Highways and Highway Transportation

by George R. Chatburn

The sinking-fund bonds are made out to run the full period and are paid for from the proceeds of the sinking-fund at the end of the term. Serial and annuity bonds are made to mature in proportion to the amounts paid each year. In the example used the serial system would retire $2000 worth of bonds each year, while with the annuity system $1800 would be retired at the end of the first year; $1900, the next; $2000, the third; $2100 the fourth, and $2200 the fifth.

Interest coupons, that is, notes for the payment of interest at stated intervals and providing for interest upon the interest if not paid at maturity, are usually attached to the bonds for the entire period that they run, one to be clipped at each interest pay day.

The Term of Bonds.

—Several states and some of the large cities have issued bonds for road improvements for long series of years. This has met considerable opposition on the ground that the bonds should not run longer than the life of the improvement, otherwise there may be another series of bonds lapping upon the first, and perhaps a second and third upon these. The arguments in favor of the long terms are that some parts, at least, of the improvement will be permanent, that reconstruction will cost less than original construction so that lapping will do little harm, and that money may be obtained at a lower rate on long-term than on short-term bonds.

It is a quite general practice for the abutting property-holders to pay for the first pavement by special assessment. Resurfacing is frequently and general repairs almost universally paid for by the city as a whole. It would seem, especially where property-holders pay on the installment plan, that a term of bond well within the life of the pavement ought to be adopted. Ten years seems a reasonable time, fifteen years at the longest. If borrowing is continued and one loan lapped upon another there comes a time when the charges for paying off the debt and the interest will more than equal the amount that can be borrowed. For instance suppose a man can continue to borrow $1000 per year on five years’ time, $200 to be paid each year. During the first year he would owe $1000, and at the end of the year he pays $200 on the principal and the interest. He borrows another $1000, so during the second year he is in debt $1800 and must pay at the end of the year $400 principal and $108 interest. The third year he is in debt $2400 and pays on principal $600 and interest $144. The fourth year his debt is $2800, and payment on principal $800 and the interest, $168. The fifth year and every year following the debt is $3000 and the payment necessary on principal $1000 and the interest $180. The payments on the principal amount is equal to exactly the sum he can borrow. While the amounts used in the illustration are small the principle is the same for loans upon long-term bonds.

It would be better for cities and states to progress more slowly than to have saddled upon them a debt in perpetuity. There are times, however, when municipalities or other districts will find it the best policy to borrow money and issue bonds. Serial and annuity bonds have this advantage that as the improvement depreciates in value with time the burden of indebtedness for the improvement becomes less. But it can scarcely be considered the part of wisdom to have the bonds run longer than the life of the pavement for which they were issued. The pay-as-you-go plan is by far the most economical method of procedure, but it cannot always be followed. There are times when budgetary appropriations are insufficient and the people will not stand for heavy taxation. In one city it had been the custom for the city by general taxation to pay for paving intersections. As the intersections amounted to about 30 per cent. of the total area paved that was thought to be an equitable division, because the entire city receives some benefit from each pavement put in. But the applications for paving were much more each year than the city could pay for from its ordinary budget. The amount of paving done each year was limited by the area of intersections that the city was able to lay. Some districts said, “We will pay for the whole pavement, intersections and all, rather than go without or wait over one or two years.” The city council allowed this to be done, and, soon, even went further and passed an ordinance taxing the whole cost including the intersections to the fronting property. This method has been in use for several years and the city of less than 70,000 inhabitants has more than 200 miles of pavement, and no citizen was ever known to protest the scheme. Of course the public as a whole could have paid for all these intersections by general taxation just as easily as the private property-holders could, but if taxes had been raised for that purpose there would have been many complaints that the poor were being taxed to pave the streets in front of the residences of the rich.

In fact, the last idea mentioned is one of the arguments in favor of large bond issues such as are found in several of the states like New York, Maryland, Illinois, California, Missouri and other states, to say nothing of cities and counties. The argument is that the entire state, county or city system should be constructed about the same time that all may have equal benefit of it and that there shall be no intentional partiality. Nelson P. Lewis states in the American Highway Engineers’ Handbook in effect that on a 4 per cent basis the $100,000,000 bonds of the state of New York will mean an annual tax of $4,890,000 for interest and sinking-fund charges, to say nothing of the annual maintenance and renewal expenses, running through two generations. He claims the same system of roads could have been built, at no greater annual appropriations, in twenty years’ time and the people would not have been saddled with debt, and it will require at least half that time to complete the system with the bonds and the debt.

In Illinois, on the other hand, the debt, some $60,000,000 is to be paid from the automobile licenses, which will be used for its amortization. In Maine automobile licenses are also being used to pay bonds, but only $500,000 will be issued in any one year and the total outstanding cannot by law exceed $2,000,000.

Maryland uses a short-term-bond—fifteen years—and provides that any road renewals required before that time shall be paid for out of general appropriations.

New York city had issued bonds until more than two-thirds of the total taxation for streets had to go to interest and amortization so some years ago a change was made to what they called the pay-as-you-go plan. It took four years to make the change, so, now, non-revenue-producing improvements are made without issuing bonds. Revenue-producing enterprises, such as water supply, transit lines, and water-front improvements, are still financed by long term, 50-year bonds.