LAW OF MUNICIPAL BONDS 1. Importance of correct procedure.—The ques tion of the legality of municipal bond issues is con sidered by bond houses to be sufficiently complex to warrant the employment of a consulting attorney who makes a specialty of that branch of domestic law. The subject is complicated because it involves the operation of the constitutions and statutes of fifty states and the charters and governing ordinances of over 7,000 municipalities. Great exactness is neces sary because valid procedure is something prescribed in detail, and it is definite and exacting in many points, so that an irregularity sufficient to impair or destroy the obligation may readily creep in. The object of this treatment is not to make an expert of the reader, but to give him sufficient insight into the work of an expert that he may know why it is wise to be guided by him.
A municipal bond is valid when it is issued as the result of the lawful and regular exercise of express or implied powers of the issuing municipality; when it is to finance a project which is a public purpose; when the method of local authorization conforms to law; when the form, number, term, recital and all the other important elements of the obligation are in agreement with existing statutes; when all accom panying requirements, such as that for the provision of a tax, to repay the debt, have been complied with ; when the signatures are bona fide and are those of the officers in power at the date of issue; and when such other concomitant acts as may be prescribed for the state government, such as the registration of the bonds, have been performed.
2. two matters of controlling im portance with reference to the legality of municipal bonds are the question of the power to issue, and the question of the effect of the representations contained in the bonds, when they come into the hands of bona fide purchasers for value. The holder of a corpora tion security must take notice of the organic law creating that corporation and the powers it grants. This law involves the state constitution, the statutes, the charter powers of the municipality and the im plied powers which may be recognized by the courts.
The investor cannot expect that the courts will rec ognize a municipality to be possessed of powers it did not have, in order to validate his security, or that legislatures will pass ex post facto laws with the same object in view. A defect in power to issue is there fore fatal.
3. tax can legally be authorized by a legislature or imposed by a municipality for any other than a public purpose. A bond issue for aiding in the construction of railways has generally been held to be legal, but the history of "aid" or "bonus" bonds is one of misfortune. Frontier communities have often been carried away by enthusiasm and have overloaded themselves with debt so that the way of escape has been by repudiation or compromise. Such bonds are not dealt in, therefore, by the best bond houses. In all cases, the issue of bonds for purposes of this sort is not an implied power, but one which must be expressly granted. It has been granted in Vermont, Nebraska, South Carolina and Minnesota. A number of states have passed acts expressly for bidding public aid of railroads or other private en terprises by the giving of bonuses, or the purchase of stock, or the loaning of public credit by guarantees. In recent years few railway aid bonds have been is sued. Some western communities, however, have is sued bonds to aid the beet sugar industry. The legal standing of these issues is precarious.
A state law may require a statement of the purpose of a bond issue to be incorporated in the instrument. If this is the case the purchaser is bound to take notice not only that the purpose is expressed but that it is lawful. The Massachusetts laws of 1913 and 1914 permit cities and towns to incur debt within the pre scribed debt limits for sewers, parks, school houses, municipal buildings, departmental equipment, bridges, sidewalks, the construction and paving of streets, walls or dikes for the protection of highways or property, cemeteries, and for the conserving of public health. Outside the debt limit bonds may be issued for tern porary loans in anticipation of revenue, for water works, gas works, and electric light plant, and for playgrounds.