9. Validation.—Judge Dillon in his work on "Mu nicipal Corporations," has said: "In all or nearly all the cases in the Supreme Court of the United States, that tribunal has held that the municipal or local offi cers were constituted the judges to decide whether antecedent or preliminary steps or conditions had been complied with, and that their decision, stated or implied in the recital, was conclusive against the corporate maker when the bonds have found their way into the hands of innocent holders." The state courts have not been so generous.
The machinery of state government has been used to validate bonds in two ways. The first is by act of the legislature to remedy defects. In the absence of constitutional limitations the power of the legislature to enact such retroactive statutes is conceded. Such legislation, however, has not been uniformly upheld by the courts. The second means is by the registra tion of the bonds with some designated executive de partment of state. Such a system is employed in Kansas, Texas and Oklahoma. Where the register ing officer is under obligation to deny registration in case there are irregularities, holders in good faith are not bound to go behind such registration, unless the bonds show defects on their face.
10. Repayment.—Clauses are now frequently found in state constitutions providing that no indebt edness shall be incurred unless an annual tax suffi cient to pay the principal and interest is provided. Where such a restriction is found in conjunction with limits on taxation, the effect is to cut down the bor rowing power of municipalities.
The common method of providing for the tc2ay ment of principal is by means of annual levies. To retire an entire issue of bonds in this manner calls for the accumulation of a sinking fund. Such funds are not as a rule kept closely and scientifically in vested. They constitute a perpetual invitation to fraud and the misappropriation of funds. The mod ern substitute for the sinking fund is serial payment.
In the case of serial bonds the Investment Bankers' Association of America believes that payment should be made within forty years. In the first two years of the life of the bond there should be no payment of principal, but after that annual payments approxi mately equal in size should reduce the principal until at the end of thirty-eight years it is extinguished.
A frequent method is to make the payments on ac count of principal and interest the same each year. In this case, as times goes on, the part of this lump payment which is applied to the principal increases.
While a term of forty years is looked upon as a maximum, there are cases in which conditions indicate a much shorter term. Bonds payable in whole or part out of special assessments should mature within ten years, or in any event in a number of years not exceeding the probable period of the usefulness of any improvement on property for which such bonds were issued.
11. Obligation.—It is of the utmost importance for the investor to observe whether a bond is a general obligation of a municipality, so that the full taxing power is pledged, or whether the lien is upon a special fund only. Unless a bond expressly states that it is payable from a special fund, or cites a law which confers the power to issue for a special purpose only, it is a general obligation.
A large proportion of the defaults during recent years are special assessment bonds. These defaults
have been due to various causes. Among such causes are the organization of districts being found uncon stitutional, a finding that objects for which the bonds were issued were not public purposes, defects in the procedure connected with issue, failure to raise special funds or the misappropriation of these funds for other purposes, failure to provide for proper repair or maintenance of the productive property pledged, and the bonds outliving the improvements secured thru them.
An illUstration of special assessment bonds may be found in the City of Olympia, Washington, 6 per cent Water Works Gold Bonds of January 1, 1916. amounting to $110,000 due serially from January 1918 to January 1935. The circular of these bonds described the lien as follows: The yield of special assessment bonds is approx imately 1 per cent higher than that of general obliga tion bonds.
In contrast to the foregoing description of special assessment bonds, an example of bonds which are general obligations of the issuing municipalities is given below. This issue is the School District per cent bonds of Cleveland, Ohio, dated January 18, 1915, and due in 1927 and 1935. The informa tion concerning the lien contained in the circular was as follows: It is now considered to be better policy for a mu nicipality in issuing bonds for special improvements to pledge its general faith, even tho the cost is to be charged against the property benefited rather than to issue special assessment bonds. This has been made the policy of the State of Ohio which has a law reading: "To provide for any deficiency in the pay ment or collection of assessments as the same fall due, the council of the issuing municipal corpora tion shall, prior to the issuance of the bonds . . . provide for the levy of a tax upon all the taxable property of said corporation." 12. warrant is an order of any of ficer or body with authority to review a debt, upon a municipal treasurer directing him to pay a claim out of any funds lawfully available for the purpose. A city is charged with the obligation to raise the nec essary fund, but it is not estoppel from pleading fraud, want of consideration or ultra vices.
13. Defects and is rare that an issue of a series of municipal bonds is made without some defect connected with the proceedings. In the at tempt to prevent these defects from exerting a seri ous effect, it is customary to embody in the bonds certain curative recitals. Such recitals are that the proceedings are regular, that the indebtedness is binding, that the total indebtedness does not exceed legal limits, and that the city possesses the power to levy the authorized tax. A second bulwark of safety is the United States Supreme Court. This court, says Judge Dillon, "Has upheld the rights of the holders of municipal securities with a strong hand, and has set a face of flint against repudiation, even when made on grounds deemed valid by the state courts, as well as by the municipalities." In spite of these safeguards, and of remedial legislation and state registration, there are occasional defaults. The investor should add one more important safeguard. He should buy municipal bonds only of a thoroly equipped and reputable bond house, or of distributors securing their supply from such a source.