[27] Acts of Indiana, 1911, Chapter 231, Sections 17 and 19.
[28] Records of Indianapolis Park Commissioners.
CHAPTER III
THE DISTRIBUTION OF THE COST OF LAND ACQUIREMENT
Cities may pay for improvements as they go along, appropriating the funds out of the general tax levy, or they may make special issues of bonds from time to time, and draw upon the general tax levy gradually for the interest charges and the redemption of the bonds. The income applicable to improvements derived from the tax levy, both directly and through the sale of bonds payable out of the tax levy, is likely to prove inadequate in almost any city in the United States, since a limit to the borrowing ability of a city is usually fixed in the state constitution at from 2 per cent to 10 per cent of its assessed valuation, and the amount available from taxation is just as effectively limited by the inelasticity of the tax rate above a certain figure. The most obvious way out of the financial difficulty is to remove the limitation on borrowing power, and there are precedents for this in nearly every progressive city. It is in fact the usual thing when comprehensive plans are proposed involving considerable financing, for the legislature to allow a bond issue and provide that it shall not be reckoned in determining the amount of the municipal indebtedness.
DEVICES EQUIVALENT TO BORROWING OUTSIDE THE DEBT LIMIT
The city of Milwaukee employs a somewhat different expedient in stretching its borrowing ability. The constitution of the state of Wisconsin allows cities to incur indebtedness up to 5 per cent of their valuation,[29] provided that the bond issue is approved by the people at a special election. Counties are also given the right to become indebted up to 5 per cent of their valuation and no approval of the people is required. These provisions give Milwaukee the right practically to borrow money up to 10 per cent of its assessed valuation, since most of the county’s valuation is included within the city’s limits. Improvements are construed whenever possible to be county improvements in order to give the city a greater borrowing power and avoid the submission of the bond issue to the people.
But Milwaukee and other cities of Wisconsin have also worked out a method of purchase of land by contract, which amounts really to purchase on the instalment plan, as a further relief from the exigencies of the financial situation. The same practice is sanctioned by legislation in Minnesota and is employed at least in Minneapolis. This method is useful where a city is close up to its limit of indebtedness. The legislation of both states specifically provides that the contract shall not create a corporate liability or constitute a pledge of the general credit of the city. In construing this language the supreme court in both states has held that there is no obligation on the part of the city to meet unpaid instalments, since the city has merely an option to purchase, with the right of possession till default in payment.[30]
It was argued in Burnham vs. Milwaukee, 98 Wis. 128, that a land contract was merely a scheme to evade the constitutional limitation on municipal indebtedness, but the supreme court sustained the contract, holding that in spite of the weight and persuasiveness of the argument the legal meaning of the statute was definite and could not be twisted or enlarged. Its conclusion was, “that the unpaid instalments upon the park land contracts do not constitute a corporate indebtedness within the meaning of the constitution because the payment thereof is entirely optional on the part of the city.” To the same effect are Perrigo vs. Milwaukee, 92 Wis. 236; Milwaukee vs. Milwaukee County, 95 Wis. 424; and in Minnesota, Kelley vs. City of Minneapolis, 63 Minn. 125.
Cities often have opportunities to secure a tract of land at a low figure subject to immediate acceptance of the offer. The offer will not stand until a bond issue, which must be submitted to popular vote, has been secured, and the amount of such an issue might increase the indebtedness beyond the limit of the borrowing power. In such an emergency the cities of Wisconsin and Minnesota may enter into a contract with the owners of land, paying 5 per cent of the purchase price at the date of contract and the balance in annual instalments. A piece of land costing $100,000 may be paid for by an initial instalment of $5,000 and 19 annual instalments of $5,000 each. In providing for these payments, the city issues bonds each year, bearing 4 per cent interest, the issues being for twenty years, of which 5 per cent is redeemed each year. The amount of each bond issue is made up of the annual instalment of $5,000 and the interest on the balance of the purchase price at 4 per cent. The last bond in the issue will be redeemed forty years after the purchase of the land. Each year the amount required for sinking fund and interest charges on each annual bond comes out of the tax levy.
There are several advantages in the contract method of paying for land: First, the payment is distributed over forty years without the necessity of legislative sanction for a long term bond; second, desirable tracts of land may be purchased at any time during the year at an advantageous price and the city is not compelled to wait for the time-wasting formality incident to bond issues; third, the city’s borrowing power is in effect considerably extended.