Jasper County Democrat, Volume 19, Number 2, Rensselaer, Jasper County, 5 April 1916 — RETIRING ROAD BONDS [ARTICLE+ILLUSTRATION]

RETIRING ROAD BONDS

Life of Highway. Not Economic Term of Bond, Should Determine Length of Loan

(Prepared by the U S Department of Agriculture.

The proper method of retiring rural highway bonds is one of the serious problems which must be worked out by county commissioners and others intrusted with the expenditure of road funds. The three methods usually followed for meeting bonds at maturity are known as the sinking fund, annuity, and serial bond plans. Sinking Fund Bonds. The majority of highway bonds now outstanding have been—-issued as straight terminable bonds to be retired by sinking funds. The term of these bonds varies from TO to 40 years, with an average of nearly 25 years. The fund to retire them is accumulated by annual installments paid by the taxpayers, and is supposed to draw interest continuously and to accumulate a sufficient amount to discharge the debt at maturity. The interest which the sinking fund draws is usually from one to two per cent less than the interest paid for the loan. Five per cent highway bonds are common with the sinking fund calculated to draw three and one-half per cent interest. The following table shows the annual payments which, with interest at three, three and one-half and four per cent, compounded semi-annually, will amount to SI,OOO at the end of a term of years. Annual Payments. Years. 3 Pet. 3% Pet, 4 Pet. 5...... &55.3699 156.3872 184.4790 10..........87.1403 85.1208 83.1386 15 630780 51.7080 49.7928 20 37.1306 35.2499 33.4420 2a 27.3469 21.5096 23.8829 30 - 20.9128 19.2739 17.7113 There are many objections to the sinking-fund method of retiring highway bonds. It may not be possible to obtain continuously the required rate

of interest on the sinking fund to discharge the debt at maturity. The existence of the sinking fund is a constant temptation to municipal officers to use it for purposes other than the purpose originally intended. If a county, for example, issues bonds for a second object, it is easy to argue that the sinking fund already accumu- , lated may be used to purchase the new securities and the finances of the community are likely to become much confused. This is particularly true since the officers in charge of such operations are frequently changing. Sinking fund tax levies may be deferredthrough carelessness or under pressure of other needs. The sinking fund always requires careful attention, because it does not progress automatically in most cases. It has sometimes been entirely neglected. The. total cost to the community of a bond issue retired by a sinking fund will be considerably greater in the end j than the cost of the same bond issue made by either the annuity method or by the serial method. By the annuity method of Issuing bonds both the principal and interest are discharged by constant annual or semiannual payments. The amount of each payment or installment is determined by the term of the bond. It usually is necessary to subdivide the bond issue into individual bonds of SIOO, SSOO, or SI,OOO each. The resulting periodic payment of principal and interest must vary slightly because of this adjustment. Under the annuity plan the amount of principal retired

is small at first and constantly increases while the interest charge decreases. The sum of interest and principal remain constant, and this is an advantage as the tax is then uniform. Serial Bonds. The serial bond differs somewhat from the annuity bond, because, instead of keeping the annual payment of both principal and interest constant, the amount of principal that is retired each year alone remains fixed. This type of bond has become more common for highway purposes in recent years, and during 1912 and 1913 the number of serial issues exceeded tjie number of issues for any other single given term. The office of public roads received reports from theso two years for $15,300,819 in the serial highway bonds, which is over 20 per cent of the total county and district bonds for which the period or term of issue was reported. The first retirement of serial bonds is sometimes deferred for a number of years The continued success of highway bonds as a means of road improvement will depend largely on whether or not the county authorities follow theso principles of sound road financing: (a) A steady and well administered system of meeting interest and providing for the retirement of bonds on maturity, whether by means of a sinking fund, by the annuity method, or through serial payments. (b) The limiting of expenditures tor road sums which are warranted by the actual saving in cost of hauling that the road improvement will effect. In this item may also be considered increased tonnage which follows road improvement. (c) Expending bond moneys only on roads of such a character that, a

satisfactory share of this money may be regarded as a permanent improvement. This means that the bond issue should not be spread so thin over an exorbitant mileage that the improvement will be largely superficial and practically disappear in a .very short time. It means, also, that a large percentage of the bond issue should go into building a satisfactory and permanent foundation for the road which will call thereafter principally for resurfacing repairs, rather than" for frequent complete reconstruction. (d) Provision for proper maintenance and repair of a bond-built road throughout the life of the bonds, so that when bonds are retired the county will still have an actual and valuable property to show for its expenditure. (e) Limiting the term of bonds so that the life of the bond will not exceed the life of the improvement.

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