The annual interest charge was climbing at a rapid rate, and every one foresaw that unless some restrictions were adopted, the taxpayers of the future would be called upon to meet enormous interest and sinking fund payments. Hence the constitutional amendment was adopted for the purpose of limiting this burden. Since that time the situation has changed considerably. Millions of dollars have been invested in improvements which not only are of great advantage to the city but which produce sufficient revenue to pay not only the ordinary expenses of maintenance and operation but also the interest and sinking fund charges, and perhaps an additional profit besides. Such indebtedness is not, therefore, a burden upon the taxpayer or any part of the community, for a debt without an annual interest charge to be paid is not a burden. If, therefore, the purpose of the constitutional provision was to be carried out, the indebtedness incurred for undertakings that are self-supporting should be differentiated from indebtedness incurred for public improvements which are of public benefit but which, nevertheless, are a burden upon the taxpayer because he is obliged to pay the interest and sinking fund charges through taxation. The amendments so far made point in this direction, for water bonds are exempt from the 10 per cent. limit, the water works being self-sustaining. For illustration, take the $50,000,000 in bonds issued by New York city for the construction of the present subway. The operating company has agreed to pay the city the interest and sinking fund charges upon the entire amount issued. As long as it does so, this debt is not a burden upon the taxpayer. Indeed the expenditure of this amount of money has greatly benefited a portion of the taxpayers, all of those who have owned property along the greater portion of the subway. Thus the existence of this debt of $50,000,000 constitutes a valuable asset; but if a future subway should be built which should not be self-sustaining and if taxpayers should be called upon to pay part of the interest upon the bonds in whole or in part, this debt would be a burden upon the taxpayer just to the extent to which it would prove to be not self-supporting. Furthermore, every addition to the property owned by the city, even though it be earning a profit to the city, reduces the amount of debt that may be incurred not only for revenue producing undertakings but for other purposes, such as schools, libraries, baths, parks, play-grounds, etc., a condition of affairs which ought not to continue, for the development of no city ought to be retarded by the fact that it has acquired a piece of property which is making a profit for the benefit of citizens or taxpayers. Certain Debts Exempted. These facts have been recognized already by the Constitutions of several States in one way or another. In some cases ad hoc bodies have been created and given the power to incur debt separately from the cities. In some cities special assessment bonds are exempt from the debt limit, either by provision of law or by making them a lien only on the property for which the assessment is levied. In many cities, particu larly in the west, practically the entire cost of street openings and street improvements, including both the original pavement and all repavements, are assessed on the abutting property or that specially benefited by the improvement. This system has been developed particularly in cities like Chicago, where the debt limit is so extremely low that every expedient must be used to gain the necessary debt margin for the most necessary expenditures. If the special assessment system should be extended as suggested, and all future assessment bonds be made by their terms a lien solely on the property assessed, the borrowing capacity of the city might thus be materially. enlarged, for such bonds impose no liability against the city, and therefore are not to be counted in determining its borrowing capacity. In a number of States a device has been used to avoid the constitutional limitation in the case of debts for revenue-producing industries. The plan has been to secure the debt solely by a mortgage upon the plant or property for which the debt is incurred. As such a debt can never become a burden upon the taxpayers of the city, it is not considered in estimating the amount of indebtedness for purposes of the debt limit. A Missouri act (Laws of 1905, page 55) permits cities of 3,000 to 30,000 to acquire water works and issue bonds therefor secured simply by a mortgage on the plant and involving no general liability to the city. In case of default of payment, the works are to be conveyed to the bondholders, with a franchise for thirty years. A similar act was passed by Iowa in 1906. The most important resort to this method was in the case of the attempted municipalization of the street railways of Chicago. The constitutional debt limit of Chicago is 5 per cent., and this, taken in connection with the very low percentage of the true value at which property is assessed, made it absolutely impossible for the city to consider the purchase of the railways, if the debt incurred was to count against the constitutional debt allowance. To obviate this difficulty the act of 1903, known as the Mueller Law, was passed to permit the issue of "street railway certificates " in place of bonds. These certificates are not a general liability against the city, but are payable soiely out of the income from the street railways. The certificates constitute a mortgage on the street railway property, and in default of payment include the right to a twenty-year franchise. An ordinance providing for the issue of certificates under the above law has recently been declared to be unconstitutional. (227 Ill. 218.) The court held that the issue of certificates secured solely by the property acquired from their proceeds did not constitute the creation of debt within the meaning of the constitutional limitation. In the case at issue, however, the certificates were secured by a twenty-year franchise to operate in addition to the railway property acquired. This franchise was city property not acquired through the issue of the certificates. The mortgaging of the franchise must, therefore, be deemed a debt within the meaning of the constitutional limitation. The new Virginia Constitution provides that, if the principal and interest of a debt are made payable exclusively from the receipts of the undertaking, such debt shall not be considered in determining the power of a city to become otherwise indebted. A Wisconsin act of 1907 permits municipalities to issue certificates for municipal plants secured by a mortgage on the plant acquired and involving no general municipal liability. The Constitutions of many States contain more or less distinct recognition of the need for some different treatment of debt limitation in the case of revenue-producing industries. Often the Constitution does not establish a single limit, but fixes a certain percentage limit for general purposes and another percentage for specified purposes. Thus, the Constitution of Missouri fixes the general limit at 5 per cent., but permits certain cities to incur a debt for water and light up to an additional 5 per cent. In a few States a certain limit is fixed which may be exceeded if the bond issue is approved by vote of the people. Thus in North Dakota the limit is fixed at 5 per cent., but by a two-thirds vote of the electors a city's debt may be increased. Debt incurred for specific purposes is often exempted. This is most frequently true of water debt, and in recent years there has been a marked trend toward the similar exemption of debt for gas and electric plants and other revenueproducing industries. Special exceptions in the case of one or more of these industries are found in the Constitutions of Alabama, Colorado, Missouri, Montana, North Dakota, South Carolina, South Dakota, Utah, Virginia and Washington. The Virginia Constitution revised in 1902 is the most recent of the State Constitutions. Section 127 limits municipal indebtedness to 18 per cent. of the assessed valuation of real estate, but excepts from this limitation bonds approved by popular vote and issued for a supply of water or other specific undertaking from which the city or town may derive a revenue. It is, of course, evident that certain municipal undertakings, which one may think will be self-supporting, may prove to be otherwise. It is also possible that the policy of a city, as regards rates charged for a particular service, may change so that an industry at one time self-sustaining may become a burden on the taxpayers. As a safeguard against such a contingency, the Virginia Constitution provides that, whenever a municipal undertaking fails to produce sufficient revenue to pay cost of operation, insurance, interest on bonds and sinking fund charges, the exemption of such bonds from consideration in determining the limitation of the city's power to incur further indebtedness shall cease, unless the principal and interest of such debt be made payable exclusively from the receipts of the undertaking. The advisory commission on taxation and finance appointed by Mayor McClellan made a special report in April, 1907, on "the city debt in its relation to the constitutional limit of indebtedness." This commission recommends that provision be made for an amendment to the Constitution increasing the city's power to incur debt. The commission states that the chief purpose of the constitutional debt limit is to prevent the city from imposing too great a burden of debt upon the taxpayers. If, however, a public industry proves self-supporting or profitable, there is no burden on the taxpayers, and the necessity for the constitutional restriction fails. The commission recommends that bonds issued for self-supporting enterprises be exempted from the terms of the constitutional limitation so long as they shall continue to be self-supporting. The commission proposes a scheme by which, should an enterprise ever become nonsupporting, the bonds issued to defray its cost would immediately be counted in estimating the city's indebtedness. |