New-York tribune., 1909-04-12
J. H4MPDEN DOUGHERTI
EXPLAINS PICTURES.
General Refunding Of City's Debt
authorized to Escape Sinking
Fund Disadvantages.
By J. Hampden Dougherty. Member Of the Charter
Commission.
FIFTH ARTICLE.

The theory OF sinking funds security for the
payment public debts has become obsolete Al
though sinking fund created in 1913 permitted
investment pledged revenues in government or
state bonds as well city stock, the practice has
long prevailed of purchasing for sinking fund in
vestments only the stock of the city itself Thus
the only security which the ctys creditors have Is
in the last analysis the citys promises to pay
No added certainty of payment can be derived from
the accumulation in separate fund of the city's
bonds, and such sinking fund might as well
he abolished. After hundred years experience
of sinking funds. this is the citys situation Its
creditors better off than the creditors OF
other cities which have never established sinking
funds. The holders of its bonds have precisely
what the holders bonds OF other cities have, and
nothing more-the credit of the city itself as as
suranCe for the payment OF its debts. SO long as
by annual taxation interest and amortization in
staIments provided. nothing more is needed ex-
Cept that the amortization instruments should be
carefully impounded and preserved Strictly speak
ing. the City's stock should not he purchased
with such instalments: they should be invested IN
other securities. Although few cities of this coun-
try have established sinking funds. greater New
York amazing it seem. has seventeen diff
ferent sinking funds, These funds are for the irst
time enumerated in the charter.
The first and chief is the fund established in 1913
for the redemption of the old city debt, usually
called the redemption fund" To it have been
pledged many city revenues. and most of those not
81 pledged have been set aside in separate sink
Ing fund for the payment of interest the debt,
briefly styled the interest fund" Nothing
sharply contrasts the difference of former and pres
ent day financial theories than this interest fund"
Interest on city bonds Is usually raised by annual
taxation; yet city fathers considered it neces-
sary to pledge many profitable revenues for that
purpose instead of raising the interest by annual
tax In 1859 it discovered that the revenues
pledged the Interest fund" which included
water ferry, dock and slip rents accommodating
an unnecessarily large sum to meet interest, the
Legislature Of that year therefore directed the
for Tho Of and
future surplus of the interest fund" That
transfer has been taking place yearly from that
time. Last year about 100000 transferred
from the Interest fund TO the redemption fund"
FROM SINKING TO GENERAL FUND.
In 1852 owing To the growth of surplus revenues
of these sinking funds. the Legislature authorized
the transfer OF future surplus 10 the general fund
for the reduction OF taxation Into this general
fund all the Citys annual revenues would hnd their
way but for the existence of sinking funds. Obvl-
ously. the larger the amount to the credit Of the
general fund the smaller the 10 be raised by
taxation. Between 1862 and 1873 there diverted
from the sinking funds TO the general fund In all
about sl7.C0o0cO
The great increase Of city debt due 20 ring mis-
rule led a change of policy in 1873 Payments
from the sinking funds to the general fund were
stopped and contractual pledge enacted that
sinking fund revenues should not be diverted. But
il was found in 1906 by year 1929 when the
last OF the old city debt Will mature. the sinking
fund Accommodations would pay it twice over; hence
the city. with legislative approval, reverted in a
wav to the policy OF 1852. An artificial system OF
general fund bonds was devised these bonds to be
issued by the city the redemption fund as the
equivalent for its surplus revenues, which were
then paid from that fund 10 the general fund Be
tween 1893 and 1858 S55.O0000 was paid from the
redemption fund" into the general fund, thus re-
ducing taxation each year by an average OF about
81 O0OU In other words, II has cost 10 run the
city government 81 10000 year more than the
amount Of taxes raised. for these transfers have
blinded taxpayers to the actual expense OF
maintenance.
In 1885, the constitution was amended to prevent
city indebtedness in excess OF 10 per cent OF the
essed value of the real estate subject TO taxa
tion within territory. The Court of Appears
subsequently, held that New York City bonds held
In its sinking should be excluded in the com
mutation of the city's Indebtedness The cohstitu-
tional restraint did not prevent a city from eN-
ceeding this debt limit for purposes of water sup
ply If IT created a special sinking fund to redeem
its water bonds none Of which may run over
twenty years AMI. by an amendment made a Ie"
years ago water bonds issued by New York city
since January !. 1901, were not to be counted IN
ascertailing its bo-ro%.ng capacity.
SINKING FUNDS AT CONSULTATIONS
At consolidation New York City had three sinking
funds-the redemption fund the interest fuho
and water sinking fund. This last fund Is for the
rademption of water bonds. some OF which e.
those issued since January l. 1904 are not included
in the ascertainment of the debt limit. BrooNiyh'
as a separate city. had also sinking fund 10 secure
its general Indebtedness and separate water sink
ing secure its water debt and similar iuuS
existed in other communities amalgamated with
New York and Brooklyn. With the charter or 1871
two additional sinking funds came into oeihs-a
new sinking fund TO redeem bond issues of the new
city for other than water purposes. and new
water sinking fund secure payment of ITS water
bonds The creation Of the first of these funds was
a grave error Public credit is no longer secured
bv pledging specific revenues TO pay interest and
principal.
The commission of 1905 favors the abolition of all
sinking funds, which however may not be done
without breach of contractual pledges unless the
CITY debt entirely refunded. Great as the prob
lem of refunding would be, IT would be wise to at
tempt it and eliminate all sinking funds for the
future There many disadvantages III sinking
funds They confuse the public mind as to the
cit,s debt and the cost of its government, and the
complicated bookkeeping system which their ex-
stence necesstates adds to the Controllers staff
and the cost of his office Water sinking funds
might have to be continued, in view of the const
fution but the profitable revenues of the city
should never have been locked up in the new sink
ing fund for the city, which the charter COM
mission of 1897 created under the title of the sink
ing fund OF the city of New York" When in 1929
the last of old New Yorks bonds shall have been
retired, water rents, ferry rents and other
sources of city revenue pledged TO the in
terest fund" and the redemption fund will be
forced into this fund for the assumed protec
ton of creditors of the city. On December 81
1907 its funded debt S5l5 coo 600 and payments
into the new sinking fund for the debt service
amounted to s1s,OOoOOO. There will in time be an
overpethoric sinking fund for the new debt, just
as in 1903 there was for the old The Brooklyn and
Oueens sinking funds are so insignificant that ex-
cept their water sinking funds, they might all be