sinking funds. In these an amount has already been cumulated which, if invested, will produce an adequate annual increment for the payment of principal. It only remains for them to invest these funds fully and each year add the earnings and the principal for further investment. With respect to the highway bonds the same condition is present in two of the issues. Even if the old construction were continued, it would seem to be reasonable only with respect to highway bonds No. 3, No. 4 and No. 5, and the Palisades Park debt, the total of all of which is only $33,500,000 out of $185,500,000 outstanding.

An illustration of the operation of the present practice is afforded by considering in toto the two principal classes of debts now in force, viz., the canal debt and the highway debts.

At September 30, 1914, the bonded debts, the accumulation in sinking funds for their liquidation, the average term of the debt, and the average number of years yet to run (in totals and average) were as follows: Canal Debt

Average number of years yet to run..... 47.2 years

These figures show that in the case of the canal debt, a reserve of one-fourth of the amount of the debt has been accumulated, although less than one-sixteenth (3 years) of the total average term (48 years) of the debt has elapsed. At the same rate, the entire amount of all canal issues would be paid back by taxpayers in twelve years instead of their having the use of the money for fifty years, as originally planned.

In the case of the highway debt, it appears that over one-sixth of the debt has been reserved, although less than one-sixteenth of the term of the debt has elapsed.

Using the same figures, and figuring an investment return of only 3 per cent, we find that the actual requirements of the sinking fund for the canal debt of $101,000,660 at the end of the fiscal year 1913-1914 are, in round figures, but $3,400,000. There was, therefore, in the canal debt sinking fund at that date an excess of more than $22,000,000 over requirements.

By the same method we find that for the highway debt of $55,000,000 there is an excess in the sinking funds of over $7,000,000 at the end of the fiscal year 1913-1914.

The principal cause of the varying proportions in the different reserves created, lies in the rate of the fixed mill tax imposed or in setting up a pro rata which does not take into account returns on the investment of the sinking funds.

According as the fixed tax rate imposed by the law authorizing one debt is more or less erroneous than the rate imposed in the law authorizing another debt, so the reserves for each must vary. Other factors affect the result, but the chief cause is the direct tax rate imposed. It is obvious that sinking fund contributions which must be calculated on the basis of a tax rate to be stated in the law authorizing the incurrence of the debt could never be correct in application, unless the first application were made in the year the law is written, which would never occur. It is also true that while a "rate" may be fixed which will produce approximately the correct "actuarial" contribution required in the first year of the sinking fund, this rate will thereafter produce too much for the reason that the assessed valuation of property in the state increases from year to year. In canal debt sinking fund No. 4, the direct tax rate is 5/1000 of a mill per million of bonds on assessed valuation. In the year 1910-11, when the first contribution was made, this rate produced $49,108.10 per million bonds outstanding. In 1915-16 it will produce $57,903.36, yet the sinking fund requirements for accrual of principal and payment of interest on one million of bonds are exactly the same as they were in 1910-11 viz: interest $40,000, accrual of principal $8,865.50, total $48,865.50. The rate stipulated in this case produced an amount in the first year only one-half of one per cent. of more than the total required. On the present assessed valuation, however, it now produces an amount 14.4 per cent. in excess of the required amount, the assessed valuation having increased from $9,821,620,552 in 1910 to $11,580,672,572 in 1915.

The Rate as Fixed is Itself Excessive

The direct tax rate for sinking fund purposes as fixed in the laws authorizing bond issues is excessive in that no consideration is given to the fact that the payments to the sinking funds to meet the principal of the debt at maturity would if properly invested earn at least 3 per cent. per annum, which earnings would obviously reduce the amount to be raised by direct tax. The laws also generally require that all premiums earned on sales of bonds and also all accrued interest on deposits of proceeds of bond sales shall be credited to the sinking funds, the object seemingly being to make it impossible to have available for purposes for which the bond issue was made any amount above the exact principal of the bond issue. These requirements, viz: that premiums and interest on deposits must be credited to the sinking funds together with the fact that no allowance is made for the earnings of

lation in sinking funds in excess of requirements.

The accompanying statements show that on September 30, 1914, there was an excess over requirements of $29,500,000 in round figures, and that $14,685,000 of this amount was due to the enforcement of the constitutional and statutory requirements as to the direct tax to be imposed. The difference of $14,815,000 represents premiums, interest on deposits of bond sale, and the earnings of the funds themselves. It would be more in accordance with business methods if all premiums realized through bond issues and all interest on deposits of bond proceeds were devoted to the purposes for which the bonds were issued, subject, of course, to appropriations. All interest on bonds should be appropriated and paid from general funds as current expense of the period without any transfer to sinking funds. The present procedure requires (if the sinking fund contributions are raised by tax) that the direct tax imposed include the amount of sinking fund interest. The tax monies as collected are taken into the general fund, transferred by appropriation from general fund to sinking fund, and appropriated and paid from sinking fund. If unnecessary appropriations and transfers were eliminated, the sinking funds could then be reduced to handling but one factor, viz: the amount set aside through annual contributions from the general fund for the payment of the principal at maturity, which would be sufficient if invested at say 3 per cent.-to liquidate the debt at maturity.

Accumulations Excessive Notwithstanding Evasions

In some cases the constitutional and statutory requirements for the sinking funds have not been complied with strictly. It has been evident to those who have made the calculations of the yearly sinking fund contributions, that larger amounts were added to the funds than necessary and there has been a tendency to evade the law. In some cases an excuse has been found for omitting the contributions, and a precedent has thus been set. Such cases, however, are not numerous, for the legal requirements are so specific that there has always been considerable hesitation over any action or lack of action-so plainly an evasion of law. It is probably sufficient therefore to call attention to the fact that had every contribution been made exactly in compliance with the law the funds would show a still larger excess over actuarial requirements than is now the case.

Need for Adequate Sinking Fund Provision in Constitution

Section 4 of article VII of the constitution requires the legislature in a law authorizing the creation of a state debt to impose and provide for the collection of a direct annual tax sufficient to pay the interest on the debt as it falls due and also to pay and discharge the principal of the debt within fifty years. It is, however, impossible at the time of authorizing bonds to be issued from time to time to deter

matures and to amortize the principal by equal payments into a sinking fund. It seems, therefore, that the constitutional provisions regulating the creation of state debt should be amended so as to permit the adoption by the legislature of any of the following three courses, namely:

(1) The issue of bonds divided into a number of equal series of which one series shall mature in each calendar year after the year in which the issue of such bonds shall be approved at a general election. In this case no sinking fund would be required.

(2) The issue of bonds under a law providing that in each calendar year after the year in which bonds are issued under the law there shall be imposed and collected a direct tax sufficient to pay the interest as it accrues on the bonds and also to pay into a sinking fund the principal of the bonds in equal annual instalments, any interest on the investments of the sinking fund to be credited to and paid into the general funds of the state, and that it shall be the duty of the comptroller annually to determine and fix the rate of the direct tax required for this purpose.

(3) The issue of bonds under a law providing (1) that in each calendar year after the year in which any bonds are issued under such law there shall be imposed and collected a direct tax sufficient to pay into a sinking fund one of a series of equal annual instalments aggregating the principal of such bonds and the interest to accrue thereon to maturity, the first of such instalments to be paid in the calendar year after that in which such bonds are issued and the last instalment at the maturity of the bonds; (2) that for the purpose of estimating the amount of such equal annual instalments interest on investments made and to be made for the sinking fund shall be calculated at a rate to be specified in such law and shall be credited on account thereof; and (3) that it shall be the duty of the comptroller annually to determine and fix the rate of the direct tax required for the purpose aforesaid.

In considering these three methods of providing for the amortization of state debt it should be observed that although the simplest method may be the issue of serial bonds it is not certain that such bonds could always be issued on advantageous terms. Under the second method above outlined an equal charge would be laid upon the taxpayers annually for the amortization of the principal of the debt, but the charge for interest. would diminish. Under the third method the aggregate annual charge for principal and interest would be equal during the life of the bonds. the amount of this equal annual charge being ascertained by actuarial calculation.

APPENDIX A