CONSTITUTIONAL RESTRICTIONS ON

MUNICIPAL INDEBTEDNESS.

I. ORIGIN AND DEVELOPMENT.

The regulation of municipal indebtedness received little attention in the United States until the early seventies, when local debts commenced to pile up at a rapid rate. The total debt of Massachusetts cities and towns, for example, "increased from $34,826,860 in 1870 to $80,427,745 in 1874 a matter of 134 per cent, while the valuation . . . increased but 29 per cent and taxes but 31 per cent. . . . Cases were not infrequent when bonds were issued by districts in excess of the total assessed value of all the taxable property therein. The debt of one hundred and thirty of the largest cities in the United States in 1876 showed an increase of 200 per cent in ten years, while the annual taxation increase was 83 per cent, and the valuation of property 75 per cent in the same period."1

A large part of this heavy indebtedness was the result of investments by cities and towns in private enterprises-especially canals, railways and turnpikes. When a number of the enterprises failed and the burden was felt by the taxpayers, a reaction occurred. As early as 1851 the Constitution of Ohio specifically prohibited such subsidies, while Oregon and Pennsylvania in 1857 adopted constitutional amendments prohibiting municipalities from lending their credit to or becoming stockholders in private corporations.2 The constitutions of Maryland, Mississippi, Missouri, Nevada and North Carolina also imposed partial limitations of a similar nature during the period from 1865 to 1868.3 These earlier restrictions, however, were somewhat indefinite as to their applicability and it was not until

1 Horace Secrist, An Economic Analysis of the Constitutional Restrictions upon Public Indebtedness in the United States. Bulletin of the University of Wisconsin, No. 637. Madison, 1914, p. 56. 2 Constitution of Ohio, 1851, Art. VIII, Sect. 6; Constitution of Oregon, 1857, Art. XI, Sect. 9; Constitution of Pennsylvania, 1838, Amendments, Art. XI, Sect. 7, adopted in 1857.

Secrist, p. 59.

after the crisis of the seventies that the movement to curtail municipal debts became of much importance.

After 1870 the agitation for constitutional restrictions on the power of municipalities to incur indebtedness was given a great impetus, so that by 1880 the constitutions of eighteen States contained prohibitions against municipalities lending aid to or becoming stockholders in private corporations. A short while later provisions were inserted in constitutions limiting the total amount of debt which cities might incur for any purpose whatsoever, the length of bonds, methods of payment and so on. At the present time, therefore, constitutional restrictions on municipal indebtedness are very general, there being only a few State constitutions which do not either contain prohibitions against the lending of credit to private corporations or include limitations as to the maximum amount of debt that may be incurred by a municipality or both. Even in those States where the constitution is silent on the subject, it is oftentimes the practice of the Legislature to limit the amount and purpose of municipal indebtedness by statute. This is the method of regulation in Massachusetts and in such other States as Ohio, Michigan, Kansas, Rhode Island, and so on. In the following analysis, however, consideration is given only to constitutional provisions, with the exception of that part of the report dealing with the situation in Massachusetts.

The various constitutional restrictions on municipal indebtedness fall roughly into three general classes: (1) prohibitions against municipalities lending their credit to private enterprises; (2) limitations as to the total amount of debt that may be incurred by municipalities, and (3) regulations as to the length of bonds, methods of payment, etc.

II. PROHIBITIONS AGAINST THE LENDING OF CREDIT TO PRIVATE ENTERPRISE.

The most common constitutional restrictions upon municipal indebtedness are those prohibiting municipalities from lending their credit to private corporations. There are thirty States which prohibit such subsidies absolutely to all corporations: namely, Alabama, Arkansas, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Kentucky, Louisiana,

Michigan, Mississippi, Missouri, Montana, New Jersey, New York, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Dakota, Texas, Utah, Virginia, Washington, Wyoming. In the three States of Nebraska, North Carolina and Tennessee, municipalities are forbidden to pledge their credit to private corporations unless approved by the voters. In a few other States, of which Connecticut, Maryland, Minnesota, Nebraska and Nevada are examples, prohibitions of this nature are only partial in their application, as in Connecticut, for instance, where the only corporations to which a city or town may not lend its aid are railroads. Thus it is seen that the practice of forbidding cities and towns from incurring obligations in behalf of private corporations is almost universal, the only States without such constitutional limitations being Massachusetts, Indiana, Iowa, Kansas, Maine, Rhode Island, South Carolina, Vermont and Wisconsin.

III. LIMITATIONS AS TO TOTAL AMOUNT OF DEBT THAT MAY BE INCURRED BY CITIES AND TOWNS.

To-day the most important constitutional restrictions on municipal indebtedness are those which limit the total amount of debt that may be incurred by a city, town or other municipal corporation. There are twenty-eight States which impose such limitations, namely: Alabama, Arizona, Arkansas, California, Colorado, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Missouri, Montana, New Mexico, New York, North Dakota, Oklahoma, Pennsylvania, South Carolina, South Dakota, Utah, Virginia, Washington, West Virginia, Wisconsin and Wyoming.1

METHODS OF FIXING DEBT Limits.

The most common method of fixing municipal debt limits in the various States is to provide that the total amount of indebtedness shall not exceed a certain percentage of the assessed

The constitutional references are as follows: Alabama, XII, 225, 226; Arizona, IX, 8; Arkansas, XVI, 1; California, XI, 18; Colorado, XI, 8; Georgia, VII, Sect. VII, 1; Idaho, VIII, 3; Illinois, IX, 12; IV, 34; Indiana, XIII, 1; Iowa, XI, 3; Kentucky, 157, 158; Louisiana, Art. 281, Sect. 1; Maine, Amendments I, XIII; Missouri, IX, 19; X, 12; Montana, XIII, 6; New Mexico, IX, 12, 13, 15; New York, Art. 8, Sect. 10; North Dakota, XII, 183; Oklahoma, X, 26, 27, Schedule 25; Pennsylvania, IX, 8, 15; South Carolina, VIII, 7; X, 5; South Dakota, XIII, 4; Utah, XIV, 3, 4; Virginia, VIII, 127; Washington, VIII, 6; West Virginia, X, 8; Wisconsin, XI, 3; Wyoming, XVI, 3, 5.

valuation of all taxable property within the city or town. The amount of debt which may be incurred under this method varies from one and one-half per cent of the assessed valuation in Washington1 to ten per cent in Louisiana, the most common provision being five per cent.

The States of New York, Virginia, California and Idaho, however, use a somewhat different basis from that of the other commonwealths. In New York and Virginia the limit beyond which debt may not be created is fixed at ten and eighteen per cent respectively of the assessed valuation of real estate alone; while in California and Idaho the aggregate amount of debt of a city or town may not exceed the income and revenue of the municipality for the current year.3 Following is a table showing the basis of municipal debt limits in the several States:

1 Debt may be increased, however, from one and one-half per cent to five per cent of assessed valuation by referendum.

The Virginia Constitution provides, however, that the constitutional limit of eighteen per cent is not to apply to cities whose charters existing at the time of the adoption of the Constitution authorized a larger percentage of indebtedness.

This limit may be exceeded, however, in California and Idaho upon approval of two-thirds of the qualified electors.

• Actual debt limit is very low in Illinois, since property is assessed at only one-third of its true value.

Cities over 15,000, 10 per cent; cities of third and fourth class, five per cent; other cities, three per cent. Other municipalities, two per cent.

• Cities and towns of less than 40,000, five per cent; cities over 40,000, seven and one-half per

cent.

7 Does not apply to cities over 300,000.

3

Some of the States not only fix debt limits in their constitutions but provide also that the approval of the voters must be received before bonds of any considerable amount may be issued within the limits so established. The most common provision in this respect is that found in the constitutions of California, Idaho, Kentucky, Missouri, Oklahoma and Utah, which require a referendum on all debts contracted by a city within the constitutional debt limit if they exceed in any year the income and revenue of the municipality for that year. Under the Pennsylvania Constitution any new debt which exceeds two per cent of the assessed valuation must be submitted to the voters, while in Arkansas, South Carolina, West Virginia, Arizona, Colorado, Louisiana, and New Mexico the creation of any debt whatsoever must be referred to the voters regardless of its amount. In the three States last mentioned - Arizona, Colorado and Louisiana - taxpayers alone have a right to vote on bond issues, while in the other States the matter is presented to the regular voters. The vote necessary to legalize a loan varies from a mere majority to two-thirds of the qualified electors.

In these States, therefore, there is a double check upon municipal indebtedness, first by fixing a maximum beyond

1 Does not apply to cities whose charters at time of the adoption of the Constitution permitted larger indebtedness than eighteen per cent.

2 Debt limit in Washington, one and one-half per cent, unless approved by referendum, in which case it may be increased to five per cent.

Does not apply to cities over 300,000.

Does not apply to New Orleans.

In addition to the States above mentioned the Illinois Constitution requires a referendum on bonds issued by the city of Chicago.