Are We Tying Millstones Around Our Children’s Necks?

J. HERBERT HODGINS December 1 1924

Are We Tying Millstones Around Our Children’s Necks?

J. HERBERT HODGINS December 1 1924

Are We Tying Millstones Around Our Children’s Necks?



A PROFESSIONAL guide was conducting a group of tourists around Quebec city. "To your left," he cried, with a minimum of accuracy but a great show of bombast, "ramparts of the citadel; built by the Duke of Wellington at a cost of twenty-five million dollars!" I gasped, but immed iately concurred with my explosive seatmate's ex pressive, "picturesque but dashed useless to day." It will probably be ever thus. Most of our political expenditures will be serving no real purpose fifty or one hun dred years hence, because of the onrush of science. Is it not a reminder that ve should analyze our governmental ex penditures? Should we saddle our sons and their sons with a tax burdens for obsolete "utilities"? Take the city of Que bec, again, as an example. Thirty years hence the tax-paying men and wo men-many of them to day in their cradles-will be paying for pavement laid thirty years agowhen some of us were in our cradles-and which will not be paid for until 1953 - and then only provided sinking funds are maintained in the next twenty-nine years. Sixty years paying for

pavements! Could you conceive piling up interest charges upon the walk to your own front door for such a period?

Bonds, supposedly to pay for these pavements, were first issued in 1893; for thirty years the ratepayers paid the interest charges yearly until in 1923 the original debentures matured. It was found that the city had provided no sinking fund. In other words, not even the proverbial umbrella had been set aside for the rainy day. The result was the city was compelled to issue a refunding loan, to the amount of $1,872,000, of five per cent, thirty year bonds.

If we assume the same rate of interest, during the first period the same as that of second, the cost to the municipality or the Quebec tax payer would be practically four times what the pavement originally cost in cash. Added to this is the additional cost entailed in connection with the current works.

And the original public works now obsolete!

In April of last year the city of Montreal offered $16,000,000 of five per cent, bonds and of these $13,000,000 were for refunding purposes and were issued for a thirty year period.

Absurdity of Comparisons

“/"MTIES are fond of comparing tax rates,” commented ^ MacKenzie Williams, chairman of the committee on municipal administration and finance of the Bond Dealers’ Association of Canada, in discussing the insidious municipal neglect of sinking funds. “Institutions and buyers of bonds look critically at the tax rate. How ridiculous are the comparisons of tax rates between different municipalities when by practices, such as these, the current rates may be kept down only to be passed along in this way to future generations!”

When economically unsound methods of finance are practised by our oldest and metropolitan centres, what can be expected of the newer municipalities? Well, probably, just what has actually occurred.

First, look at the record of sinking fund shortages in the

In Ontario there have been situations which have caused caustic comment on the part, for instance, of Commissions of Inquiry. Take Guelph:

“The Inquiry Commission criticizes the agreement between the city and the Hydro as cumbrous and complicated. The city under the agreement receives no financial benefit and has handed over its railway for fifty years, subject to renewal in the hands of the Commission which controls the personnel of the management. Criticism is also made of the Special Act which allowed the sinking fund in connection with the bonds to be deferred for ten years and spread over a period of forty years from that date. As the bonds already issued, amounting to $300,000, fall due in 1931, a new issue for the full amount will have to be made. This deferring of the sinking fund and the long spread afterwards is

municipalities of the province of British Columbia. According to the report of Robert Baird, inspector of municipalities for 1923, nineteen cities and districts are short $3,562,904.91 in their aggregate of $20,817,647.70 sinking fund requirements. This compares with $5,633,713.26 at the end of 1922, which suggests a distinct financial recovery, but Inspector Baird is compelled to admit that “a considerable amount of this reduction is due to the process of refunding maturing debentures,” which nullifies the seemingly improved condition. The refunding operation immediately resumes the original debt with the attendant financial burden of fresh interest charges.

In the province of Saskatchewan, the combined sinking fund shortages of seven urban municipalities at the end of last fiscal year amounted to $281,348, chiefly accounted for by North Battleford’s deficit of $17,438 ?nd Swift Current’s $160,868.'

Similarly, there are important shortages in certain Alberta municipalities. The situation in Manitoba is not serious but in Quebec there are well-known heavy shortages.

hardly in accord with the principles of sound finance.”

Folly of Instalment Buying

EVERY now and then we hear of inexperienced newly-weds who go blithely forward into the uncertainties of domesticity, wholly unmindful of future responsibilities likely to menace their income due to the cumulative burden of instalment purchases. But even the most irresponsible, fortunately, are seldom rash enough to take on, even in their light-hearted mood, the purchase of a house, a car, furniture, a piano, a gramophone, pictures, decorations, clothes, a set of books, an encyclopedia and a radio, all at the same time, by the instalment method.

No! Individually none of us would deliberately pursue so extravagant a course.

Yet, municipally, are we not doing that very thing? To-day we are in the economically unsound position in our civic affairs of the confirmed instalment buyer. But lately emerged from a war, we have bought public buildings and schools, highways and pavements, grain elevators, telephones, railways, canals, waterworks, and sewers, gas and electric light plants, hydro, abattoirs. And other business ventures are contemplated, as for instance, Toronto’s proposed coal, bread and milk adventures.

We have bought so many things, all at the same time, upon the instalment plan, we find difficulty paying our bills.

No phase of Canadian municipal finance and administration appears more misunderstood—and yet no subject is of more vital interest to the taxpayer—than the repayment of municipal debts and the management of the funds with which such debts must eventually be repaid, the “sinking fund.”

When a municipality borrows money upon the sinking fund plan, it is for a definite period of, say, ten, fifteen or twenty years. The theory of the loan contract is that the municipality shall set aside a sinking fund with which to liquidate the loan at maturity. Moreover, this fund should increase, as the work for which the money was originally borrowed depreciates. Security holders should always have behind their bonds at least the same amount of specific assets.

Then there is the taxpayer’s side of the deal. The taxpayer is given to understand that when a twenty-year loan is issued he must pay such amounts in his yearly

tax bill that the interest

not only be paid

when due, but that the whole loan will be retired at the end of the twenty years. Interest payments and debt charges will then cease in this connection.

When a sinking fund is not accumulated, and the debt not promptly paid, grave injustice to all parties of the transaction develops. Of necessity refunding bonds are issued.

The buyer of refunding bonds should have behind his bond, in addition to the general security of the issuing municipality, specific security, such as pavements to the full value of the loan. If these pavements have ceased to exist he then has only the general security of the municipality which can now be reinforced only by an accumulating sinking fund—provided its accumulation is not, again, disregarded.

AN EMINENT financier says: “If the Bank of Montreal or the Canadian Pacific Railway had been mismanaged as the Dominion of Canada has been mismanaged, both would now be bankrupt.” What is the solution? Just this: when you are ill you call in an expert diagnostician. Well then, if our municipal plant is being mismanaged, why not call in a business doctor? “Municipal government will never be put upon a business-like basis, as long as the mayor and aldermen elected every year have anything to do with administration and finance. These functions should be controlled entirely by one experienced official — call him what you like, manager or commissioner.” This is the view of C. J. Yorath. Mr. Yorath should know: he pulled both Saskatoon and Edmonton out of impending financial chaos. H. C. Thompson, city treasurer of Winnipeg, concurs in this suggestion. “Some municipalities,” he stresses, “would be in better position to-day if some board or person in authority had controlled their capital expenditures.” “Central supervision is desirable for the purpose of giving advice, direction and assistance to governing bodies of municipal institutions,” is the opinion of C. M. Hamilton, Saskatchewan’s minister of municipal affairs. John Murphy, mayor of Halifax, N.S., approves of a centralized department, equipped to advise muni ipalities. “A department to act in an advisory capacity on financial questions, such as bond issues, sinking funds and local improvement problems, would prove most beneficial,” he says. No mystery lurks behind the idea. It is simply an insistence that our municipalities be administered as any prosperous business is administered. It means, in short, anything which ivill lighten the tax burden. muddled civics enough?

Taxpayer (shouting to Ottawa Taxation Conference)—I don’t want this burden shifted, I want it reduced. It is keeping me in a constant state of low spirits and hopelessness, it prevents progress, it is the cause of present business stagnation, it is driving people out of the country, and it is one of the direct causes of the continued high cost of living.

But look at the tax payer! Here, you and I, as home owners in the community, are concerned. First of all

concerned. Continued on page 55

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Are We TyingMillstones Around Our Children’s Necks?

the asset which existed during the first twenty years of the original bond issue has passed. So have many of those who paid taxes during those first two decades. You and I, to-day, are compelled to pay yearly interest and sinking funds for another twenty years—for something of which our forefathers had the entire benefit. Not only that, but, in the case of a pavement, you and I will be compelled to pay interest and sinking fund charges upon the replenished pavement.

That is exactly what happened in the city of Quebec.

That is exactly what has happened virtually in every Canadian community. Laxity of administration in building up sinking funds to meet maturing civic obligations is one of the most flagrant errors of our municipal bookkeeping.

Slip-Shod and Irregular

EVERY now and then your daily paper brings to mind the slip-shod—sometimes criminally irregular—practices in municipal administration throughout Canada. Take for instance a few of the headlines which have appeared in the newspapers, of recent months: /

1. “Concluding session of Hamilton scandal quiz sees official scored: inefficiency scored.”

2. “Too many mouldy spots in municipal affairs,” citing Ford, Ont., St. Boniface, Man., Cobourg, Ont., Oshawa,

3. “St. Boniface municipal officers charged with theft of $50,000.”

4. “Too many revelations look bad.”

5. “Township system much at fault in York matters.”

6. “Brooklands municipal official charged with theft.”

MacKenzie Williams told me he considered inexperience the undoing of municipal officers, and the reason for the financial condition of many embarrassed Canadian municipalities. “Municipal affairs,” he pointed out, “which were a few years ago relatively simple have become, with the advent of our utilities and the many new phases of activity of municipal life, more involved, complicated and intricate. It is really too much to expect a municipal official without extraordinary experience or training to be at once an accountant, more or less a manager of utilities, and a financial expert.”

Inexperience has begotten all sorts of illconceived notions about administering sinking funds. The other day the treasurer of an Ontario community decided in his own mind that it would be “good business” to take advantage of the existing premium for Victory bonds. He proposed to cash in, credit the sinking fund with the , profits and invest the proceeds in bonds of a financing corporation whose securities could be bought to return better than six per cent.

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He was actuated by an entirely honest impulse. He desired to “make money” for his municipality. But because of sheer ignorance of fundamental economics he overlooked that he was tying up sinking funds with an element of speculation— perhaps only the shade of speculation but speculation nevertheless.

Protecting Maturing Issues

THE war taught many civic fathers the inadvisability of investing sinking funds in bonds which mature at a later date than the bonds for which the sinking fund is created. To obtain higher yields it had been the practice, particularly in Western Canada, to invest somewhat indiscriminately. Bonds were purchased solely because of yield and with no thought of maturity dates. War broke out. Security values fluctuated wildly. Maturing issues had to be protected. A sinking fund had been established, it was true, but it was virtually useless when maturing issues had to be liquidated. Bonds in the sinking fund were of irregular maturities. They should have been of conforming or earlier maturity. To obtain funds the sinking fund securities had to be sold, on a declining market. The result is obvious.

Do not such situations demand alert government departments which can cooperate with our municipalities to indicate the best methods of municipal housekeeping—departments to which municipalities may refer as clearing houses for the best practice in municipal affairs?

Saskatchewan has more or less led the way toward an efficient era of municipal administration. Two years ago the University of Saskatchewan initiated short courses for rural municipal secretaries. Many municipalities have had independent investigations as to the administration of their affairs. Such surveys were made in the instance of Victoria, the Border Cities, Winnipeg and Point Grey, B.C. More public bodies, too, are taking an interest ín government.

Quebec and British Columbia, too, have measurably strengthened their municipal situation by means of a provincial department.

“The Province of Quebec is ahead of others in respect to a department of the provincial government acting as advisor to treasurers and municipal councils,” in the opinion of Joseph Daoust, president of the Montreal Chambers of Commerce. This department has been in existence for five years and “renders valuable assistance,” according to Mr. Daoust. One of the recent provisions of municipal administration in Quebec is that muni-

cipalities must deposit their sinking fund with the government. This should curtail refunding operations for future maturities.

Robert Baird, inspector of municipalities, states that the advice and assistance of the municipal department in British Columbia are always available to municipal officials and councils in any problem which may arise, including the management of sinking funds.

“We are anxious,” says Mr. Baird, “to be informed upon and to keep closely in touch with every municipal problem as it arises. Officials are equally desirous of obtaining independent advice and of ascertaining what course is followed under similar circumstances in other parts of the province. Various affairs of municipal policy are subject by statute to approval of the Lieutenant-Governor in councilor the inspector of municipalities, but apart from these matters, questions constantly present themselves upon which the provincial department can furnish advice which will be of real assistance.”

The experience of those provinces which are attempting business-like direction of municipal finance, and the opinions of representative men versed in community administration clearly indicates the trend toward sounder economic practice. Will it continue?

After all our cities, our towns, our villages must strike off a balance sheet, each year, just as any unit of our industrial life. What of the profit and loss statement?

It is vital that we maintain our national record for prompt payment of debts, keep expense of government down, and, accompanying these, secure at least a graduation, annually, of our accumulated tax burden.

In view, then, of the inquiring, critical, attitude of large investors—particularly as pertaining to Canada’s credit abroad— and in view of the fact that at the present time our provincial sinking funds, in addition to innumerable municipal sinking funds—fall considerably short of the actual, theoretical requirement of one-half of one per cent., sufficient to retire outstanding obligations at maturity, is it not urgent that our provinces give immediate consideration of municipal finance?

Canada is sufficiently grown-up to-day to need administration upon a thoroughly business-like policy.

Any community in the Dominion may be likened to an industrial corporation. To develop soundly, industry must be capably managed. To progress nationally and internationally, Canada’s municipal units require to be financed with a conservative mind, and thought always of the community’s as well as of the Dominion’s credit status among bankers and financiers.

Here’s Where Your Money Goes HAVE you any idea what becomes of the money you pay into your civic tax coffers ? The following table analyzes the distribution of tax funds in seventeen Canadian cities. From these figures, which are based on data compiled by the Citizens’ Research Institute of Canada, you will be able to determine the specific direction of every dollar of your tax contribution, upon the basis of every one hundred dollar tax bill. (Debt charges other than for education and local improvements are included under general government):

Improvements City— Gen’l. ProHighChariReCity’s Prop. Gross Govt. Educ’n tect’n. ways ties Health creat’n Share Own. Total Victoria .................. 14.04 19.91 9.54 11.21 4.79 9.52 1.28 15.61 14.10 100.00 Vancouver ................. 8.40 25.12 14.30 16.44 10.33 9.74 2.68 4.84 8.15 100.00 Edmonton ................ 19.14 33.83 10.86 5.13 6.38 4.61 1.20 10.34 8.61 100.00 Calgary .................. 19.66 33.00 6.24 10.01 8.09 2.10 11.34 2.85 6.71 100.00 Regina .................... 13.23 35.66 11.92 8.68 6.62 7.68 1.86 6.35 8.00 100.00 Saskatoon ................. 22.2» 41.28 11.86 5.51 2.73 5.68 1.38 3.45 5.91 100.00 Winnipeg................. 21.11 31.53 13.37 7.37 6.01 9.14 2.65 .92 9.00 100.00 Toronto ................... 9.64 32.92 17.17 5.63 6.05 12.37 4.58 4.88 6.76 100.00 Hamilton ................. 12.61 32.64 12.62 7.63 15.49 7.53 3.38 4.31 3.89 100.00 Ottawa .................... 10.45 32.09 12.67 12.62 9.86 8.11 2.65 4.08 7.67 100.00 London................... 12.29 36.22 11.05 4.63 10.98 9.28 2.07 4.45 9.03 100.00 Windsor .................. 9.42 37.48 13.78 12.26 1.87 1.87 2.76 6.47 1 4.09 1 00.00 Montreal .................. 33.38 30.01 17.69 9.32 3.13 6.18 1.29 ? ? 100.00 Quebec ................... 39.03 25.70 20.43 10.63 1.27 2.29 .65 ? ? 100.00 St John.............. 13.21 30.25 14.86 19.61 16.40 4.97 .83 .19 .19 100.00 Halifax ................... 23.29 31.63 20.13 8.96 6.22 8.34 1.43 ? ? 100.00 Charlottetown ............. 34.74 20.99 12.32 24.40 .56 6.64 1.35 ? ? 100.00