increased $225,000,000 and local governments $267,000,000.

In terms of 1913 dollars, Federal expenditures in 1924 were more than three times as high as in 1913; state expenditures about two and threefourths, and local governments a little less than twice as high.

Less than one-third (31.8 per cent) of the total expenditures were made by the Federal Government, (68.2 per cent) or over two-thirds were spent by local governments.

The greater part of expenditures above taxes collected is represented in borrowed money which must be paid back with interest, and therefore, establishing a fixed tax burden for this purpose until the debt is retired. Borrowing by honest governments which do not repudiate debts is merely postponed taxation, and eventually must be paid by the taxpayers.

TIME TO CALL A HALT

This increase in public expenditures cannot continue indefinitely. The people of the United States as a whole, and in particular citizens of the western states, are fast approaching the time when, through necessity, they must determine carefully how much of the income of the people may be taken for public expenditure, without lowering the individual standard of living.

Approximately one-sixth of the total annual income of the people of the United States is taken now for governmental expenditures. There is grave doubt if a much greater proportion may safely be taken without disturbing the very ideals which we call American. Already we are informed that the increase of population indicates that, at a not remote date, the pressure of popu lation will force down our scale of living, unless we can keep it up through greater efficiency in industrial production.

As far back as 1890 it was stated by the Bureau of the Census that the American Frontier in the United States had disappeared, and that there was virtually no more desirable free land to be had. Since that date there has been a remarkable increase in population and an industrial development unequalled anywhere in the history of the world. Through industry and the use of our natural resources, we have pressed forward. The increasing services demanded by the people of government have been provided. Our tax burden has grown in proportion and with acceleration since 1913.

The older state and local governments in the East made extensive capital outlays for public improvements while there was free land for expansion and exploitation, and an abundance of natural resources to draw from. The newer states and their political subdivisions in the West have much of their capital outlay for public improvements to make, and conditions of financing are much changed over what they were even fifty years ago. Although most of the government land open to entry lies in the western states, there is comparatively little valuable free land, and the natural resources, although abundant, are by no means untouched. In some of the western communities it is already more difficult to pay for public improvement than it was when local

natural resources, now practically exhausted, were being exploited.

It is the part of wisdom to be prepared and see how we can continue to provide the greatest measure of public service without increasing the tax burden out of proportion to benefits, and in particular we should prepare to provide those services which are most essential.

PUBLIC IMPROVEMENTS

Undoubtedly, the greatest single factor in the increased cost of government and one of the most difficult problems to solve is the financing of pub lic improvements. The aggregate costs of public improvements have steadily grown from year to year, until now they reach an appalling figure annually. No accurate analysis has been prepared and it is doubtful if such can be made for the annual expenditures for all public improve ments, because of the variety of methods used in financing, and overlapping with other functions of government.

The activity of the Federal Government in financing public improvements will not be included in this discussion and attention will be directed to municipal public improvements. Municipal is used in the largest sense and includes, states, counties, municipalities, schools, and other districts.

The three principal methods used for financing public improvements are from (1) funds derived from ordinary or special tax levies; (2) funds secured by some form of special assessment imposed on property of specified districts; (3) the proceeds from bonds which are either issued as a lien against specific classes of property, specific pieces of property, or the whole credit of a political unit. A fourth method of financing might be called from miscellaneous sources such as gifts, contributions, etc. This last method will not be discussed, as it cannot be considered a constant factor under political control.

The employment of tax funds for financing public improvement is in more general use than is commonly believed. Sometimes it takes the form of specific appropriation from the general fund. Other instances provide that certain special taxes shall be used for designated expenditure. An example of this form is the use of the gasoline tax for road construction. Many other examples might be quoted, but since this is so readily understood, no others seem necessary. Another plan of using tax money direct is to allot a certain proportion of the tax levy for public improvement.

These methods of using tax money direct for public improvements have decided advantages, in that the cost is reduced to a minimum in a payas-you-go method, overhead is reduced to a minimum, legal costs, collections, bond issue costs, assessment costs, and other miscellaneous costs are practically eliminated. There is, moreover, no possibility of a future liability of principal or interest or both falling due when there are slack times and the ordinary tax levy itself is difficult to meet. Interest, which is a considerable item, is entirely eliminated. There are examples where communities have been very successful with this method. It should be used only where the i

provement is for the general benefit of all who pay the taxes.

If properly budgeted over a long period of time, this method of financing public improvements eliminates practically all of the objections to the other methods which will be discussed.

There are objections to this method, in that not sufficient funds can be secured to execute projects. This is particularly true in new and rapidly growing communities such as we have in the West. The West is beginning, however, to outgrow its youth and become more fixed. San Francisco is celebrating now (1926) the one hundred and fiftieth anniversary of its founding. Los Angeles is preparing now to celebrate in 1931 the one hundred and fiftieth anniversary of her founding. It is also argued that the voter will not sanction improvements if he knows he will have to pay for them. This is true in practical politics, but a poor argument in economy, for the taxpayer pays the bill under all but the gift plan. Educate the voter to the most economical method by presentation of the facts. Do not deceive him merely on grounds of expediency.

There is a legitimate objection to paying for public improvements of long life out of current taxes, on the ground that present taxpayers pay all the bill and only get a fraction of use, and, therefore, the payment, in part at least, should be passed on to future enjoyers. This is a fair argument, but could likewise be applied to all of the present generation's contribution to the succeeding, and logical reason for the condition of dependency on the following generation of such a large proportion of persons over 60 years of age. This argument is used to extend payment for public improvements so far into the future as to make certain the extinction of the improvement before the payment is completed.

Each year sees additional public improvements of many kinds requested, and, if more of the present needs were paid for as we go, on a plan which would indicate the future needs, and all luxuries were eliminated, very soon an annual appropriation as large as would be required for interest and redemption would take care of the total necessary annual expenditures of this sort. An example may be cited in the case of the State of California, which in 1925 expended $4,150,480 in interest on bonds, and only $835,000 in redemption. It is evident that in the end more could be secured for the people if the payments had been reversed. In this event there would be available over the borrowing plan all the costs of borrowing including overhead, discounts, and interest. The interest alone on most public improvement bonds is larger than the principal.

Public improvements paid for from current taxes have been increasing in volume, but the amounts have not been segregated. An idea of the percentage expended for some of these general purposes may be ascertained from figures published by the Industrial Conference Board. These figures, however, include funds derived from bond issues.

In state expenditures, highway outlay is the largest, followed by that for education and eleemosynary establishments, with penal institutions third. For local governments education is first, debt charges of interest and retirement second,

and highway a close third. Out of a total of $6,497,000,000 expended by state and local gov ernments in 1913, some $1,848,000,000 or 28.4 per cent for education (including libraries); $1,330,000,000 or 20.5 per cent for highways; $1,072,000,000 or 16.5 per cent was expended for interest and retirement of public debt; while only 5.5 per cent was used to meet general overhead cost of government.

The use of special assessments levied on property of designated districts to finance public improvements such as streets, roads, paving, drainage, flood control, irrigation, water, light, schools. mosquito abatement and what not is general. The methods and specific acts may vary, but the principles are the same; therefore, I will draw my examples from conditions in California with which I am more familiar.

The procedure in these cases of special assess ment districts is carried out by forming an improvement district for the purpose intended under an appropriate act, either general or in some cases a specific act. California has had several acts for organizing improvement districts usually known by the year they were enacted, as 1911 Act, 1915 Act and recently the Mattoon Act has been brought into use. This new act, drawn entirely with the psychology of the public official trying to get an improvement through for those demanding it, has so few safeguards and limitations and gives so much power as to be a possible instrument of confiscation. Almost any thing may be done under this act. It has some meritorious features, but like other improvement district acts, its lack of limitations casts grave doubts as to its constitutionality.

Petition by voters in the affected district, by declarative ordinance by municipal officials or by vote where necessary are the methods used in forming a district. The details will not be presented because of the time limit.

The boundaries of the district are drawn and the costs of the improvement are estimated and then the costs are assessed against the property of the district. Under some acts only real estate bears the assessment, in other instances only land, and in other cases personal property is included. Objections may be raised to all these assessment cases, but the greatest objections may be given for including personal property where the improvement is of a permanent nature. If the assessment is high, this type of property moves out and leaves a larger tax burden on the remaining property.

A great danger in making assessments in these districts revolves around the attempt to have property "assessed according to benefit" derived from the improvement. This is a work which requires the most expert skill and then is never entirely satisfactory. Another problem is that of the area to be included in a district. That all the benefited area should help pay for the improvement, seems to be a general rule; but then. what of overlapping districts both as to benefit and assessments? A whole city may benefit from the opening of a street, but clearly adjoining property would generally benefit most. With this in mind some cities, Los Angeles, for one, contributes from a general fund and assists with such improvements as are for the benefit of all

the people. The problem of overlapping of assessments and benefits has not been satisfactorily solved.

Another great danger in this problem is that of having too great a burden either through too costly an improvement or one too expensive for the property in the district to bear. Sometimes this may be solved by enlarging the district, other times the only solution is to abandon the project as too expensive in the same way a private concern would do. Unfortunately, governments seldom do this.

After the assessments have been determined, bills are sent or notice given that assessments are due, and they must be paid within thirty days or they are declared delinquent and property may be sold for taxes. In such case penalty and legal fees fall on the property and must be paid by the taxpayer to clear up his property. The taxpayer can, if assessment is over a specified amount ($25.00) in one act, elect to pay by installments and bonds are issued accordingly, usually bearing 7 per cent interest. These bonds will be discussed under the following section on bonds.

Three objections to this method of financing public improvements appear at this point. One is the high interest rate on the installments to be considered under bonds.

The second arises from the fact that notices of special assessments frequently fail to reach the property owner, either by accident or design of those who may profit by tax sales, penalties, or legal fees connected therewith, and consequently the property owner has an annoyance and added burden. This could be remedied by making certain that notices reach the property owner or by placing all special assessments on the regular semi-annual tax bills.

The third objection which is the most serious arises from the fact that work done under public contract assessment is as much as 25 per cent greater than those financed by municipalities. This additional 25 per cent must come out of the pockets of the taxpayer. The system then is extravagant.

The San Francisco Bureau of Governmental Research in 1923 made a study of costs of the methods of financing and performing new street construction by the city pay plan and public contract by assessment. The result of this study covering a period of eight years proved conclusively that public contract prices, on the average, were nearly 25 per cent greater than those charged for city pay work. This analysis showed that contractors increase their bid price under public contract assessment projects by an allow ance in their bids for the anticipated percentage of property owners who will elect to pay by installments. These bonds must be sold by the contractor at a discount if he wishes money to operate with and it is found that most of them need the ready money.

This discount does not make up all the 25 per cent, for under the assessment public contract method, the owner has thirty days after the work is completed to decide upon cash or installment payments. The contractor must then have enough capital to carry the whole job and he must calculate interest on this, or he may secure the

capital by selling the special assessment roll at a discount to some investment house. This discount or the interest for the carrying capital must, of course, be added to the bid.

There is yet another reason for a part of the 25 per cent addition by the contractor and also the high interest rate of 7 per cent on the bonds issued. This comes from the inherent weaknesses in the Improvement District Acts in other states as well as in California under which special assessment districts are organized. These acts are such that the contractor, and especially the honest one, may possibly have all sorts of annoyance and grief with his contract-delays in payment, in acceptance, delays in proceedings, legal entaglements, delays in collections, injunctions, etc. And the laws are such that the municipal officials are not liable-they individually escape once the contract is let. The contractor and the investment house financing him must have, as it were, a margin for insurance against the contingencies listed above. Here again the taxpayer may reduce costs by remedying the apparent effects.

San Francisco, largely through the instrumentality of the Bureau of Governmental Research, adopted an amendment to her charter approved by the State Legislature, January 21, 1925, authorizing the establishment of a "Public Improvement Revolving Fund," so as to have cash to pay for improvements and save this 25 per cent excess of contracts for assessment districts over city pay contracts. This plan deserves the closest study by every member of this conference.

Mr. Joy Winans, Chairman of the Los Angeles City Committee of California Taxpayers' Association, has worked out a similar plan for Los Angeles, but with extensions which propose, in addition to doing all that the San Francisco plan does, also to reduce interest rates from 7 per cent to at least as low as 6 per cent on all special assessment street improvement bonds. Here is a method worthy of close observation by all taxpayers.

The third and last method of financing public improvements to be discussed is that of using the proceeds from bonds. These bonds may be issued as liens against specific pieces of property as in the case of special assessment district bonds referred to above, specific classes of property, or the whole credit of a political unit. This method of financing public improvement is the one most generally used and one which has been increasing at a tremendous rate in recent years. The growth may be realized from recent statistics on municipal bond sales in 1925 compiled and published by the COMMERCIAL AND FINANCIAL CHRONICLE in their STATE AND MUNICIPAL COMPENDIUM for June, 1926. These figures include all bonds of states, counties, municipalities, school and other districts and naturally include bonds which are not for improvements. By far the largest bulk of them, however, are for improvements. Only large issues which are of a permanent nature are included, so that the total figure would be greater if issues of $25,000 and less were included.

The grand aggregate value of all municipal (municipal used in largest sense as indicated before) bonds marketed for 1924 was $1,398,953,158, an increase of over 30 per cent over 1923, which

reliable. Serial bonds for 40 years bearing 5 per cent interest require a repayment of $2.021⁄2 in principal and interest for each dollar borrowed, and if they bear 6 per cent and are for 50 years $2.53 must be paid in interest and principal. These types of issues are common in the West and the taxpayer may assume that ordinarily when he votes for a bond issue bearing 5 per cent interest or over he will repay more than two dollars for every dollar voted.

Local governments cannot go on issuing bonds at the rate they have been. The end of prosperity with bankruptcy either of our governments or of our standard of living will result. What is the remedy?

First, the establishment of economy-mindedness on the part of the taxpayers and officials, so that extravagant and unwarranted improvements are not required. And to the end that greater use shall be made of the pay-as-you-go method on a plan of budgeting public improvements on a cash basis so far as practicable.

Second, the reduction of interest rates on all public bonds, such as assessment district bonds, by correcting defects in the laws and establishing responsibility, and the judicious use of the credit of county, municipal and town governments for financing such projects, thereby reducing costs of improvements as much as 25 per cent and interest rates from 7 per cent to as low as 4 per cent or 5 per cent.

Third, the reduction of interest rates on ordinary municipal bonds where the credit of a politi cal unit is pledged, by budgeting all public improvements over a period of years. The budget should be for not less than five years and preferably for ten or more years. This method will have the additional effect of stabilizing municipal bonds and keeping interest rates down, if not reducing them, of providing for those improvements FIRST WHICH ARE OF PRIMARY IMPORTANCE and will not permit tying up the bonding power by issuing bonds up to the legal limit in issues for projects of secondary impor

tance.

Most political units other than states have legal limits for bonding as well as the limit set by the New York law for securities legal for investment of savings banks. Likewise, most bond issuing political units due to the orgy of voting bonds in the past few years, are dangerously near the legal limit and many are over the New York limit. There are, however, many public improvements which should be carried out. One pressing need for all the West is more and better water. In Los Angeles, and in California at large, we have many projects of primary importance which have to wait for a completion until secondary items are out of the way. A condition of embarrassment results and the logical thing to do is to take a balance sheet of resources and budget all public improvements for a period of years, so that adequate financing of primary projects may be planned and the municipal credit not be endangered. Once a budget is drawn with provision for emergencies, then it should be strictly adhered to and only such improvements made as are properly budgeted.

For more than twenty years in the United States budget making has been pointed to as the only

logical way to conduct government. Today it is generally accepted as an annual necessity for cities and counties and yearly or biennially for states. Great savings have resulted from this plan.

This short time budgeting is not enough for public improvements. Already a growing number of cities have prepared long time budgets for improvements and are adjusting finances to carry them into effect. Detroit has one of the most comprehensive plans based on a ten-year budget. Kansas City, Toledo, St. Louis and many other cities have also prepared ten-year budgets for public improvements. Western communities have more public improvements to make than any other part of the United States. Los Angeles city alone has more projects planned than any other city in the world. If any part of the United States needs a long term budget for public improvements the West certainly does. If at any time in the history of the United States an orderly and businesslike method of financing public improvements is needed it is now when new municipal bond issues have reached $1,400,000,000 annually and the taxpayers' liability is such that a sane plan must be evolved before progress is halted and reaction causes the pendulum to swing to the other extreme. Taxpayers, promoters and officials should work together for the best interests of all in a situation which demands a solution other than the impending Socialism which approaches when you take more than one-sixth of the annual income of all the people for the expenses of government as is now being done.

The afternoon session closed with the address of C. C. Chapman of Portland on "How Excessive Taxation Deters Industrial and Agricultural Development," and state progress reports by Mr. Beatty for Wyoming, and George Spalding for Colorado. TUESDAY DINNER SESSION

Tuesday evening, a dinner was given to the Conference, sponsored by the Los Angeles Chamber of Commerce, at which Dr. Johnson presided. It was addressed by Frank F. Merriam and Hugh Pomeroy.

Mr. Merriam has for many years been speaker of the California House, and, after some minutes of humor, which was much enjoyed, described the practical details of getting bills through a legislative body.

Mr. Pomeroy, secretary and director of the Los Angeles County Regional Planning Commission, which has jurisdiction in the territory outside the large cities, was an entertaining speaker. His address will be published in a later issue of The Tax Digest.

NECESSITY OF BUDGETING AND
COLORADO RIVER DEVELOPMENT

On Wednesday, Joy A. Winans, chairman of the Los Angeles City Committee.