(4) Statutory or constitutional provisions frequently require that bonded debts shall be contracted only after a vote of the people reg istered in a special election upon the question. Such a referendum may be required for the creation of any debt, or of such debts as would be in excess of a specified amount, or of debts which are to run for more than a certain length of time. In some cases two-thirds or more of the voters must approve the proposed debt; in other instances only taxpayers or property owners are allowed to vote.
(5) Maximum period of years to constitute the life of the debt is often stipulated. These limits are frequently placed at from 20 to 30 years but in some cases the term will vary with the purpose for which the debt is incurred. By vote of the people, above mentioned, the length of the debt term may be extended in a few instances.
(6) One of the most common restrictions upon municipal indebtedness is that which com pels the city when incurring a debt to levy a direct tax annually during the life of the debt for the purpose of paying the interest and of accumulating a fund out of which to pay the principal at maturity. Such a fund is known as a sinking fund. This fund must not lie idle but must be profitably invested by the city.
These restrictions upon the power of Ameri can cities to borrow money have been of some use in preventing financial recklessness on the part of cities, but in general the policy of set ting up hard and fast restrictions of general application to all cities is unsatisfactory. There is an unfortunate lack of elasticity. Some cities cannot borrow as much as they need; others borrow more than they need. A debt limit based on assessed pr,operty values is an incen tive to raise the assessments unduly. There are no general legislative or constitutional restric tions upon the power of English, French or German cities to borrow. Instead municipal debts in those countries are supervised as to purpose, amount, interest-rate and methods of repayment by administrative authorities of the central government. This administrative con trol is exercised in England by the local gov ernment board, in France by the prefect, in Prussia by the provincial authorities. By this method the city's debts are adequately regulated but by a means elastic enough to meet the needs of the individual city.
Kinds of Municipal Municipal debts may be classified in several ways. A debt may be funded, in which case it is represented by interest-bearing bonds issued for a definite period, and with some definite provision for re payment at maturity, or it may be a floating debt, not secured by bonds, usually small in amount, and with no special scheme provided for its repayment. The latter comprises usually
the short-time obligations which the city incurs in special emergencies in connection with the current needs of administration. The floating debt is usually funded when it becomes large in amount. The bonds representing the funded debt of the city are usually negotiable and are sold in the financial market like the securities of private corporations. They usually bear re citals stating the authority under which they were issued and other facts tending to show their legality. If these recitals are false for the purpose of floating an illegal bond issue, the courts will refuse to allow the city to escape paying its just debts by setting up the falsity of its own statements. This is known as the doctrine of estoppel by recitals. The gross debt of the city is the sum total of all its funded and floating debts. The net debt is the amount of the gross less the amount of such sinking funds as have accumulated for the ultimate re payment of the funded debt.
Methods of city may fol low one of two policies in borrowing money. First, it may issue bonds, all of which mature at the same time, and which are to be paid out of a fund gradually created for the purpose. This plan has thus far been most often used. It has, however, several disadvan tages. It requires the setting aside of a cer tain part of the city's income each year and the investment of that money. Sometimes through miscalculations, carelessness or dishonesty the funds are not properly invested. Sometimes the annual stipend is not paid into the sinking fund as it should be. The second method of borrowing is by issuing serial bonds. These bonds mature at different times in such a way that a fixed proportion of the debt will fall due each year and must be retired. The advantage of this plan is that there is no necessity for a sinking fund with the problems it creates and there is no way for the city to escape its an nual payment short of absolute default of the bonds which annually mature. The weight of opinion now favors this plan.
Cooley, 'Handbook of the Law of Municipal Corporations' (Chap. 19, 1914) ; Dillon, 'Municipal Corporations' (Chap. 20, 5th ed., 1911) ; George, R. E.. 'Municipal Finance' (1916) ; Munro, 'Bibliography of Municipal Government' (pp. 413-416, 1915) ; Munro, 'The Principles and Methods of Munic ipal Administration' (1917) ; United States Bureau of Census, 'County and Municipal In debtedness, 1913, 1902 and 1890' (1915) ; United States Bureau of Census, 'Financial Statistics of Cities) (1915).
Associate in Political Science, University of Illinois.