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S T A T E A N D C I T Y SECTIO N OF TH E C o m m e r c ia l & f in a n c ia l ^ h r o n ic l e '. E n tered a c c o r d in g t o A c t o f C on gress in tlie y e a r 1907, b y Wil l ia m B . D a n a C o m p a n y , in O ffice o f L ib ra ria n o f C ongress, W a sh in g ton , D. O. Vol. 85. St a t e NEW a n d C it y YO RK , NOVEM BER 30 S e c t io n . The State and C ity Section , issued sem i-annually on the last S aturday o f M ay and N ovem ber, is furnished wit
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STATE AND CITY  SECTION OF THE C ommercial  & f inancial  ^ hronicle '. Entered according to Act of Congress in tlie year 1907, by W illiam  B. D ana  C ompany ,  in Office of Librarian of Congress, Washington, D. O.  Vol. 85. NEW YORK, NOVEMBER 30 1907 No. 2214. S tate   and  C ity  S ection . The State and City Section, issued semi-annually on the last Saturday of May and November, is furnished without extra charge  to every annual subscriber of the Commercial and Financial Chronicle.The Railway and Industrial Section, issued quarterly on the last Satur day of January, April, July and October, is also furnished without extra   charge  to every subscriber of the Chronicle.The Street Railway Section, issued three times a year, in February, June and October, is likewise furnished without extra charge  to every Chronicle subscriber.The Bank and Quotation Section, issued monthly, is also furnished without extra charge  to every subscriber of the Chronicle.Terms for the Chronicle, including the four Sections above named, are Ten Dollars per annum within the United States and Thirteen Dollars (which includes postage) in Europe, and Eleven Dol ars and Fifty Cents In Canada.File covers of the Chronicle are sold at 50 cents each; postage on the same is 18 cents. File covers for Sections can be had at same price.CHICAGO OFFICE—Pliny Bartlett, 513 Monadnock Block.LONDON OFFICE—Edwards & Smith, 1 Drapers' Gardens, E.C.WILLIAM B. DANA COMPANY, PublishersPine Street, corner of Pearl Street,Post Office Box, 958. New York.  ANOMALIES OF SAVINGS BANK LAW CON CERNING RAILROAD SECURITIES.  A most cursory examination of the savings bank laws of various States with regard to investments cannot fail to show the advisability of uniformity, by the adoption of the best features found in the laws of some of the States.' That railroad securities are barred from Colorado and permitted—under certain conditions—to enter New York, while Kansas in sists on not the slightest qualifying restriction, is a state of things provocative of injury to banks and to investors alike; for where they are so used by any State they are called “investment securities”,^ and mislead buyers of bonds and stocks so characterized.Ten States permit their savings banks to invest in railroad securities, provided certain stipulations are observed, but no two of these agree as to the condi tions under which such investment way. be made. Nine States have laws which prohibit entirely the acquisition by savings bank officials of railroad bonds or stocks. Throughout the remaining States railroad securities are admitted without restraint. Surely it is pertinent to inquire why mortgage bonds which are eligible in the States of New York or Massachusetts, Connecticut or New Jersey may not be considered equally desirable in Colorado, and, conversely, that if Massachusetts and New York require in many instances, a dividend record of at least four per centfor ten years, there must be great laxity in the laws of Maine and Missouri, where, with one exception (later to be noted), there are absolutely no dividend quali fications at all.Much has l^een accomplished in recent years to ward adding to the safety of deposits of savings insti tutions in various States. The New York legislation of 1905 is particularly admirable; Maine has this year added provisions which, if they admit additional securities, at least provide for the enforcement of certain restrictions; the State of Wisconsin has now savings bank statutes identical with those of New Jersey, and in Michigan, where formerly no railroad securities wrere admitted, they are now allowed under laws of a fairly stringent character. But much re mains yet \to  be done in order to deal wisely, safely, and at the same time progressively, with funds accu mulated mostly from the classes of moderate means. A short comparison of the statutes of the various States may be of use in order to arrive at some com prehension of the differences which at present exist. In Alabama, Arkansas, Georgia, Illinois, Kansas, Kentucky, Louisania, Maryland, South Dakota, Utah and Washington there are no prohibitive statutes. California and Pennsylvania limit investment in rail road securities to banks having a capital stock. North Carolina permits institutions organized under the Savings Bank Law of 1887. to invest in “the first mortgage bands of railroads which have paid interest for twro years previous.” Rhode Island leaves the investment of savings bank funds to the judgment of the trustees. In Colorado, Indiana, Iowa, Nebraska, Ohio, Tennessee, Virginia, West Virginia and Vermont railroad securities are not admitted. Interest there fore centres chiefly in the States of New York, Massa chusetts, Connecticut, New Jersey, New Hampshire, Maine, Michigan, Minnesota, Missouri, and Wisconsin, all of which, to a certain extent, admit such securities, under laws of varying character. Those enacted by the States of Massachusetts, New York and Connecti cut ensure the greatest measure of safety, and New Jersey also has for many years possessed statutes which adequately guard the interests of depositors. Restrictions enjoined on investment in railroad secur ities in New York State, particularly by the laws of 1905 require that these must be first mortgage bonds of a corporation owning at least 500 miles of road, or showing minimum gross earnings of $10,000,000 per annum, thereby eliminating the liability to adverse 6STATE AND CITY SECTION. f'VOL. LXXXV. circumstances which local conditions might impose upon the smaller road. The company must have paid for five years an amount equal to four per cent of its capital stock, which is required to be at least one-third the amount of all bonded indebtedness. One important provision is that gross earnings shall be not less than five times the amount of fixed charges. The older statutes require dividend payments of four per cent for five years in the case of corporations of New York State and ten years for all others, and the only weak joint in the armor is that of sub-divisions (d) and (e) which permit investment in two railroads of the State without question as to their financial standing.In Massachusetts the Fitchburg, Old Colony, Boston & Lowell (all subsidiary roads) and Boston Revere Beach & Lynn railroad companies gain admittance without challenge; and special leniency is shown to ward corporations of New England States. This, however, is a matter of little moment in view of the splendid record of the majority of such roads, and insistence that the security shall be a first mortgage of a road which has paid four per cent 09 all issues of capital stock for a period of ten years, and can show a due proportion of stock to bonded indebtedness, amply guards against any features of an undesirable character in the case of corporations of other States. Further, the exclusion—save in the New England States—of all companies but those which are specifi cally named, and in each case of the highest grade, is yet another guaranty of absolute safety.Connecticut, which ranks with New York and Massachusetts, shares with the latter State the pro visions limiting investment to bonds of railroads in corporated within certain States, and insists that security must be a first mortgage given by a railroad company which has paid interest on all of its funded . indebtedness and dividends of four per cent per annum for a period of five years. Also—in the case of sub division 10, dealing with specifically named roads— the share capital must equal or exceed one-third of the entire bonded indebtedness, but in all other clauses it is only required to be “one-third of the entire outstanding issue of said bonds/’ a wording which easily may be construed as applying only to such securities as at the time of purchase might be under consideration. A proposed revision of the statutes with reference to savings bank investments came before the Connecticut Legislature this year, but did not become law.New Jersey exacts that securities seeking admission to the banks of that State shall be first mortgage bonds, (by which is meant a mortgage which is entirely a prior lien),or refunding mortgage bonds “of an issue to retire entire funded debt.” The company must also have paid, regularly, dividends of not less than four per cent on entire capital stock for five years prior to investment.Michigan, Minnesota and Wisconsin also exact a dividend record of four per cent for five years and stipulate that securities shall be first mortgage or refunding mortgage bonds, Michigan adding the addi tional proviso as to proportion of bonded indebtedness, and, in common with Minnesota, permitting investment in first mortgage bonds guaranteed as to principal and interest by a company fulfilling the necessary requirements.. The laws of these States are simple,but of a fairly satisfactory nature, although it is easily conceivable that where the only restriction is failure to pay dividends, a savings bank might accumulate securities which, through passing of dividends by the issuing corporation, would subsequently cease to be legal, and could only be disposed of at a loss.The laws affecting savings banks in New Hampshire are less stringent. Under certain conditions stocks are legal, and only a three years’ dividend payment is necessary to secure the legality of bonds. Guaran teed bonds also are admitted. That the ratio of stocks to bonds must be 33 1-3 per cent is insisted upon, and further security is assured by a clause which states that, save in the case'of a company whose bonds are guaranteed, the issuing corporation shall be “in operation and possession of its own road.”The States of Maine and Missouri evince consider able laxity in their endeavors to safeguard the interest of savings bank depositors. Until this year the only Maine requirements were that the securities should be first mortgage bonds of completed roads in New England or certain other States, no question being raised as. to the financial conditions of the issuing corporation, and bonds and stocks of leased roads were legal if terms of lease were such as to guarantee payment of regular dividends and interest; but recent legislation has extended the field for investment to include bonds, stocks and notes of New England roads earning and paying dividends of five per cent on a capital stock equivalent to one-third of the bonded debt for a period of ten years. So loosely, however, is the new section worded, that at first sight it would appear to penalize the railroad corporations of New England by an insistence in their case upon dividend requirements which are not of obligation for companies whose articles of incorporation are filed in Kansas or Kentucky.Were brevity and simplicity the only considerations, Missouri would certainly be awarded the palm for successful legislation. The first mortgage bonds of a completed road located wholly of partly within the Western States “which has paid interest on its bonds for three years next preceding such investment,” such is the sole requirement. Yet this is in advance of sub-division (b) of Article 3 of the statutes of the State of Maine, which makes no mention even of in terest .Such, in brief, are the salient features of the laws affecting investment in railroad securities enacted by the several States, but so short an outline hardly serves to convey an accurate impression of their manifold incon sistencies. That guaranteed bonds of, say, a leased road of the New York New Haven & Hartford should be legal in New Hampshire and ruled out of New Jersey; that another leased corporation paying regular divi dends whose bonds are not so guaranteed should be ex cluded from New Hampshire and yet be eligible for many other States; that first mortgage bonds of a non-dividend-paying company may form a per fectly legal investment for Maine and Missouri, while thoroughly sound junior liens of a road which for years has rendered to its stockholders the satisfactory return of 10% are ineligible; that even in the more conserva tive States bonds of certain specifically named roads not at present in the dividend class are regarded as legal; that it is even possible in some instances to in clude bonds on which the interest is in default—is a Nov. 1907.] STATE AND CITY SECTION.7 condition of affairs inexplicable to the average intelli gence, and calling for some measure of recognition from the keener intellects which are the pride of our various senates and assemblies.That there must be considerable divergence in the laws of the several States is inevitable. It does not, however, need to be said that whatever makes for safety in the statutes of one State may with advantage be copied by another. Full discussion by bankers of the points at issue and joint meetings of officials of the States having such matters in charge would tend to encourage wise and beneficent legislation on the part of the various States, and be productive of a greater degree of safety in savings bank laws.The “man in the street” is being educated gradually to the desirability of “legal investments.” He is withdrawing his hard-earned savings for the purchase of such securities. Is he to invest his$500 or $1,000 in worthless bonds or stocks because he is assured by some irresponsible man—or by any one who may interpret literally some carelessly worded statute— that they are in truth a “legal investment” for banks of the State perhaps in which he resides? EXEMPTION OF CITY PROPERTY FROM TAXATION. Certain court decisions rendered this year and last year have extended very greatly the application of the constitutional provision in Kentucky under which property owned by a city and used for public purposes is exempt from State and county taxes. These deci sions have attracted the more attention because in reaching its present conclusions the Kentucky Court of Appeals was obliged to reverse its former rulings on the same point. The new ruling has been applied thus far in two separate cases. One was the case of the City of Frankfort, decided in June 1906, and which brought out the change of views referred to on the part of the Court of Appeals. The other was the case of the City of Louisville. This last came up the present year in June, and the lower courts very naturally felt bound by the ruling laid down in the City of Frankfort case. Additional interest has also been directed towards the Frankfort case by the fact that, though decided last year, a petition was made for a re-hearing by the State of Kentucky, and this petition was definitely overruled in May of the present year, shortly before the question of the exemption of certain property held by the City of Louisville came up for consideration..Section 170 of the Kentucky Constitution contains these words: “There shall be exempt from taxation public property used for public purposes.” In the Frankfort case the city owned certain bonds, the in come from which it had set aside to be used in paying the expense of lighting the streets. In deciding the question of exemption in favor of the city, it became necessary to overrule a long line of former decisions, holding water-works property owned by cities to .be liable for taxes, and this was expressly done. In the Louisville case the city was the owner of the stock and property of the Louisville Water Company, and the county court of Jefferson County held that under the City of Frankfort case the property of the Louisville Water Company was not liable for State and county taxes. Accordingly, Louisville is now relieved of the necessity of any longer paying State and county taxeson its waterworks and also on its wharf property. These State and county taxes against the’Louisville water-works have, according to the local papers, amounted annually to about$35,000, and those against the wharf property to several thousand dollars more.It seems desirable, therefore, to examine into the facts and principles of the Frankfort case. The specific question involved in that action was whether \$40,000 bonds of the Capital Gas & Electric Company, owned by the City of Frankfort, for the purpose of lighting the streets of the city, are public property used for public purposes within the meaning of the Constitution. The City of Frankfort owned a gas-plant, but deeming it to the best interest of the city to sell it, it did so, and in the sale acquired the bonds in question, the income from which is devoted solely to the purpose of paying the expenses of lighting the streets of the city. The bonds are non-negotiable and are to be held by the City of Frankfort for the purpose of carry ing out its contract, now held by the Capital Gas &  Electric Light Company. The conclusion of the Ken tucky Court of Appeals was that where non-negotiable bonds acquired by a city as a part of the consideration for the sale of a gas plant are held by the city solely for the purpose of devoting the income to paying the expenses of lighting the streets, they are used for public purposes within the meaning of the Constitu tion, and therefore exempt from taxation. As already stated, the previous decisions of the Court of Appeals were authority for a wholly different conclusion. The Court goes at length into an ex planation of the reasons for its change of views, and shows that the circumstances themselves have greatly changed since the earlier decisions supporting the con trary view, besides which the words in the Constitu tion are plain and seem to sustain the later construc tion. The Court says that the Legislature authorizes municipalities to levy and collect taxes for the purpose of building and maintaining water-works and lighting plants. They are acquired for public purposes and maintained for public purposes. They are paid for with money that arises from the levy and collection of taxes which can only be levied and collected for public purposes. Water is essential to the comfort, health and safety of the citizens of the municipalities. It is also essential to the safety and protection of the citizens of the municipalities that their streets should be lighted. Experience has taught that the streets of cities should be lighted, not only for the protection of the citizens, but the property as well. Therefore, the Legislature has recognized water-works and lighting plants as public necessities. The right of municipali ties to tax their inhabitants for the purpose of raising money to build and maintain these plants was not even questioned, and the Court has repeatedly recog nized that it can be done.'In the case of the City of Owensboro vs. Common wealth, the Court had under consideration Section 170 of the Kentucky Constitution, and held that a public park owned by the city was in the meaning of the Con stitution “property used for public purposes.” It also held that the property connected with the fire depart ment of the city, including engine house, fire engines, ladders, &c., was property held for public purposes and exempt from taxation. In another case it was also held that a provision in a city charter authorizing   8 STATE AND CITY SECTION [V  ol . lxxxv . taxation for the purpose of sprinkling the streets was constitutional, and that taxes thus collected were for publi purposes. In discussing the question in that case it was said that whatever is necessary for the preservation of the public health and safety is a public purpose within Section 171 of the Constitution. The words were:For the purpose of furnishing the citizens with pure water, water works may be established, and public wells dug and maintained; that the public highways may without peril be traveled at night, they may be lighted at the public expense; that the people may have convenient and wholesome places for resort, public parks may be established and kept. For the education of the young, public schools are conducted. For the support of the indigent aged, almshouses are provided. For the reformation of vicious young, re formatories are maintained. For the relief of the sick, hospitals are provided. For the protection of the public health, nuisances are abated, streets and sewers are flushed and cleaned. As a protection against con flagration, fire departments are established; and as a safeguard for life and property police departments are organized. It cannot be successfully denied that the dust upon the streets of large cities is a fruitful source of disease as well as of annoyance to the citizens. The same principle which authorizes the streets to be cleaned for the purpose of preventing noisome odors and epidemic of disease authorizes them to be sprinkled. . . . Whatever public service the mu nicipal corporation may itself perform, it may hire others to perform for it, if it appears that the latter method is the cheapest, and the best, unless there be some constitutional or statutory inhibition.It had been contended that a water-works plant is not public property in the meaning of the Constitu tion—rather that it is private property, and ought not to be exempt from taxation, because it sells water to the inhabitants of the municipality. But' the Court reasons that the city is authorized to acquire and own water-works plants, because water is needed for the purpose of flushing sewers of the city, and carrying off the material which would accumulate in the city and cause sickness and produce death. The Court argues that if a city can build sewers at public expense because they are a public necessity, it would seem that the ame necessity exists for acquiring water works for the purpose of making the sewers useful and accomplishing the purpose for which they are built. Likewise water is needed by the inhabitants of the town to carry away the effete matter from the various residences to thesewers in the street. The public is just as much inter ested in carrying such matter from the homes of the citizens as it is in carrying it through the sewers of the city after it reaches them. The same necessity rests upon the city to see that the inhabitants are sup plied with water for that purpose as it does to see that a sewer is constructed for the purpose of carrying the matter away after it has flowed into it. Above everything else it is the duty of the Commonwealth to look after the public health of the citizens. It has made the municipality its agent for that purpose. In some instances the State requires the cities to main tain boards of health at their own expense. If a small pox epidemic breaks out in a municipality the expenses are not paid by the State, but by the municipality, the agency which the State has selected to perform a public duty which it owes to the citizens.The view of the Court hence is that the water is not sold for private purpose but for public purposes. It is not sold to make a profit for the benefit of the city in its private capacity, but for public purposes. The municipality, by reason of its agency of the State government, is required to look after the health of its citizens, and it supplies water to them for compensation as the best means of accomplishing that purpose, and any excess of income over the expenses of maintaining the water works goes, not to the municipality in its private capacity, but to it in its public capacity, for the relief of the citizens of public burdens.The same course of reasoning is applied to the owner ship of a lighting plant. Such a plant is necessary for the safety of the citizens and their property, and there fore can be maintained at the expense of the citizens of the municipalities. Accordingly the city of Frank fort had the right to acquire the gas plant it sold and for which the bonds, the question of whose exemption from taxation was at issue, were given. The bonds are preserved for the purpose of aiding the city in doing that which it is authorized to do—in furnishing lights to the city. They are not held for any other purpose and they were created under a law that au thorizes the production of a fund which the city was empowered to create by levying and collecting taxes. The bonds being thus in the estimation of the Court held for public purposes, it follows that they are not subject to taxation for county and State purposes.

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