THE SINKING FUNDS OF NEW YORK CITY. BY EDGAR J. LEVEY, X Deputy Comptroller. Reprinted from MUNICIPAL AFFAIRS, for December, 1900. lEx IGihrtfi SEYMOUR DURST When you leave, please leave this hook Because it has heen said "Sver'thin^ comes t' him who waits Sxcept a loaned book." Avery Architectural and Fine Arts Library Gift of Seymour B. Durst Old York Library AA THE SINKING FUNDS OF THE CITY OF NEW YORK. By Edgar J. Levey. The Sinking Fund system of the City of New York has long been shunned by the casual student of municipal affairs on account of its intricacies and difficulties, which have, indeed, sometimes been exaggerated. That this system is far from simple cannot be denied; but it is by no means true that its complexities are so great as to offer serious obstacles to the understanding of any in- telligent investigator. Even in its most defective features, it is a natural outgrowth from the financial conditions of the past century, and a brief narrative of those conditions will serve to explain the existence of many peculiarities which might otherwise seem anomalous. Before taking up for review the history of the New York city sinking funds, it is desirable, however, to appreciate at the outset the difference between the conditions under which sinking funds are established by national and by municipal governments. Na- tional governments are supported largely, if not chiefly, by indi- rect taxation and by revenues uncertain in amount, in consequence of which there can be no exact or scientific correspondence betw^een budgetary appropriations and treasury receipts. Their budgets may fall within the limits of these revenues or they may exceed them. In the one event, there is a treasury surplus; in the other, a deficit. If the maintenance of a sinking fund be not treated as a preferred obligation over other items in a national budget, the moneys which should be applied to it are usually the first to be di- verted to the more pressing exigencies of current expenditure, and its growth is continually interrupted. If, on the other hand, the maintenance of a sinking fund be treated as a preferred obligation, it will necessarily happen, in years of deficient revenue, that the nation must become otherwise indebted, partly or wholly as a re- sult of such sinking fund maintenance. In other words, faithful redemption of old debt merely results, under such conditions, in the incurring of new debt, and sometimes at a higher rate of inter- est. This is precisely what happened to England during the 2 period of heavy borrowing between 1785 and 1829, when about £330,000,000 were borrowed at about five per cent in order to re- deem the same amount of debt at four and one-half per cent, resulting in an annual interest loss of £1,627,765 for 43 years. The frequent changes of policy in regard to the maintenance of sinking funds by both the governments of Great Britain and the United States have been attributable, principally, to these causes. In the municipal governments of to-day, however, the raising of annual revenue follows as a direct consequence of the framing of the annual budget, and the extent of that revenue is made dependent, with almost scientific exactness, upon the size of each budget. In American municipalities direct taxation, if not the sole means of revenue, is at least the residual factor, determined (through the medium of a tax rate) by the requirements of the annual appropriations. There should be, therefore, neither surplus nor deficiency, and the causes which, in national governments, give rise to temporary suspensions of debt amortization and dis- arrangement of sinking fund policies are wholly absent. There are, in contemporary municipal governments, no obstacles in the way of scientific debt redemption, unless those obstacles be — as they are in the case of New York city — inherited from the mis- takes of the past. THE SINKING FUND OF 1813. It is not difficult to understand why the sinking fund of the city of New York was originally framed upon defective principles. The funded debt of the city had its beginning in 1812, when authority was obtained from the legislature to issue bonds to the amount of $900,000 to fund floating indebtedness which had been incurred by the city partly on account of the construction of the present city hall and other public buildings. The act of the legis- lature of June 8, 1812, did not attempt to pledge any specific revenues of the city for the redemption of the bonds thereby authorized to be issued, but sweepingly declared that '^all and singular, the revenues of the Mayor, Aldermen and Commonalty shall be and they are hereby pledged and appropriated for the pay- ment of the interest which shall become due on the said stock." In 1813 Comptroller Thomas E. Mercein took steps looking towards the ultimate redemption of the principal of this debt and recommended to the common council the establishment of a sink- ing fund for this purpose. At that time expenditures of the city government weie not strictly limited, as now, by ap])ropriations made in advance of the incurring of liability. Public woik was performed and supplies were furnished upon the orders of the common council ; and, while the local authorities were compelled to furnish to the legislature estimates of expense in order to obtain annual authority to levy taxes, there was no substantial corre- spondence between these estimates and the liabilities actually incurred from time to time by the common council. Moreover, in the early part of the nineteenth century, the miscellaneous reven- ues of the city formed a much larger proportion than now of the total receipts of the city treasury, and to this extent taxation was a less important factor in determining the limits of annual expen- diture. There were at that time frequent annual defi "its, and the whole financial system bore more resemblance to the state of the national finances than it did to the better ordered budgetary methods of modern nmnicipalities. When Comptn^ler Mercein first broached the idea of a municipal sinking fund for the city of New York, the ideas of the preceding century in regard to what constituted "funded "debt still persisted to a considerable degree. Debt was regarded as "funded" when based upon the pledge or mortgage of specific revenues. The state of the public credit then was not unlike that of China to-day, in that creditors demanded a tangible or visible guarantee. As Professor Ross states of the early English loans : "By this ' funding ' policy the public debt came to consist of many small loans, each bottomed on its own petty item of revenue. This complicated and rigid system, wherein the growth of one source of income could not be used to eke out the shrinkage of another, proved unfit for a growing public finance."^ It will be noted hereafter how a somewhat similar system has proved equally unfit for the growing public finance of the city of New York. Comptroller Mercein had before him the examples of the United States and British governments, which had established sinking funds based upon pledges of specific revenues. Perhaps he may also have been influenced by the fact that it was doubtless easier then, as it is now, to secure for any purpose the appropria- tion of miscellaneous revenues of the city than moneys raised directly by taxation. Merceiu's scheme contemplated the pledging ' Sinking Fundu, p. 9. 4 of commutation of certain water lot rents and quit rents; licenses for pawnbrokers, second-hand dealers, hackney coaches and street vaults; market rents and fees and twenty-five per cent of the pro ceeds of sales of real estate belonging to the corporation (after- wards changed to all the proceeds of the sale of real estate belong- ing to the corporation in 1825). He estimated that these revenues would provide the sum of $400,000 by January 1, 1827, when the city stock became payable, leaving $300,000 to be otherwise pro- vided for. On August 9, 1813, an ordinance in substantial con- formity with his recommendations was passed.^ The preamble of this ordinance read ''whereas, it is highly useful to establish a fund out of which purchases of the New York city stock may from time to time be made, whenever the same can be done at par or the true value thereof, whereby the said stock will be prevented from depreciating and the redemption of the same will be regularly progressing, therefore," etc., etc. The history of this sinking fund from 1813 to the date of its re- organization by the sinking fund ordinance of February 22, 1844, does not call for particular description, except that attention may be called to the financial inconvenience experienced from time to time by reason of the accumulation of unnecessarily large annual revenues, which fluctuated between $10,146.80 in 1814 and $176,- 556.55 in 1843. Although the legislature, by several enactments following the Act of 1812, had made the sinking fund provisions of the ordinance of 1813 applicable to loans issued under their provisions, on Decem- ber 10, 1832, the comptroller, Mr. Talman J. Waters, called the attention of the common council to the fact that the cash accumu- lations of the fund amounted to $311,101.49 ; that the outstanding city stock could not readily be obtained for purchase, as shown by the fact that " since the 15th July, 1831, there have been but thiee transfers of that stock, and they not for sale but for apportion- ment of estates"; and asked the question: "What shall be done with the accumulations of the sinking fund account ? " He 1 Reeaacted with slight variations in the revisions of 1817 1821, 1823, 1827 and 1834. The commissioners named were ti)e mayor, recorder, city treasurer (cbamber- laiu), comptroller, and chairman of the fiuiince committee of the board of aldermen. Until the passage of the Greater New York charter in 1897, when the president of the council was substituted for the recorder, no change was made in the composition of this body, except that during the existence of bicameral local legislatures, the chairmen of the finance committees of both houses weie commissioners of the sinking fund, ex officio. 5 called attention t( » the fact that, exclusive of sales of real estate, the average revenue of the fund would be sufficient to redeem the outstanding bonds in less than seven years, though those bonds had seventeen years to run, an; I he recommended that $3(i0,000 of the sinking fund's cash be applied to the payment of bonds of the corporation (not by the terms of their issue redeemable from the sinking fund) held by the Bank for Savings. ^ This recommenda- tion (entirely justifiable by the financial condition of the sinking fund, but as objectionable, from a technical standpoint, as many suggestions destined to be made thereafter in regard to similar conditions) was reported on favorably by the finance committee of the common council, who entered into an extended argumenta- tive defense of the proposition. The committee was of the opinion that ^'the case under con- sideration is one of a different character from that which would exist if the corporation were to pay its current engagements as they are contracted from year to year out of the sinking fund. That would clearly be a violation of the intention and purpose of the act, inasmuch as it would put in jeopardy that sacred and ample security which the legislature has reserved for the public creditor." This virtuous declaration was not accompanied by reference to the fact that the bonds proposed to be redeemed had been originally issued for current expenses and intended to be merely temporary loans to be paid from the proceeds of taxes, which had not been forthcoming. This early difficulty, which was followed by numerous other advances of the surplus revenues of the sinking fund for general treasury purposes, foreshadowed many later experiences in the management of the sinking fund; among them, (1) that the revenues of municipal sinking funds can with difficulty be used to purchase before maturity bonds held by the public ; (2) that one of their most useful functions is in absorbing new funded debt as it is issued from time to time; and (3) that sinking funds based on pledges of specific revenue lead to the greatest financial inconveni- ences without any corresponding advantages. In 183-i the comptroller again called att(Mition to th(? inijiracti- cability of making investments as directed by the ordinance, in consequence of the very high prices maintained by the several stocks therein designated, and renewed a former suggestion that, 1 DocumenU B'L of Aid., Vol. II, No. (30. 6 inasmuch as a judicious investment of the funds could not be made in conformity with the ordinance, they might be applied to the payment for such real estate as the common council might deem it necessary to purchase for public purposes.' On March 4, 1834, an ordinance was adopted (subsequently followed by many of a similar character) authorizing the commis- sioners of the sinking fund to invest in the purchase of lands for the extension of Grand street, Essex and Centre markets, provid- ing at the same time that " the whole of the rents, fees and income of said markets in their improved state, and the land thus pur- chased, are hereby appropriated and pledged for payment of the principal and interest of the sum that shall be thus drawn from the said fund. " ^ These occasional diversions of the fund did not appear, how- ever, to confine its growth within the limits of its original purpose. On January 1, 1840, the total funded liabilities of the city amounted to $7,716,105.78, of which $5,473,730 consisted of water stock, with he redemption cif vrhich the sinking fund had been charged on May 7, 1835. In his report for the year 1839, Comptroller Alfred A. Smith called attention to the fact that the revenues of the sink- ing fund "assigned originally to pay off a debt of a few hundred thousand dollars, not yet due by ten years, are amply sufficient to extinguish the whole funded liabilities of the city as they mature, with the exception of about two millions of the water loan redeem- able in 1860 ; and this, too, without impairing its present capital or resorting to the claim for money heretofore drawn from the sinking fund for general treasury purposes, and which should be returned to it " He called attention, however, to the fact that the cost of the Croton Aqueduct would largely exceed the original estimates ; that large additional issues of the stock would there- fore have to be made ; stated, that the revenue from the sale of water for years to come could not be expected to "contribute much, if, indeed, any, more than sufficient to keep down the inter- est of its cost"; doubted, in fact, "whether it can ever furnish anything towards the final cancellation of the loan!" and finally recommended that the sinking fund be strengthened by adding excise and ferry licenses to its pledged revenues. 1 Compt. Rep., 1884, p. 4. ' Proceedings, Common Council, Vol. 11, p. 134. 7 CAUSES WHICH LED TO THE SINKING FUND ORDINANCE OF 1844. On January J, 1843, the city debt had grown to $14,790,424.33, of which $11,897,801.10 had been incurred for the new Croton water system. The proper method of paying the intoi-ost on tliis water stock became a subject of pohtical discussion, l^ending the construction of the Croton Aqueduct, the interest on these bonds had been paid largely out of the proceeds of new issues; but dur- ing the last five months of 1842, such interest, to the amount of $152,914.53, had been paid from taxation. In that year the first receipts from the Croton water rents were forthcoming, and opin- ions differed widely as to the disposition which should be made of them. The Croton Aqueduct board believed that these water rents should be applied to the sinking fund for the redemption of the bonds. The comptroller held that they should be applied first to meet the current expenses of the Croton Aqueduct works; secondly, to the payment of interest on the bonds, and only lastly to the redemption of the stock. He estimated that under his plan the whole city debt could easily be paid off as it fell due, while, under the method proposed by the Aqueduct board, accumulations of the sinking fund would equal the whole city debt twenty-two years before the last of it became payable, whereby, he claimed, too great a burden would be cast upon the taxpayers of the day to the unjust advantage of posterity.^ In 1843 the board of aldermen requested a report from the comptroller, the street commissioner and its finance committee in regard to the expediency of selling the real estate of the city not in use or required for public purposes. This report, which was ren- dered on December 29, 1843, made the proper subject of its inquiry an excuse for dealing with a far wider reaching question — the re organization of the sinking fund ; and incidentally it settled the mooted problem of the disposition to be made of the water revenue. The committee began by reciting that ^^the City is now bur- thened with a heavy debt, demanding annually, for the payment of interest, the levy of a large sum in the form of a tax upon the property of our citizens"; and stated that the means of reducing taxes were easily available by the sale of the valuable real estate owned by the corporation which, on account of its unimproved 1 Compt. Hep.. 1842. p. 121. ^ DocumenU. lid. of Aid., Vol. X , p. 585 8 condition, yielded nothing in the form of revenue to the city treasury. The report continues: It has, much of it, for more than a century, been a direct burthen upon the taxable property of the City, as corporate property producing, as before stated, for that long period, little or no revenue and paying no tax. Not only are the improvements, generally, such as tend to a low valuation, com- paratively, of this property in our tax lists, and the revenue derived from it greatly in- adequate to its present actual value, but that revenue is expensively and neglectfully collected. Public bodies like ours, potent and powerful, though they be in name and prerogative, make but indifferent landlords. They perform their functions, as such, through agents appointed, not so much with reference to their practical qualifications for the place as to their politics; not so much with reference to their ability and faith- fulness in the collection of money, as to their skill and influence in collecting suffrages. The result may be deduced without any great forecast. We have sometimes good agents, and sometimes very poor ones, and last and worst, sometimes very corrupt and dishonest ones, who sink, by their defalcations, a large portion of the revenue, ot which the collection is entrusted to them. To avoid the necessity of these agencies to collect the value of that which produces an inadequate revenue, at best, into the fund to which it stands pledged, to apply it there to the final liquidation of the principal and interest of the debt which it has been devoted to secure, seems a primary object to be att. lined; and this object, your Com- mittee think will be most successfully accomplished by providing for the sale and dis- position of the improved real estate of the city, in the mode suggested by the Ordi- nance. ******** Existing Ordinances provide onlyjfor the administration of the Fund as it comes into the Commissioners' hands in cash. The proposed Ordinance in addition to this, is intended to establish a permanent policy in the management and sale of the uncon- verted property of the City, pledged to the Sinking Fund. Tha objects to which this Fund ought to be devoted are two-fold; one for the liquidation of ihQ principal of the City debt, and the other the payment of the interest as it accrues. This has already been legislated upon by the State Government. It is enacted that the revenues assigned by the Corporation for the extinguishment of the debt, be permanently pledged for that purpose. The Ordinances of the Corporation fully respond to this. It has likewise been enacted that all other revenues of the Corpora- tion, be pledged to the payment of the interest thereon; and in the same law, the State pledge themselves to pass all other necessary laws to levy a proper tax, in case these revenues should at any time prove insuflicient. These revenues were sufficient, until the creation of the Water debt, and thereupon, the legislature, in conformity with its pledge, passed a permanent law for the levying of this deficiency annually. The Corporation, although it has always paid the interest, has never passed, in the form of an ordinance, a provision in conformity with the State pledge; and this is pro- posed in the Ordinance now submitted by your Committee. THE SINKING FUND ORDINANCE OF 1844. By this ordinance (which was approved by the mayor on Febru- ary 22, 1S44), the pledges of revenue for the redemption of the debt 9 were left practically uachanged, although a more complete and detailed method was provided for the speedy sale of the city's lands; but nearly all the remaining revenues of the city/ including water rents, were pledged to a separate sinking fund, the complete title of which was " The Sinking Fund of The City of New York for the Payment of the Interest Accruing and to Accrue upon the Stocks of The City of New York until the Same be fully and finally Redeemed." ' The duties and powers of the commissioners of the sinking fund were prescribed with considerable detail and provision was made for the collection by taxation of the amount by which the revenues of the " Interest Fund " might fall short of the annual interest charges on city stock. The plan of providing elaborate sinking fund machinery for meeting annually recurring interest charges seems rather remark- able. In the ordinary conception of a sinking fund there inhere two fundamental ideas: (1) debt redemption by anticipated pay- ments, and (2) accumulation by the accretion of compound interest. Anticipated payment of interest on public securities is unknown except within such narrow limits as to be useless for purposes of amortization. The idea of accumulation seems equally inapplic- able. It is obvious that so far as interest on debt is concerned, its periods of payment will substantially be of as frequent occurrence as the availability of the sinking fund resources. If, therefore, the amount of the available income equals or is less than the annual interest charge, there can be no accumulation; for the income will be no sooner received than it must be paid out. In such an event there can be no useful purpose in creating a *'* fund *' for the per- formance of so simple a function. If, on the other hand, the amount of annual revenues exceed the amount of interest charged thereon, accumnlation will undoubtedly ensue, but with the sole result of locking up money of the taxpayers for some problemati- cal end which, at least, cannot be said to be in sight. It has not been uncommon, in the creation of sinking funds, to charge them simultaneously with the payment of accruing inter- est, as well as with the duty of redeeming the principal of funded Un ISoQ it was found that the sinking fund ordinance of 1844 haci not, in its enumeration of revenues pled^^ed thereio, exhausted all the revenues of the city and these unpledged revenues (the sources of whicli hhd not exist' d in 1844) were creclited to an account crejited on tne bo -ks of the corp«iration, entitled the General Fund (sub^ sequenily known as the Qen( ral Fund for ihe Reduction of Taxation). 2 For the sake of brevity these two funds will generally be referred to iiereafter aji the; "Uedeniption Fund" and the " Interest Fund." 10 indebtedness; but where this double duty operates upon a single fund, no particular inconvenience can result, since whatever is left of the annual revenues, after the payment of the interest, can be applied automatically to purposes of redemption or absorption of new issues. But in the sinking fund ordinance of 1844 two dis- tinct funds were created, wholly independent of one another, and consequently affording neither aqueduct nor storage reservoir for the overflowing revenue of the sinking fund for the payment of interest. It is true that at the time the ordinance of 1844 was passed there was no true conception of what the future receipts from water rents would be. Even Comptroller Douw D. William- son, in his argument in 1843, designed to emphasize the probable adequateness of these receipts, only estimated that for the thirty- eight years from 1843 to 1880 inclusive, they would amount to $14,475,000. In fact, they amounted, during this period, to $34,010,699.46. The financiers of that time were more interested in the question of supplying from taxation the deficiency in the annual interest charges left after the application thereto of water revenue than in planning for the disposition of what may have then seemed a very improbable surplus in those revenues. Owing to the rapidly increasing revenues from water rents, however, the necessity for resorting to taxation to supplement the resources of the interest fund ceased with the year 1850, as exhibited by the following table : REVENUES AND DISBURSEMENTS OF THE "INTEREST FUND" FROM 1844 TO 1851 INCLUSIVE. Croton Watkk Dock and Slip Rbnt. Rent. $108 243 02 157.791.66 193,914.70 221,635.10 255,053.09 278,811.72 458,951.87 458,789 78 $34,897.00 68,424.38 71,876.47 75,866.39 92,785.12 100,208.13 108,483.98 97 706.41 Ferry Rent. Tavkrn * Excise LiCBNSKB. 1 1 Taxation. Total Revenues. 1 Ivtbrert Charcb. $31,705.90 46,786 20 49,788.10 50.720.00 49,750 00 50,127.04 50,982.50 53,270.00 $34.987.10,$302,517.15 35,079.89 375,000.00 36,563.19 300.000 00 41,565.55 300,000.00 47,406.92 276,000.00 48,746 291 250,000.00 53,493.05 186,689.00 60,221.631 $570,525.23 770,410 50 739.410.88 771,048.86 799,204.15 800,678.25 943,842.76 751,154.24 $529,151.43 754,672 59 761,099.79 765.417.25 771,348.45 779.089.96 770,764.69' 765,733.82 1 The sources of revenue of the Interest Fund during this period were, in addition to those sp*»ciflcally enunaerated nbove: (1) Common r..and Rent, (2)Ground ftent, (3) House Rent, (0 Water Lot R-)nt, (5) Interest on bond and morterage (6) Tnrer st erenprally, (*'') Mayoralty Fees. (8) Court Fees and Kines, (9) Fines and Penalties, (10) Police, (II) Sewer Permits, (12) Commutation of Alien Passen- gers, (13> Sales of Personal Estate. 8 The balance (surplus) in bank on December 31, 18!0, was $264,046.52. The sinking fund ordinance of 1844 was in its inception entirely the creation of the local authorities. In the following year, how- 11 ever, its provisions were re- affirmed and embodied in the law of the state by the legislature. A memorial was presented to that body by the common council, with a bill for borrowing $5^)0,000 for the Croton Aqueduct, the fifth section of which declared that the ordinance of 18-14 should not be altered except to add to the fund for the redem[)tion of the debt " without the " consent of the legislature first had and obtained," and that the said ordinance should remain in ^' full force until the whole of the debt created for the introduction of the Croton water into the city of New York shall be fully redeemed." ^ In lS5Gthe receipts of the interest fund" were SI, 136,852.05, w^hich, with the cash surplus on January 1st of that year, aggre- gated $2,-i06, 020.05, against which were charged interest payments of «»nly $760,088.81. This tempting surplus seems to have been partly disposed of by the following method, which was evidently dicTyated by the temporary needs of the city treasury. The cash means of the " redemption fund" for the year 1856 were $1,434,- 085.19. Its redemptions of and new investments in funded debt amounted only to §1,065,459; but it had also invested $700,000 in revenue bonds of the city issued for current expenses in anticipa- tion of the collection of taxes. This left a deficiency which w^as made good by the simple method of '^advancing" $332,131.72 from the interest fund." It was proving inconvenient to pre- serve the unnatural separation of the two funds. In 1857 this advance" had increased to $386,325.60. On December 31, 1858, the interest fund had accumulated a surplus over and above all existing charges against the same of $2,579,534.12, and the ever increasing embarassment of this anomalous feature of municipal finance led, in the following year, to the passage of Chapter 406 of the Law^s of 1859, wdiich authorized the transfer of this surplus to the redercption fund.o » Ch. 225, L. 1845. •Tbe preamble of this act read as follows: WnERKAB, the revenue set apart and mentioned in title two of the ordinance of the mayor, aldermen and commonalty of the city of New York, entitled ' An ordi- nance providing for the redemption of the city debt, and the payment of the interest thereon,' passed February twenty-second, eighteen hundred and forty-four, being the revenues pledged and appropriated to the payment of the interest upon the said city debt, have accumulated after the payment of all interest provided for in said ordi- nance to be paid on said debt and chargeable to said sinking fund for the payment of the interest on said debt, so that on the first day of January, eighteen hundred and fifty- 12 This amount was transferred as of January 1st, 1859. During the year 1859, $542,501.02 was transferred; in 1860, $776,674.13; and in 1861, $68b,495.75— making a total of $4,582,205.02. APPLICATION OF SURPLUS REVENUES TO THE REDUCTION OF TAXATION. This practical consolidation of the redemption and interest funds was not permitted long to continue. The unequal and therefore unfair adjustment of the debt burden as between present and future taxpayers, which resulted from the unneces- sary segregation of nearly all the city's revenues, could not long escape the attention of the city's financial officers, naturally solic- itous as they were to reduce the weight of taxation. The disparity between the redemption requirements of the city debt and the means set apart to effect that redemption had been accentuated by the action of the legislature in ignoring the interest fund in numerous acts passed subsequent to 1844 which provided that the interest on bonds thereby authorized to be issued should be paid from taxation.^ In 1862, Comptroller Robert T. Haws in a communication to the common council^ recommended that legislation should be secured which would permit the surplus revenues of the interest fund to be appHed ta the reduction of taxation. After calling attention to the fact that the interest fund was charged with the payment of interest only upon the Water Stock, the Fire Indemnity Stock and the Building Loans Nos. 3 and 4, and that the interest on the greater portion of the then existing debt was by law payable from taxation, he stated: Instead of appWii'g such surplus to the unnecessary augmeiitation of the Sinking nine, they amounted to the aggregate sum of two millions five hundred and seventy-nine thousand five hundred and thirty-four dollais and twelve cents; ** And whereas, there is no object to which said sum and the accumulations which may hereafter arise from said revenues can be applied, as no power exists by which the commissioners of the sinking fund mentioned in said ordinance, can invest g.aid moneys permanently; "And whereas, it is desirable that said surplus and the accumulations which may hereafter arise from said revenues, after the payment of all interest on said debt, should be transferred to the sinking fund for the redemption of the city debt provided for in said ordinance; therefore," etc., etc. * Oq January 1. 1863, bonds were outstanding to the amount of $3,788,000, the principal of which had also been made payable from taxation by the laws authorizing their issue. ^ Documents, 1862, No. 3. 13 Fund for the Redemption of the Principal of the Debt, as has been done during tl)e last few years, it is proposed to appropriate the amount to the payment of interest and the general expenses of the corporation, which by existing laws are provided for wholly by taxation. He submitted an estimate showing that the redemption fund would, without the assistance of the surphis revenues of the interest fund, be far more than sufficient to extinguish as it matured the entire existing debt payable therefrom. As a consequence of these representations, the legishiture by- Chapter 163 of the Laws of 1862, authorized the transfer of the surplus revenue of the interest fund to the general fund ^*to be applied to the diminution of the taxes of said city." In pursuance of this act there was transferred to the general fund during the seventeen years from 1862 to 1878, inclusive, the sum of §17,290,713. THE BONDED INDEBTEDNESS ACT OF 1878. During these seventeen years, there was an immense growth in the city's debt. Among the chief purposes for which bonds w^ere issued during this period may be mentioned the improvement of Central Park, the war expenditures for bounties, etc., ($14,597,3n0), the wasteful undertakings of the Tweed ring and the refunding of floating indebtedness which necessarily followed its overthrow. The funded debt increased from $25,738,012 in 1862 to 8121,- 440,133 in 1878. Nearly all these new bond issues had been made payable, principal and interest, from taxation, so that on Janu- ary 1, 1878, the state of the city debt and the sinking funds was as follows: Funded debt payable from taxation, $09,030,089.68 " sinking fund, 21,510,043.47 Total Funded Debt, $121,440,133.15 Deduct securities held by sinking fund, 31,080,007.54 Net Funded Debt, $90,360,125.61 This situation naturally forced the serious attention of the local authorities. The sinking fund held securities amounting to nearly ten millions of dollars more than the entire debt which it was pledged to redeem. Nearly four- fifths of the entire city debt was payable from taxation, and the redemption dates of that debt had been so unevenly distributed that abnormal amounts would 14 have to be inserted in the budgets of certain years unless other provision should be made for its payment. The average revenues of the sinking fund for the preceding five years had exceeded three millions of dollars, and these revenues were steadily increasing. The last bonds payable from the sinking fund did not mature until 1917 at which time the surplus in the fund, if allowed to continue to accumulate uselessly, would reach Brobdingnagian proportions. Comptroller Kelly on January 9, 18T8, submitted to the mayor a draft of a bill to be presented to the legislature together with a memorial explaining its provisions.^ Comptroller Kelly's scheme contemplated the following legislation: (1) The sinking fund for the redemption of the city debt was to be continued and after providing for the payment of the bonds and stocks of the city payable therefrom as provided by law, should form a fund for the payment of the bonds and stocks then outstanding which had been madp payable from taxation. (2) All moneys and revenues heretofore pledged to the sink- ing fund to continue to be so pledged until all of said bonds and stocks of the said city shall be fully and finally redeemed." (3) The surplus revenues of the interest fund were to be definitely pledged to the redemption fund — in effect there being a new consolidation of these two funds. (4) In consideration of the redemption by the sinking fund of outstanding assessment bonds, the proceeds of collections of assessments for local improvements completed or under contract at the time of the passage of the act were to be likewise pledged to the sinking fund. (5) An amount not exceeding one million dollars a year was to be raised by taxation for the sinking fund whenever the com- missioners of the sinking fund should certify to the board of esti- mate and apportionment that the accumulations of the sinking fund would not be sufficient to meet the payment of bonds falling due in the next following calendar year, and if this provision should still be found insufficient for that purpose, authority was to be given to issue refunding bonds payable within twelve years. (6) For the payment of all bonds and stocks to be hereafter issued pursuant to the provisions of any statute authorizing the same and which by the provisions of such statute are payable 1 Documents, Bd. of Aid., 1878. No. 2. 15 from taxation," regular amortizing installments were to be in- cluded in the annual tax levies. (7) A new provision of law was recommended, the subse- quent effects of which have been so important that it is quoted in full as follows: Between the city and its creditors, holders of its bonds and stocks as aftMCBaid, there shall be and there is hereby declared to be a (contract that the funds and revenues of the city and the funds to be collected from assespmeuts as aforcf^aid, by this statute pledged to the Sinking Fund for the Redemption of the City Debt, shall be accumulated and applied only to the purposes of said binking Fund as lierein provided, until all of said debt is fully redeemed and paid. The form and substance of Comptroller Kelly's proposed statute were undoubtedly influenced by the political conditions of the time. The factional antagonisms of the day were such that the state legislature and executive were certain to look with sus- picion and distrust upon any recommendation emanating from the local authorities. Doubtless with a view to meeting all possible objections of a technical character, the Comptroller's bill was drawn in a manner which disclosed an ur fortunate timidity of purpose. In the effort to appear to guard with zealous fidelity the interests of the bondholders entitled to the security of the pledged revenues of the sinking fund, and to create additional revenues for the benefit of purchasers of bonds to be thereafter issued, this bill was padded with pledges for the future which were not only unnecessary but were destined to work great inconvenience to the financial administration of the city. Especially was this true of the "contractual pledge" above quoted. Even this bill, however, when passed by the legislature was vetoed by Governor Robinson who claimed that the rights of holders of bonds payable f tom the sinking fund were violated, objected to the refunding provisions, and recommended that the $1,000,000 appropriation in the budget should be changed from a maximum to a minimum amount. The bill, having been modified so as partly to meet his objections, finally received his signature and became Chapter 3S3 of the Laws of 1878. This act which is commonly referred to as the " Bonded Indebted- ness Act," committed the city to an indefinite bondage to the "pledged revenue" fetich from which it has never been able wholly to free itself. In 1878 the time was ripe for a reorganization of the sinking fund system upon rational and scientific lines. It is obvious that at this time no bondholder could legitimately demand greater 16 security for his debt than a sinking f and which possessed assets nearly fifty per cent in excess of the entire debt payable therefrom. Wise statesmanship would have demanded, and good faith would have warranted, the diverting of all subsequent revenues of the sink- ing fund to the general fund for the reduction of taxation (partially accomplished during a period of seventeen years under the pro- visions of Chapter 163 of the Laws of 1862), and establishing new sinking fund regulations under which there should be raised each year by taxation amortizing installments exactly sufficient with their accumulations of compound interest to redeem all new debt at its maturity.^ Snch a departure would have proved most bene- ficial to the future management of the city's finances. If, how- ever, uni*easoning popular belief in the pledged revenue " system seemed to demand its continued existence, there was no financial necessity for superimposing upon this system new provisions for additional revenue from taxation. Tlie revenues of the sinking fund (amounting then to about three millions annually) were for practical purposes entirely surplus"; and this surplus might properly have been charged (as it was eleven years later by the act of 1889), with the redemption of subsequently issued funded debt. But in 1878, as in earlier and later instances of legislative tinkering with the sinking funds, it was only the pressing financial inconveniences of the hour which controlled. The future might care for itself. The problem then seemed to revolve about these questions only: First, how to redeem otherwise than from taxa- tion four-fifths of the public debt which, as originally issued, had been made thus redeemable; and secondly, how to dispose of an additional burden of $21,320,500 of assessment bonds for the redemption of which it was known that the revenues applicable thereto wo aid be greatly deficient.^ These ends were accom- ^ The writer is neither unaware of the argument which might be drawn from the provisions of Chapter 225 of the Laws of 1845, nor forgetful of the reasoning of Cor- poration Counsel Lacombe in his Sinking Fund opinion of November 28, 1884; but the theoretical benefits to be obtained in 1878 from a close, technical construction of sinking fund law were of such extreme tenuity, and the practical advantages of a common-sense construction so manifest, that it seems scarcely conceivable that adverse criticism could then have attached to any serious effort to reorganize the sinking fund system on a scientific basis, Tlie situation was entirely different from that presented by the passage of the Act of 1889. Professor Durand in his Finances of the City of New York (p. 310), holds similar views to those here expressed. ^ Most of this large indebtedness had been incurred for street improvements begun during the Tweed regime, assessments for which had been frequently vacated or remit- ted by the courts owing to frauds and irregularities of various kinds. 17 plished, hut in their accomplishment a sinking fund system was created so burdensome in its nature that it is not astonishing that only eleven years Inter further legislative interference was invoked and obtained in spite of the contractual pledge" of 1878.^ By the change in the disposition of the surplus revenue of the interest fund — e., from the general fund for the reduction of taxa- ^ 1 his period was an imporlaut one iu the history of the city debt. Ou Novem- ber 4, 1«84, the constitutional amendment was adopted which prohibited cities of over one hundred thousand inhabitants from becoming indebted in excess of ten per centum of the assessed valuation of real estate, with an exception as follows: "Nor sliall this section be construed to prevent the issue of bonds to provide for the supply of waler, but the term of the bonds issued to provide for the supply of water shall not exceed twenty years, and a sinking fund shall be created on the issuing of said bonds for their redemption, by raising annually a sum which will produce an amount equal to the sum of the principal and interest of said bonds at their maturity." Ten per cent of the assessed valuation of the city on January 1, 1885 was $111,976,1'"39.70. The total bonded debt, exclusive of revenue bonds, was $125,810,579.33, of which $35,479,579.33 was held by the sinking fund. If, as Corporation Counsel Lacombe had held, the constitutional restriction ran against the gross debt, the citj'' would have exceeded this limitation. An attempt to issue $3,000,000 bonds for dock purposes was at first successfully enjoined by certain taxpayers and bondholders, and for a while new public improvements were suspended, but the Court of Appeals finally decided (Bank for Savings v. Grace, 102 N. Y. 313), reversing the courts below, that stock purchased by the sinking fund was " not a debt against the city within the meaning of the constitutional prohibition." Prior to 1889 the constitutional provision above quoted relative to the creation of a sinking fund for water bonds required no particular attention, since, under the pro- visions of the Bonded Indebtedness Act amortizing installments were being raised for the redemption of all bonds issued since 1878. The view seems to have been taken, however (see Minuteis Com. of the S. F., Jan. 6, 1885), that this provision required the creation of such a distinct fund, regardless of the question, whether the constitutional limit of indebtedness had been exceeded by the city, and on January 16, 1889, the com- missioners of the sinking fund adopted the following resolution : ''Resolved, that the Comptroller be and is hereby authorized and directed to separau* the amounts of annual installments raised by tux for the payment at maturity, of bou^is issued for the supply i>f water, pursuant to section 11, ot Article Vlll, of the State Constitution, to ba kept as a distinct fund from the general account, and tle.siguate the securities iu which the moneys are invested, to be reported from time to time, to this Board." Thereafter these instaMm^nts with their accumulations of interest anil the stocks in which they were invested were segregated into a separate sinking fund known as "Sinking Fund for the Redemption of the City Debt, No. 2." Chapter 178 of the Laws of 1889 (see jyoat) was drawn under a similar misapprehension, but three years later the Court of Appeals decided (City of Rochester v. Quiutard, 136 N. Y. 221) that this pro- vision had no application to a city whose inilebleduess did not exceed the constitutional limit. Undoubtedly, had this been understood to be the law in 1889, the amendment to the Bonded Indebtedness Act passed in that year would have provided that the install- ments for water bonds might be provided from the surplus levenut s of the redemption fund instead of from taxation. 18 tion to the redemption fund — there was added to the accumulation of the sinking fund during the ten years, 1879-1888, inclusive, the sum of $21,650,000 — the effect of which was the same as though this amount had been raised directly by taxation. In 1879, the minimum" appropriation of $l,OuO,000 provided by the Bonded Indebtedness Act was included in the tax levy. ^ In the next nine years the sinking fund installments raised by taxation under the provisions of the eighth section of the act, amounted to $4,880,- 696.69. Coincidently the ordinary revenues of the redemption fund, especially from dock rents continued to increase. The annual revenue, which in 1877 had been $2,909,066.14, grew by leaps and bounds until in 1888 it amounted to $8,903,284.80. As these revenues exceeded the average annual issues of bonds during this period , the net funded debt (including assessment bonds and excluding revenue bonds), decreased from $111,649,317.91 to $88,120,405.34. This was too rapid a pace in debt extinction for the local authorities of the time. The budget for the year lb78 had been $30,079,077.12; in 1888 it had grown to $37,051,053.93. It was generally agreed that a reduction of the burdens of taxation would be popular and desir- able — e^^en necessary. Debt amortization was proceeding at a rate which was not fair to the present generation. The experience of 1862 was about to be repeated, with this difference, however: that, whereas at the earlier date the diversion of the surplus revenues of the interest fund had awakened little if any protest, an attempt at this time to devote any of the revenues of the sinking fund to the reduction of taxation was bound to be open to the charge of a breach of faith founded on the solemn statutory pledge contained 1 The act as finally passed required the board of estimate and apportionment to insert in the budget such an amount as the commissioners of the sinking fund should certify to be necessary to meet the payment of any bonds or stocks falling due in the next following calendar year, by reason of an insufBciency in the accumulations to the sinking fund; ''proi?ided, however, that the amount so to be raised by taxation and paid into the Sinking Fund, as in this section provided, shall not in any one year be less than the sum of one million dollars nor more than two million dollars." The sum of one million dollars was inserted in the tax levy for the year 1879 in pursuance of the provisions of this section but tbi-i item never afterwards reappeared in the budget. Tbe obviously excessive resources of the sinkmgfund led to a construction of the some- what ambiguous phraseology of the act in regard to this appropriation, under which it WHS held to be required only when actually ne«ded for the redemption of bonds matur- ing in the next calendar year. 1'.) in the act of 1S78, declaring that a contract existed between the city and its creditors that all the revenues of the sinking fund should be applied only to its purposes until the entire debt payable therefrom should be finally redeemed and paid. What was really done was, in fact, a clear repudiation of this pledge. The method pursued was rather involved, but may be briefly summarized as follows: (1 ) The annual installments required by the Bonded Indebted- ness Act of 1S7S to be raised for the redemption of bonds issued after June 3, 1878, were no longer to be provided for by taxation, but might be " set apart out of the surplus income, revenues and accumulations of the sinking fund for the redemption of the city debt after fully providing for the payment of the stocks and bonds which had been made preferred claims or "liens" of said fund/ Recourse w^as to be had to taxation only in the event of these surplus revenues becoming insufficient. This provision did not affect the annual installments raised by taxation for bonds issued for water purposes under the supposed requirements of the consti- tution, but its immediate effect, was, nevertheless, to reduce taxa- tion in the sum of $975,769.02. (2) The sinking fund for the payment of interest on the city debt was charged with the new duty of paying ''interest on bonds and stocks of said city purchased and held and to be purchased and held for investment by the commissioners of the sinking fund." The amount of such interest on January 1, 1889, was $1,617,915.54. ^ Under the Bonded Indebtedness Act the " liens " on the sinking fund were in the order of their priority, as follows: 1. Bonds payable from the sinking fund under the ordinance of 1844, and other ordinances of the common council authorizing their issue. The amount of such bonds outstanding on January 1, 1889, was $4,593,400. 2. Bonds issued under the provisions of 6, Ch. 383, L. 1878 176 Con. Act) to refund or redeem before mntiirity bonds issued prior to June 3, 1878, which by the terms of their issue had been made payable from taxation. The amount of sucli bonds outstanding on January 1, 1889, was $9,700,000. 3. Bonds issued after June 3, 1878, for the payment of which no provision other- wise than from taxation had been made in the statutes authorizing their issue. The amount of such bonds outstanding on January 1, 1889, was $23,007,553.11 (exclusive of water bonds to the aiuount of $20,900,000, for wliich annual installments were raised by taxation and credited to *' Redemption Fund, No. 2"). 4. Bonds issued prior to June 3, 1878. originally payable from taxation. Amount outstanding on January 1, 1889. was $08,828,142. Sul)sequently, under the provisions of Chapter 79 of the Laws of 1889, the bonds issued for the new parks in the 23rd and 24th wards and in Westchester county were made a direct charge upon the sinkine fund. 20 By charging this amount against the interest hmn instead of the tax levy, the surplus revenues of the interest fund, which the Bonded Indebtedness Act had specified as one of the pledged appropriations of the redemption fund, were, of course, depleted accordingly — a clear violation of the ^'contractual pledge." Protests against this plan did not fail to appear in the public press ; but so ample appeared to be the security of the city's bond- holders that the validity of the act embodying these suggestions (Chapter 178, Laws 1889), has never been called into question in the courts. The legislature authorized the board of estimate and apportionment to '' reconsider, revise and amend the final estimate for 1889" (passed in the preceding December), and the sum of $2,653,684.56 was accordingly stricken therefrom. The effect of the act of 1889 upon the Bonded Indebtedness Act may be stated as follows: first, it practically repealed the provision in the act of 1878 relative to the raising by taxation of installments for the redemption of all bonds issued after June 3rd, of that year and made them a residual charge upon the ample ordinary revenues of the Redemption Fund; secondly, it brought about a partial return to the policy of the act of 1862, which per- mitted the surplus revenues of the interest fund to be applied to the reduction of taxation, and conceivably (if the interest due on the bonds held for investment by the commissioners of the sinking fund should increase more rapidly than the revenues of the interest fund) might some day result in the entire absorption of the fund for that purpose.^ The revenue of the redemption fund dropped from $8,903,- 284.80 in 1888 to $6,444,761.39 in the following year. Yet such have been its recuperative qualities, due to the rapid growth of its principal sources of revenue, that its revenue amounted to $10,- 266,488,07 in 1897 and $12,592,31<».46 in 1900.' ' The pr »otic^l effects of the act of 1889 upon subsequent tax levies have been as fol- lows: Tlie amortizing installments (which, if that act had not been passed, would have been raised by taxation) increased gradually from $975 769 03 in 1S89 to $3,485,557.72 in 1900. Tiie auDiial interest cbarge on sinking fund holdings (which otherwise would have been inserted in rhe tax levij-s instead of paid from the interest fund), increased from $1 639 450.34 in 1889 to $3,747,022.84 in 1900. The aggregate of these items, including interest compounded at three per cent (which would also have borne its share in iucreasiag taxation), amou'its to $83,085,759 95, wh ch represents the total sav- ing to the taxpayers during these twelve years. ^ These tigur-'s include the ;im )urits raised hy taxation as installments on water ,onds (consiituiing Redemption Fund, N-t. 2). 21 CONDITIONS EXISTING AT TllK DAT!-: OF CONSOLIDATION. During the ten years preceding the Greater New York consol- idation, and especiahy during the last three years of this period, the bond issnes of the city of New York were much larger than at any other time in its history. During the years 188S-1897, inclu- sive, the issues (excluding $7,000,000 refunding bonds) aggregated $138,382,64:9.4:1, the principal objects of expenditure being as fol- lows: water, $25,877,000; docks, .^^20,800,000; school houses, §18,- 725,365.97; other pubhc buildings, $10,746,400.64; new parks in the 23rd and 24th ^vards, $9,823,100; other parks, parkways and drives, $11,771,493.95 ; assessment bonds, $13,043,53().zl ; repaying streets, $10,169,308 ; and bridges, $8,032,290.37. The funded debt showed the following increase: Dec. 31, 1887. Dec. 31, 1897. Total Funded Debt, $128,268,719 45 $223,018,033.78 Less Sinking Fund Investments,. 34,057,319.45 84,192,672.51 Net Funded Debt, $94,211,400.00 $138,825,361.27 In other words the revenues of the sinking fund during this ten year period had been so large that new bond issues aggregat- ing $138,382,649.41 had effected an increase in the net funded debt of only $44,613,961.27. It is also a rather remarkable coincidence that the net funded debt on December 31, 1897, was almost exactly the same in amount as the aggregate of bonds issued during the ten preceding years. The sinking fund problem which had to be faced by the fram- ers of the Greater New York charter was not simple. The sinking funds brought into the financial system of the new city from the several municipal corporations annexed to the city of New York require but little comment. From the city of Brooklyn came tw^o : The Sinking Fund of the City of Brooklyn and The Water Sinking Fund . The former consisted almost exclusively of annual amortizing installments raised by taxation under laws authorizing the issue of certain bonds which constituted, however, only about twenty- seven per cent of the entire funded debt of the city of Brooklyn.^ ' Tlie hi>re issued by any of the municipal and public corporations or parts thereor hereby made part of the City of New York including the Counties of Kings and Richmond. Under such a scheme there was certainly little ground left for attacking the constitutionality of tht- new charter on account of its sinking fund provisions. The charter commissioners seem to have been not altogether forgetful of the coming day when the redemption fund will have completed its functions, but the method adopted by them of dis- posing of its enormous revenues is destined to raise in the near future the same difficulties which were experienced under the Bonded Indebtedness Act of 187S. The most remote maturity date of bonds redeemable from the redemption fund is 192S. It will prove sufficiently burdensome, as will be seen hereafter, to accumu- late unnecessarily the prodigious revenues of that fund for so long a period without repeating after that time the i;nistakes of the past. The financial inconvenience of any sinking fund system bottomed on resources derived otherwise than from taxation would seem to have been sufficiently demonstrated by the experience of New York cit)% lasting over a period of eighty four years, and it would have been better to have provided for the transfer of the revenues of the redemption fund, as they become released from existing pledges, to the general fund for the reduction of taxation. Instead of that, it was provided that Whenever the bonds and stocks outstanding on December 31, 18U7, and being charges or liens on any of the sinking funds hereby made subject to tl)e control of the Commissioners of the Sinking Funsioiiers, iiorustt for any purpose whatever. It cannot be in any way put beyond the reach of the creditors of the sinkinir fund. It must be held intact for the purposes of tli») trust, and the ci editors of the fund are entitUd at the maturity of their debts, to be ]>Hid tlierefrom in th(i order of the priorities ni their claims thereon, and, in the meantimt . to have the full fund held in trust as a security for such payment. The surplus of the Sinking Fund can no more be destroyed or withdrawn from :he trust, or the operation thereof, than could the equity of redemption, surplus or increased value of laud covered by a mortgage or trust deed to secure a debt be destroyed, with drawn from the mortgage or trust deed or from the operation thereof.^ On the other hand, the important fact of very practical iuiport may be alleged that by the Act of 1889 the contractual pledge'' was undeniably violated, and, so ample was the security of a city bond generally regarded, that no bondholder cared to contest the validity of this statute iu the courts. Perhaps it may he said that the solution of this question lies rather in the realm of finance than of law. If so, statutory con- struction becomes of less practical importance than the opinion of holders of city bonds. REMEDIES DISCUSSED. The extent to which public creditors are influenced at the present time by the existence of sinking funds designed to provide means for the liquidation of their claims may fairly be said to be a debatable question. In the early history of public loans, when public credit was but little understood, that influence was un ^ The fact that oue of the moal impDrtant conclusions of this opinion was rejected by the Court of Appeals (Bank for Savings v, Grace, 102 N. Y. 313). should not deprive ;he reasoning of the learned corporation counsel on the point above discussed, of the re^-pect to which it is entitled. 30 doubtedly very great. What Professor Ross has aptly termed the ^Hheatrical element in practical fiDance" was undoubtedly served by the sinking fund based upon specific revenues, ''characteristic of new countries in the earlier stages of financiering or of nations threatened with disaster to public credit." But to-day in the case of civilized states or metropolitan comnmnities, it is rather the state of the public credit which controls, and in the common estimate of this there are really but two factors : ability and williugness to pay. That sinking funds add to the popularity of municipal loans is unquestionable. But the cause for this is to be sought rather in the fact that sinking funds provide an easy and convenient method of liquidating indebtedness (really adding to a city's ''ability to pay") than in any sense of proprietorship in accumulated funds. ^ Certainly do valid reason can be forthcoming why a bond- holder should prefer to be paid from specific revenues of a city rather than from the proceeds of taxation. Nor is it likely that a bondholder would ask greater protection of the law than the secur- ity of a sinking fund which would with certainty provide means for the ultimate discharge of his debt. In the history of the New York city redemption fund, it seems to have been at all times assumed that its surplus revenues might, after meeting preferred charges thereon as they fell due, be made ap- plicable to amortizing new issues. Yet this was but one means of lessening the surplus which would otherwise accumulate for the security of the preferred liens. If the preferred lienors were so con- fidently expected to view with complacency the appropriation of this surplus to the security of other bondholders, why should they not experience w^th equal contentment the transfer of such surplus for the benefit of the taxpaying public ? These are some of the considerations which must soon receive attention in the final determination of the disposition which should be made of the accumulations of the sinking fund for the redemp- tion of the city debt. Three remedies suggest themselves : First : A return in whole or in part to the scheme embodied ^ la fact the idea of accumulation is wbr)!!} absent from the conception of one of the most efficient forms of a sinking fund — the fixed sinking fund with a constant ap- propriation, -which, by periodic purchases and extinction of outstanding debt, causes progressive declines in interest charges and correspr.ndinglj rapid amortization. in the act of 1889. This would still leave in operation tlie ohjec- tional)le features of the specific revenue system and would be open to the same theoretical chnrge of bad faith involved in tlie repudiation of the ^'contractual ])ledge'' of 18TS. It would, however, amelior- ate the financial hardships of approaching years, and would possess the sentimental advantage of following a precedent. Second : To provide that whenever hereafter the local authori- ties shall have inserted in the tax levy full and sufficient amortiz- ing installments for the redemption of all bonds payable from the redemption fund all the specific revenues of the city now paid into that fund (excepting, of course, interest on investments and deposits), and accruing during that year, might be credited to the General Fund for the Reduction of Taxation.^ This w^ould un- doubtedly be the most logical, scientific and satisfactory method, but it remains to be seen whether it would not call forth vigorous protests from some holders of bonds of the city of New York issued prior to consolidation.^ Third : To adopt the last mentioned method from the date when the last of preferred lien" bonds shall have been re- deemed — ?*. e., in 1910. Such a course would be entirely free from technical objection (see note number 3, page 27). The chief dis- advantage of this scheme w^ould be the unnecessary taxation to be borne for the debt service until 1910.^ ^ Scarce!}^ any public attention is now given to the administration of the sources of the great revenues of the sinking funds. They have practically no immediate effect upon taxation. If the annual taxes were largely dependent in amount upon the size of these revenues — as they would be if such revenues were paid into the general fund — it is fair to assume that this important side of m\micipal administration would benefit from the closer public scrutiny which would inevitably follow. 2 In 1900 the revenues of Redemption Fund, No. 1, exceeded the amount which would be required for an annual installment to redeem all the bonds payable therefrom by about five and one-half millions of dollars. This amount repre^ents tlie unnecessary burden of taxation imposed by reason of an excessive debt-service. The appended statement shows year by year the excess of sinking fund revenues over the amounts necessary to amortize bonds issued since June 3, 1878. Amortizing installments to redeem the remainder of the debt payable from the tedemption fund would average about $1,165,000 throughout the period covered by this statement. It is to be noted that, while the revenues of the redemption fund are steadily increasing, the installments required to redeem bonds of the former city of New York are naturally decreasing owing to cancellations of maturing bonds. ^ This year, 1901, the installments raised by taxation for the two new sinking funds provided by the chnrtrr am.ount to $1,629,86'J.07. If new issues of bonds should continue to be made, running for similar average periods nnd in the same amounts for the next six years as in 1900. these installments would hereafter be : in 1902, $2,171,- 32 The iaore.ised burdens of taxation imposed upon the tax- payers of New York city by the operation of the Greater New York Charter have aroused a more critical spirit in regard to municipal expenditures than has been manifested for some tim.e, and it is in- conceivable that serious public discussion can be long postponed in regard to a subject which involves a possible lightening of the tax burden in an amount which already exceeds five millions of dollars annually, and which is destined soon to reach even much more formidable proportions. ^ During the next few years it may be possible for the commis- sioners of the sinking fund to apply palliative measures by making 1688 46; in 903, $3,713,414.85; m 1904, $3,255,191.24; in 1905. $3,796.967 63; in 1906, $4,838,744 02 ; in 1907, $4,880,520 41; in 1908, $5,422,296.80; in 1909, $5,964,073.19, and in 1910, $6 505,849.f'i8. It might be possible, however, for the commissioners of the sinking fund lo hasten the redemption of the preferred lieu " bocds by repurchases from the public under a system of competitive bidding. Of the "preferred lien" bonds outstanding and held by the public, $475,000 mature in 1902, $20,000 in 1907 (both first liens), $6,900,000 in 1908 (second lien), $9,357,000 (" park" lieu) in 1909, and $2,800,000 (sec ond ien) in 1910— making a total of but $19,552,000. ^ It raiy readily be imagined that in the financial administration of the city there have been not a few compensating advantages derived from the overflowing revenues of the sinking fund. The necessity for refunding operations has seldom arisen. With a modicum of forethought it has bf en possible to husband the resources of the sinking fund so that large amounts of maturing debt could be easily redeemed without recourse to tiie t«x levy. By far the larger part of annual new issues of bonds have been absorbed directly by the sinking fund for investment, thus avoiding the expenses and delays of frequent public bond sales, and rendering it possible to make close adjustments of cash to the needs of the city treasury. Many actual economies in regard to liabilities on interest account have been possible, and from the standpoint of mere convenience to the fi-^cal officers of the city, the situation has been, in these respects, thoroughly agree- able. It should not be forgotten, moreover, that since consolidation the city has some- times been perilously near to the constitutional limit of indebtedness; and to the exces- sive contributions of the taxpayers to the debt service in the past is due the fact that the ne' d' bt of the city is not at present much larger than it is. If a change in the sinking fund system should ensue, which would result in the surplus revenues of the redemption fund being applied to the reduction of taxation, it is not unlikely that in the near future many expenditures which are now payable from the proceeds of bond sales wou'd have to t»e made from taxation. This consequence, however, would not be altogether deplor- at>le. The city of New York now defrays from bond account many liabilities which are not in the nature of permanent public improvements. Among the m"st striking of these may be mentioned the stock or plant of the department of street cleaning, consist- iuu lHr>:elv of horses carts, harness, burlap bags and similar articles serviceable for but a f months, which are paid for from time to time from the proceeds of l>ond8 ma'ur- inn in thirty or forty years. All expenses of ordinary maintenance of the dock department are similarly defrayed. 33 serious efforts to rei)urcbase from the public outstanding bonds payable from the redemption fund. But it would scarcely be pos- sible thus to redeem literally the whole of such outstanding debt; and if the redemption fund must, under the provisicais of the charter, be treated as an inviolable trust fund until every bond now legally redeemable from it is paid, the relief afforded by such purchases would prove but temporary. The repaying of streets, -which in most cities is properly regarded as " niaintenanre," is ikewise made a charge upon the public debt. Many similar instances might be cited. It would, indeed, seem that there has been in the financial history of the city an uncon- scious endeavor to equalize and adjust by the?e illogical means, the abnormal conditions which prevail in regard to the redemption of the city debt. It would be an interc sting study to analyze the purposes for which the city of New York issues bonds with a view of aseeitaining ihe extent to which payment of ordinary current expenses is thus post- poned. But these considerations, though not unimportant, do not appear suflBciently weighty to offset the criticisms which have been made of the existing sinking fund system. (tables follow.) 34 W O o « og §5 5 o HH GO OQ 00 1—1 o . O .2 OS OS CO o l> HQ ® *j . • CD OS CO CO 00 00 a ° ® ? o o ) - o {>" lO J> CO id o o CO OO CO oo CO CO o 'm « o CO* CO 00_^ lO" '> o OO i> CO § ° a § g a CO OS os^ OS co £- CD CD CM CO 00 CO 00 OS 00 C5 a ° ^ 2^ a ss ^ 03 ,3 o-i © I- a to o ^ 'a S O 4C iO CO lO o i> o O = ® =^'=^5! ■:o cs Tfi CO CO o »-| ^ w 00 o 01 OS CO o CO lO lO a a o 00 CO 00 00 o C5 T-H CO iC 00 o CO OS CO CO o y fc. .2 -M C3 CO CO VJ o3 o lO o 00 »o CO 00 CO CO OS a o a> ja 09 •-•a^ o o o 00 T-H i> o OS CO C3 CO 00 00 1) id 00 o 00 o J> Os' LO ^* o'i CO o ~ a £ B"^- CO 00 OS CO CO J> »o 'o (E S 3 5 "O 00 lO" cV Oi o" CO co" CO LO o CO CD^ CD co" CO os" 03 00 CO OS CO o OS OO ^ O CO a .2 ct OS OS 1> lO CD co" o CO*" o" o lO' CO QO" CO CO o 03 T-( a o oQ O) ^ o £ ^ a o o o CO r~. o o QO CO o CO CO 03 o o o o o o CD o 00 iO o o o o o o o co" o 00* CD x> A o o o o o o CO o 00 a as o l- CO CO OS CO co* 00 1— r T3 a a 03 >»a CO o — , o o o o o o o o o o le fi oul( cost it 11 > r -I- s - O O. r t; . o o o o o o o o o o o o o o o o o o o o cd o o O — M o •2 c W p. *r © "-I ^ "o o o o o o o o o o o o o © of §2 of els payabl sent the 08, bad > t- o_ io" lO o_ 05 CO co' o o CO TjT 00_ co" o o" GO os" 00 OS OS CO 00 o V2 % 00 co" 00 OS^ co" co" 00 OS CO CO ^ t> lO 08 ^ o C.2 CO o> OS iO o :2 a IS^ ID OS 1— < t> 00 CO oo' CD OS o CO CO ^ OS i6 OS CO cd o CO 04 00 OS OS CO i> CO o c- 00 CD o o oo o> to CO CO co lO »o »o Pi OO CO CO 00 CO lO CO iO a CO OS OO os_ CO CO CO .5 ! X. lO CO co" o co" co" J>* oo" 00 oo" o" bo a u <:o {> lO o? o o Ti^ 00 o 00 CO - a CZ2 00 ^ g _ J3 OO 00 OS lO OS lO OS CO a> ci CO CO OS 00 CO OS cd o o OS c? O) CO CD o OS CO V- c a ^ 5 oa a Qj ^ ^ SEE ^ CO o CO »o OS lO^ os" CO*" oo" OS CO* '*■" 00 CO t3 S £-0 QO o o lO o o CO o CO a OO CO l> o_ o CO co_ cd" 1—1 00 o (?^" o" CO o •—1 OS* a 2 ^ a S 3 g tH TH CO CO CO CO a d o ® ,13 o OS ^ o CD 00 00 a o OS 00 CO o OS 00 00 CO oo a Iraents !. For ave be net SI "cost o CO CO* '<^<" o cd CO cd 0) a a «a CD O £> CO os" o CO o £> co" OS 00 oo" o co" o co__ CO* CO lO l> CO 00 lO* lO OS CO co* ► d S T3 ** 3 © CO CO 00 00 o 00 r-\ w CO t> Id CO lO co^ OS^ o? CO 00 Ui cT c 00 00 '5 > 00 CO C5 r— CO CO lO os 00 CO QJ 'o2 OS 00 o t— OS 00 t> CO CO i6 00 t> £>" 00 i> CO* OS V t— « ^ ® i: c •»— I CO CQ o i> CO CO s o M 00 CO lO iq_ co CO a ? a <» CO 00* l> o" OS lo" CO* Oi CO CO* lo" a ^ c« 00 OS CO o !>• V ee a © 5 OS CO JO lO OS CO o OS o a c? J=i 2 S^l 00 OS o t-l COT a ^co s-i 4) Tl QO cs OS OS OS OS OS cs OS OS o 00 00 00 00 00 00 00 00 00 00 00 OS .2 o^©--^ Crotoh Watbi Dock ihd Slip 1.006,0(19 47 1,670.916 4S 714.409 06 1,301,031 11 1,411.104 m 1.686,880 73 1,848,603 04 54,, i,™ 00 50 050 00 38.050 00 60,693 44 443,148 I 233.147 ' 27,428 60 25 337 00 24.214 00 33.046 60 079 11 485 78 093 35 10,1.59 ; 14.276 ( 9.606 1 3.792 ( 3.260 ; 2,811 ' 2.677 ' 2 732 ! 2.845 I I 07 $345,288 96 t6,797 00 10.902 1 14.474 : 16.681 ' 17,390 12 17,047 46 14.910 03 13.964 20 8 429 20 18.429 40 8,066 63 13,533 10 T^BLE II. Payment of Intereit on The Cily Dt 15.664 72 15 120 62 9.232 27 2.694 80 7.002 18 0,067 37 6 293 30 9 504 02 3 016 18 506 75 340 7.1 $6,608 67 9,021 00 14 610 00 5,449 50 13,191 00 i,258 00 ;,640 00 14,487 00 16.464 00 15,038 00 16,455 00 17.232 00 i.522 00 r.322 00 926,617 59 984.500 68 ,101,939 86 ,133,610 ( ,130,852 ( 143,281 83 169.388 61 224,605 01 1,222,697 38 313.058 64 ,279,122 49 ,388.313 02 1.452,484 38 603.854 43 746,549 69 .873.119 63 1.988,619 41 1.996.104 73 1.634,104 27 ..538.737 03 87 63 . 839.441 15 Total. i liible lire slated as " gross " receipts— i". received, and sometimes io subsequent years. 'J'be aggregate :1