character which may be described as sinking fund debt, i.e., debt to be paid at maturity from the accumulations in funds established for the purpose. Of this amount $171,459,407.96 represented the indebtedness of 25 of the 33 cities payable from sinking funds and $8,189,228.76 represented the indebtedness of 60 of the 321 towns payable from sinking funds. Eight cities (Chicopee, Gloucester, North Adams, Pittsfield, Quincy, Salem, Somerville, and Woburn) have no sinking fund indebtedness, their outstanding fixed debt being all on the serial basis. Of the 261 towns having no sinking funds, 46 were without any funded or fixed debt, while the indebtedness of the remaining 215 was partly on a correct serial basis, partly represented by demand notes, and partly consisted of time loans issued without provision having been made for annual payments, or liabilities created by the use of trust funds without written evidence of the same having been given.

(b) Boston.

In a report of the Boston Finance Commission, dated January 30, 1909, the recommendation was made that the "dangers inherent in the (sinking fund) system seem to the Commission so great as to require the discontinuance of this system by the city and the borrowing of money in the future in such manner as will make the provision and accumulation of a sinking fund unnecessary. This can be accomplished by adopting the ordinary serial or annual payment form of bond. . . .' (Reports, II, pp. 164-165.)

In accordance with this recommendation the amended charter of the city of Boston (Chapter 486, Acts of 1909) provided (Section 26) that:

All loans made by the city after the passage of this act shall be made payable in annual installments in the manner authorized by section thirteen of chapter twenty-seven of the Revised Laws as amended by section one of chapter three hundred and forty-one of the acts of the year nineteen hundred and eight. No sinking fund shall be established for said loan. . . .

Since 1909 no sinking fund bonds except rapid transit bonds have been issued by the city of Boston.

(c) The Municipal Finance Act.

In 1912 the Legislature established a joint special (recess) committee on municipal finance, and from the report of this committee (House Document No. 1803, 1913) the following excerpt on the matter of municipal borrowing methods is taken:

The committee is firmly convinced that the serial payment method is preferable to sinking funds in that it is simpler, it does not involve the problems of administration or the complicated mathematical computations required in keeping an accurate accounting of sinking funds, and while perhaps during the first year or two of its operation it may entail heavier annual assessments, in the end it reduces the cost of the improvement for which the debt is incurred below that which would have to be paid under the sinking fund method.

The committee believes that the serial payment provisions of law should require specifically that payments should begin on the first anniversary of the issue of the notes or bonds.

On the recommendation of this recess committee the Municipal Finance Act of 1913 (Chapter 719, Acts of 1913, Section 14) provided that:

Cities and towns shall not issue any notes payable on demand, and they shall provide for the payment of all debts, except those incurred under the provisions of sections three, four and nine, by such annual payments as will extinguish the same at maturity, and so that the first of such annual payments on account of any loan shall be made not later than one year after the date of the bonds or notes issued therefor, and so that the amount of such annual payments in any year on account of such debts, so far as issued, shall not be less than the amount of principal payable in any subsequent year, and such annual amount, together with the interest on all debts, shall, without further vote, be assessed until the debt is extinguished.

The Legislature has thus prescribed a definite type of serial bond issues for all the municipalities of the Commonwealth.

VII. RELATIVE MERITS OF THE SINKING FUND AND SERIAL PLANS OF PUBLIC BORROWING.

(a) Economy.

It has not been demonstrated that either the sinking fund or the serial bond plan is the cheaper under all circumstances.

Given the same assumptions as to rates of interest and accumulation, the aggregate payments will be the same under either plan. If the sinking funds are assumed to accumulate at a rate greater than the rate of interest on the bonds, the advantage is with the sinking-fund system; but if the rate of accumulation in the sinking fund is assumed to be less than that paid for interest on the bonds, the serial system will cost less. The proper assumption to make is, of course, that the two rates are the same;

and on this hypothesis the aggregate cost to the community is exactly the same by either plan. A million dollar, three per cent, twenty-year loan, for instance, involves on the serial plan direct payments by the city, on account of principal and interest, of $1,315,000, while on the sinking fund plan the payments would amount to $1,334,426. This is not the whole story, however, for in the earlier period of the loan the payments on the sinking fund plan are less than on the serial plan, while in the later years the converse is the case, and the value (or aggregate interest) of the differences, compounded at three per cent, amounts to $31,461 on the sinking fund plan as against $12,035 on the serial plan - a difference of $19,426, which exactly offsets the difference between the direct payments by the city on the two plans.1

Under exactly similar assumptions the cost of the two plans should be the same. In actual practice, however, the conditions invariably favor the serial plan. It should be remembered in this connection that the sinking fund plan cannot make its proper showing unless the funds are promptly invested and continuously kept invested at a rate of interest at least as high as that paid on the bonds. This is a condition which in actual operation is almost never fulfilled. In the financial reports of New York City for the present week (ending May 19, 1917) the amount of sinking fund money uninvested is given as $9,561,349.60.

(b) Certainty.

It is claimed by the advocates of the serial bond plan that the exact annual cost of a loan issued under that arrangement can be determined at the outset for the entire period, whereas the contributions to the sinking fund must be calculated year by year. Until ten or fifteen years ago, the financial officers of the Commonwealth followed the practice of determining at the time of the original issue of the bonds the amount to be paid into the sinking fund each year. This amount was paid in annually regardless of whether the fund was by the accretion of interest accumulating faster or slower than was originally calculated. Nor was any heed paid under this plan to the fact that from time to time unexpended balances from appropriations were "covered into" the sinking fund. The result was that some funds, when the time came to pay off the bonds,

Nathan Matthews, Municipal Charters, pp. 62-63.

held more than enough while others held too little.1 The present practice is to compute anew each year the contribution which every sinking fund requires. Not until this computation is made can the exact burden for the year be ascertained, although the annual variations, to be sure, are not usually great. Not until the end of the term, therefore, can it be stated to a dollar just how much a loan under the sinking fund plan has actually cost the community.

In the municipal sinking funds of Massachusetts the Director of the Bureau of Statistics reported in 1913 that in fifty-two instances in forty different cities and towns the sinking funds were found to be deficient, the total deficiency being $1,794,391.58. On the other hand, forty-seven cities and towns had sinking funds showing a surplus, the total surplus being $2,855,192.37.2 It is apparent, therefore, that even annual computations do not insure exactness.

(c) Safety.

It is evident that under the sinking fund plan large amounts of money and securities are in the custody of a few officials. The total sinking funds of the Commonwealth (including those for the amortization of the metropolitan districts debt at maturity) amount to about $40,000,000. These funds have been carefully and efficiently administered in the past, yet the experience of other States and even of cities within the Commonwealth indicates that there are possibilities of mishap.

The reports of the Boston Finance Commission contain the following comments upon Boston's experience with sinking funds in the years preceding 1909:

In 1880 a defalcation occurred in the office of the City Treasurer, and to hide his stealings the then cashier had been shifting balances from the sinking funds to the regular treasury account and vice versa.

Since 1899 three local institutions, holding $347,985 of sinking funds money, have failed, and in each instance an officer of the failed bank was at the time a member of the Board of Sinking Fund Commissioners. While it is true that the depositors of these institutions were paid in full, yet the

1 By Chapter 3 of the Acts of 1912 (Section 5) the Treasurer and Receiver-General was authorized to apply a surplus in any sinking fund to any other sinking fund in which there should happen to be a deficiency.

2 Report of a Special Investigation relative to the Sinking Funds and Serial Loans of the Cities and Towns of the Commonwealth, House Doc. No. 2162 (1913), 17.

experience of the city in the future may not be so fortunate, and large losses may at any time be incurred.

Banks in which individual commissioners were interested have been favored in the matter of deposits, and have at times received amounts out of proportion to their strength and standing.

Some years ago the sum of $700,000 was loaned by the Sinking Fund Commission to a single corporation in which a member of the commission was a director.1

Experience in other States also shows that sinking fund moneys have sometimes been devoted to other purposes to meet temporary emergencies and have not been restored; that inadequate contributions have been made in some years under pressure of demands from other quarters; that losses have taken place through unwise investments; and that many sinking funds have not proved sufficient to provide for the repayment of their bonds at maturity.

(d) Distribution of Burden.

Under the sinking fund plan the aggregate amounts included in the tax levy for interest and payments into sinking fund are uniform each year throughout the term of the loan; in other words the burden of each loan upon the taxpayers is distributed uniformly over twenty, thirty or forty years, as the case may be. Under the serial plan it may be provided that the payments of principal shall be so adjusted that the aggregate payment each year for principal and interest shall be the same (see Chapter 341, Acts of 1908, and Chapter 486, Acts of 1909, Section 26). In that case the distribution of the burden is uniform as in the case of the sinking fund plan. Or it may be provided (see Chapter 133, Acts of 1882) that the annual payments of principal shall be equal, in which case (the interest payments growing gradually less each year) the burden is heaviest in the first year of the loan period and lightest in the last. Or, as a third alternative, some public authority may be empowered to determine at the outset what portion of the principal shall be repaid each year (see Chapter 226, Acts of 1903, and Chapter 3, Acts of 1912), in which case the burden may be distributed at discretion. All three methods, as has

1 Reports of the Boston Finance Commission, II, 162.