities such a supply cannot be obtained except by the construction of costly works, to bring the water from a distance and to distribute it among the houses of the city. The construction of such works may be undertaken by a private company of share-holders, subscribing the necessary capital and looking to a profit on the investment. But a far more satisfactory method is the construction of the works by the municipal government itself.

The original cost of the Cochituate Water Works, bringing water a distance of about twenty miles for the supply of the city of Boston, was about four millions of dollars. Of this sum, two millions were borrowed in London for the term of twenty years, at four and a half per cent. annual interest, and an equal amount at home at five per cent. The annual interest on the original debt was accordingly $190,000. Within five years after the time when the distribution of water was begun, the annual rents for its use equaled this sum. The account has been complicated by the continual extension of the works, involving new expenditures of money, a great part of which has been obtained by additional loans; but the increase of water rents has more than kept pace, in due proportion, with the cost of these extensions. At the present time the receipts into the city treasury from the water works are more than a million of dollars annually ($1,013,483.27 in the year ended April 30, 1875), while the payment of interest on the portions of the water loans still outstanding, including considerable sums for the gold premium on payments made in London, was $540,858.77 in the year ended April 30, 1875.

A still more striking illustration of the wisdom of such undertakings, in a financial point of view, is afforded by the Mystic Water Works, which were constructed for the supply of the city of Charlestown, now merged in the city of Boston. By these works the water is brought a distance of about six and a half miles. Their cost was about a million and a half of dollars, for which the money was borrowed at five and six per cent. The receipts for the year ended April 30, 1875, were $284,897.61. The payments for interest during the same year were $101,856.33. It is easy to see that a debt of this character is not a burden, but a relief, to municipal finances.

It is almost superfluous to point out that the possession of a system of water works by any city or town is an object which justifies municipal expenditure to a certain degree, without reference to compensation in money derived from water rents. Considered merely as a protection against fire, waterworks may almost he regarded as essential to the existence of the place. In another point of view, it may be a condition making habitancy possible. This is the case, for instance, in all those parts of the city of Boston where land for houses has been obtained by reclamation from the sea. Some of the houses erected on such land are of the most expensive construction, and are assessed at a high valuation, making a large annual return in taxes. If the city government had not been prepared to furnish water to these houses, it is easy to see that they would never have been built. It has not accorded with the prevalent ideas of public policy for the government of any city to make a considerable profit in dealing with the supply of water to the inhabitants, and in some of the cities and towns of Massachusetts an indifference is exhibited to obtaining a return in water rents sufficient to cover the current expenses of the maintenance of the works, after providing for the interest on their cost. When the deficiency is supplied from the annual taxes, it does not fall within the province of the present paper to criticise this policy. The legislative act of1846, under which the original system of water works for the city of Boston was constructed, contained very careful provisions with a view to the maintenance of water rates on a scale which should not only render the works self-supporting, but should provide gradually for the extinguishment of the indebtedness incurred for their construction. Thus, it was provided that if the surplus income and receipts for the use of water at the prices established by the city council, after deducting all expenses and charges of distribution, should for any two successive years be insufficient to pay the accruing interest on the water loan, the supreme judicial court should have authority, on the petition of one hundred or more of the legal voters of the city, to appoint commissioners to “ raise and increase ” the prices, if proper in their judgment, so far as necessary for these purposes and no further. On the other hand, if the surplus income and receipts, computed in the same way, were found for any two successive years more than sufficient to pay the interest, a similar machinery might be set in motion for the reduction of the price. By way of safeguard against any frivolous attempt to set the machinery in motion for the purpose of either increasing or decreasing the prices, a provision was inserted in the act giving the court discretion to order the costs on such petitions to be paid in whole or in part by either of the parties. In point of fact, no action has been taken under these provisions of law. It would be a mistake, however, to suppose that they have been useless. They have served to establish the principle which should control the city government in the management of water rates. Similar provisions have been inserted in many of the acts authorizing the construction of water works at public expense in other cities and towns of the commonwealth.

When municipal expenditure is incurred for objects of general concern and permanent value other than water works, and especially for those that require the disbursement at once of large sums, the policy of borrowing money to meet such expenditure might be defended by the experience which justifies water debts; but the number of such objects is comparatively small, and none of them, it is believed, possess in common with water works the feature of productiveness, in yielding an absolute revenue of money which can he applied directly to the payment of interest, or to the reduction of an outstanding debt. Expenditures for a comprehensive system of sewers, of street widening and extensions; for public parks when required by the concentration of large masses of population within narrow limits; for the erection of a city or town hall, of school-houses or other necessary public buildings, and perhaps a very few others, approach the nearest to water works in this respect, because such outlays onee made with due foresight and prudence may save the necessity for current expenses for the same objects in following years. But it is clear that cautious use should be made of reasoning which would justify debts for such purposes, especially when the amount of disbursement necessary therefor in a single year is not very considerable.

But no respectable process of reasoning can justify the borrowing of money by cities and towns to make good a deficit, originating apparently by accident, but caused in fact by a neglect to assess in each year the full amount of tax required for current expenses, including with such expenses those which, although not exactly “ordinary,” are such as ought to be covered by taxation as soon as they arise. Carelessness or neglect in this respect is the true origin of most municipal debts, as it is also of the indebtedness of many private individuals. Those authors who undertake the instruction of the people by tales of fiction, “with a moral,”are never tired of pointing out the mischief of debt; but they are too apt to make the falling into debt appear as an act of the will, more or less deliberate; arising,perhaps, from the imprudent indorsement of a note for a friend, from a foolish resolve to take a larger house and thus embark on a scale of personal and family expenditure larger than one’s income justifies, or from some other cause that might have been avoided by a firm exercise of the will when the occasion arose. Such moral stories, however, omit to put their readers on their guard against the subtle advances of debts which result from a careless miscalculation of resources, whereby household bills paid promptly at first, from money already earned and in hand, come frequently to await payment until the period arrives when income is available, then fall hopelessly into arrears, and at last, perhaps, take the form of notes payable to tradesmen. Cities and towns drop accidentally into indebtedness in a similar way with still greater ease than individuals, because their credit enables them to borrow money without inconvenience to bridge over an emergency apparently temporary. There is always somebody very glad to take the town’s note; and the manner in which municipal affairs are usually conducted contemplates the occasional borrowing of money for current expenses in anticipation of the current revenue. In our New England towns, the municipal year is almost universally the year extending from one annual town meeting to the next. The town meetings are held in the spring. The taxes are assessed as of the first day of May, but it is generally past midsummer when the valuation is settled, and the tax-bills are made out for distribution as soon thereafter as may he; payment of taxes is seldom exacted before the first day of September, more often not until the first of October, and, unless heavy penalties are attached to delay in payment, a considerable portion remains uncollected until nearly the close of the municipal year; indeed, there is always a balance that is not collected at all within the same municipal year, the magnitude of this balance depending in some degree upon “hard times;” for if the market rate of interest is high, there are sure to be some long-headed tax-payers who think it wise to defer to the most remote period possible a payment which is always disagreeable.

While the town revenue thus accrues almost wholly in the latter part of the municipal year, the town expenses for the most part are payable at regular intervals throughout the year; the borrowing of money to meet them as they become due is a matter of course. It follows that if there has been a failure to provide a sufficient tax, there will be a deficit at the end of the year, represented by town notes for “hired money,” as with charming simplicity it is called in the town accounts. Such a deficit is the nucleus of a town debt. If the careless policy be maintained,— as it too often is, — if the tax for the next and following years is assessed with the same disregard of the actual amount necessary to maintain an equilibrium in the town finances, the deficit at the end of each year, represented by town notes outstanding, is of course larger and larger. The annual deficiency is really increasing against the town by compound interest, and before the people are really aware of it, they may find themselves saddled with a debt of somewhat formidable proportions; and yet they have never wittingly given a vote to authorize the creation of a town debt.

We have spoken of “ towns ” in the preceding paragraphs. Unfortunately in the larger communities, which have adopted the form of a “ city ” government, the process of insensibly running into debt is even easier. There is the same facility, arising from the same cause, as has been described in the case of the towns. In towns, however, the appropriations are generally voted at the annual town meeting at the beginning of the municipal year, and the amount to be raised by taxation is — or ought to be — fixed with reference to the expenditures authorized at the same time; and unless one or more special town meetings are afterwards held within the year, there is no opportunity for augmenting the amount of expenditures thus expressly authorized. In cities, on the other hand, the two branches of the city council, in which the control of the public purse is vested, are in regular session throughout, nearly the whole year. They take, perhaps, a short vacation in the summer months, but with that exception their meetings recur every week. It is almost impossible that occasions should not be found at these meetings for authorizing new expenditures; rarely for saving anything out of appropriations already made. When an occasion for new expenditure arises at any time within the municipal year after the amount to be raised by taxation has been fixed, the means of covering the expenditure can be found only in some general appropriation for “ contingencies ” that may have been providently made at the outset, or by a transfer from some appropriation, if there be any such, which appears to have been made larger than was necessary, that is to say, by reducing some previous appropriation. If neither of these resources is available (and except for inconsiderable sums, generally neither is available), there is nothing that can be done except to direct that the money be borrowed.

It is easy to see that in such cases the money ought to be borrowed temporarily, and, unless in a case of such a nature as to justify a permanent debt, the amount should be included in the amount raised by taxation in the following year. Unfortunately it has too often been the custom to put such loans in the form of permanent additions to the funded city debt.

In order that the system of meeting current expenses by current taxation may be faithfully carried out, the beginning and end of the municipal year should be exactly defined. Lack of precision in this particular conspires to make easy the insensible creation of debt. But if due care be taken, no city or town need have any debts except such as may he deliberately created for particular purposes; and these purposes should never be of a temporary or frivolous character. And if any city or town finds itself incumbered with a debt already incurred by previous neglect in any degree of the principles which ought to be observed in such matters, the inhabitants should steadily set themselves at work to provide for its extinguishment.

In the management of debts which are necessary, or which, having been already incurred, must be tolerated until they are extinguished, the institution of the sinking fund demands notice. There undoubtedly exists a prejudice against sinking funds, and it is often declared that the theory upon which they are founded has been disproved; “exploded ” is the favorite word. Such wholesale denunciation is unreasonable and mischievous. It is generally derived from the failure of the well - intended experiments made in the last century fur the reduction of the British national debt. These experiments failed, not from any fault in the theory of a sinking fund, but because the necessities of the government required the continued borrowing of more money than the aggregate of the savings that could be made available for the reduction of debt, whether used for a sinking fund or otherwise. The part which compound interest plays in the scheme of a sinking fund is always exaggerated. The accumulation at compound interest of money saved for the payment of debt no doubt produces wonderful results; but on the other side of the account, indebtedness, with the interest thereon, will also accumulate with equal rapidity, unless kept down by current payments. It is a mistake to regard a sinking fund as a contrivance which will in itself extinguish a debt; a debt cannot be paid unless money is found somewhere for its payment. The sinking fund is merely a convenient piece of machinery by which whatever resources are possible for the payment of debt may be husbanded and rendered available to the greatest advantage.

That sinking funds, viewed in this light, have proved wise and useful instruments of finance is well illustrated by two conspicuous instances, that have been cited in the recent discussions of the subject. In 1836 the State of Massachusetts subscribed for ten thousand shares in the capital stock of the corporation established for the construction of the line of railroad westward from Worcester to Albany. The money to pay for these shares was obtained by borrowing a million of dollars, for twenty years, at five per cent, interest. At the same time provision was made for a sinking fund to meet this debt at maturity. The nucleus of the sinking fund was the premium received on the sale of the state scrip ; the fund was also fed by whatever dividends were received upon the shares of stock ; but besides these sources of revenue incident to the object for which the debt was incurred, one half the proceeds of sales of land in Maine belonging to the State was regularly paid into the fund. It accordingly resulted that, seven years before the maturity of the debt, the fund arising from these payments, together with the accumulations of interest thereon, was already as large as the amount of the debt it was established to redeem. After the year 1850 the annual income of the fund, instead of being added to the principal, was set at liberty, flowing into the treasury to be used as a part of the ordinary revenue of the State for current expenses; and on the 15th of July, 1857, when the debt of $1,000,000 became due, the fund amounted to $1,079,756.35, sufficient to extinguish the whole debt, leaving a handsome surplus available for other purposes.

In the other instance the sinking fund had less assistance from extrinsic contribution. Not content with the subscription for which means were obtained in the manner already described, in pursuit of the policy of aiding in the construction of the railroad throughout the length of the State, the legislature of Massachusetts, by a series of acts passed in the years 1838, 1839, and 1841, authorized loans to the railroad corporation amounting in the aggregate to four millions of dollars, by means of issues of state scrip redeemable in thirty years. The debt, although represented by state scrip, was really the debt of the corporation. In order to insure the ability of the corporation to meet it at maturity, provision was made for a sinking fund, of which the nucleus, as before, was the premium derived from the sale of the first issues of state scrip; but its chief source of nourishment was an annual payment into the fund by the corporation, after the railroad was opened for use, of an amount equal to one per cent. of the principal of the debt. The fund began with the amount of $55,550.35 on the 1st of January, 1839. On the 31st of December, 1844, the railroad having been opened for use, the sum of $40,000 was paid in by the corporation, and a similar payment was made annually thereafter for twenty-six years. These payments, with the accumulations of interest, made a fund from which the first portions of the debt, amounting to more than one half of the whole, were discharged as they became due in 1868. For the payment of the remaining portions of the debt it would have been necessary to continue the fund a few years longer than the term originally contemplated; but an arrangement was finally made with the corporation, under which, by the use of the residue of the sinking fund, the whole of the state scrip was canceled by the 31st of December, 1871. It is worthy of note that the commissioners in their final report were able to state, “ No losses have occurred on any of the securities in which the fund was invested, for the last twenty years, and but a very small amount before that time; nor has the fund ever been subjected to any expenses whatever for its management.” A similar sinking fund had been established with reference to a loan of one million of dollars made to the same railroad corporation by the city of Albany. Debts for which a state or city guarantee had been obtained, amounting to five millions of dollars, a sum equal to the original capital stock of the corporation, were thus discharged from resources provided by the corporation itself, but husbanded and made available by the contrivance of the sinking fund.

The amount of annual contribution to a sinking fund necessary to insure the accumulation of a specific sum at a particular date in the future is a matter of exact calculation, depending of course upon the rate of interest assumed for the investments, and it is essential also that there should be no losses, and that no expenses chargeable to the fund should be incurred in its management. Such expenses should be provided for otherwise. It is therefore quite possible to establish and maintain a sinking fund which shall prove adequate for the extinguishment of any municipal debt of which the creation is justifiable. It is now generally held in Massachusetts, in the management of both state and city finances, that a sinking fund may best be invested in the same description of securities as those which it is established to cancel. In such case, the institution of the sinking fund amounts to little more than a very particular engagement to contribute a certain sum by annual taxation towards the extinction of the debt. Such an engagement is the very essence of integrity in the financial operations of cities and towns when they borrow, and, especially when the sums to be dealt with are comparatively small, the desired result may be attained without the cumbrous machinery of a sinking fund, if the city or town will take care to raise by taxation every year, and apply to the extinguishment of its indebtedness (in addition of course to the payment of all current interest), a stated proportion of the principal outstanding. In order to avoid too minute calculations, in cases in which the establishment of a regular sinking fund is deemed inadvisable, ten per cent. might very well be assumed as a convenient proportion. Any city or town which steadily effects a reduction of its debt to this extent, year after year, is not likely to find itself encumbered with a troublesome burden. Meanwhile the taxation must also be made sufficient to meet current expenditure, including each year any deficit coming forward from the preceding year.

If cities and towns will act upon this principle, there seems little occasion for adopting an arbitrary proportion between debt and valuation, although this may perhaps be regarded as an additional safeguard. The obvious objections to such a limit are the seeming authority that it gives to the creation of indebtedness within the limit, and the difficulty of establishing the valuation upon a certain and uniform basis. It must also be regarded as another objection that there is no logical reason for any particular proportion. Three per cent. or five per cent., which have been proposed as proper limits upon the indebtedness of cities and towns, are proportions of debt in some cases larger than cities or towns ought to assume, and, on the other hand, are proportions very much within the limits thought prudent for corporations of a different character. Thus, every railroad corporation in Massachusetts is authorized by law to issue bonds to the amount of one hundred per cent. of its capital, and by the law of Congress any national bank with half a million of capital may issue notes (secured, no doubt, by the pledge of government bonds) to the amount of ninety per cent. of its capital. With the aid of their deposits many national banks maintain their loans to an amount exceeding double their capital. Prudent financiers, in considering the security offered by municipal loans, will regard rather the proportion they bear to the annual tax-levy; not, of course, because it is supposed that the whole tax-levy for three or four years could be actually applied to the exclusive object of paying the municipal debt, but because the ability and willingness to bear taxation is an illustration likewise of the ability and willingness to pay off indebtedness. We have already seen that taken in the aggregate and measured by these tests the indebtedness of the cities and towns in the United States, although amounting to a formidable sum, is not dangerous; and although some cities and towns have suffered debts to arise which are larger than could be desired, an examination of particular cases will show few, if any, in which the immediate adoption of safe and prudent measures will not enable the city or town to extricate itself promptly from a position likely to cause either present or future embarrassment.

Charles Hale.

  1. The aggregates of polls, property, and taxes, as assessed each year, are printed in a document of the public series under the direction, of the secretary of the commonwealth, and the statistics of municipal assets and indebtedness form each year a part of the annual report of the deputy tax commissioner, generally printed as a document of the House series.
  2. This sum includes an amount of $8,554,113 of “war expenses unpaid” in the several cities and towns, together with $26,137,234, the amount of city and town debts then existing.
  3. These gratifying reductions should doubtless be ascribed, in large degree, to the attention called to the subject of municipal indebtedness in Massachusetts by the passage of an act relating thereto by the legislature of the State at the session of 1875.