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National municipal review, Supplement 1, 1928

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Title:
National municipal review, Supplement 1, 1928
Series Title:
National municipal review
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National Municipal League
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Philadelphia, PA
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National Municipal League
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English

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serial ( sobekcm )

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Volume 1, Issue 1

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Auraria Library
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Auraria Library
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Copyright National Civic League. Permission granted to University of Colorado Denver to digitize and display this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.

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Full Text
STANDARDS OF FINANCIAL ADMINISTRATION
By
LENT D. UPSON
AND
C. E. RIGHTOR
Reprinted from Supplement to the National Municipal Review February, 1928. Vol. XVII, No. 2
PUBLISHED BY
NATIONAL MUNICIPAL LEAGUE 261 Broadway, New York, N. Y.


STANDARDS OF FINANCIAL ADMINISTRATION
By LENT- D. UPSON, Director and C. E. RIGHTOR, Chief Accountant Detroit Bureau of Governmental Reeeareh
The purpose of this chapter is to enumerate some of the more important and generally accepted qualities, both of organization and procedure, that characterize sound financial administration in an urban community. Public finance covers a wide scope of community endeavor, and obviously the criteria of correct practices must be expanded in minute detail if the numerous ramifications of the subject were to be explored to final conclusions. Such minuteness is impractical in any discussion intended for the use of the lay citizen, and this discussion, therefore, is limited to the general divisions of public finance,—particularly to budgeting public needs, financing current activities, financing permanent improvements, collection, custody and disbursement of funds, controlling financial transactions, and purchasing.
I. Budgeting Public Needs
Every unit of government, regardless of type or location, collects and disburses revenue for presumably public purposes. Usually some more or less regular process is followed in preparing the estimates of expenses and in having these estimates approved by a legislative body. These authorizations are commonly spoken of as the budget, and the process by which the estimated income is correlated with estimated expenses and the latter finally authorized is called the budget procedure. Whether this process of correlation and the resulting budget are good depends upon the amount of care that is given to the procedure.
As almost a first step in the direction of the more efficient expenditure of public funds (excepting, of course, civil service, which had been inaugurated many years previously) the public turned to the introduction of scientific budget measures,—that is, careful planning and control of public expenditures. High hopes, that havfe been largely justified by experience, were had for the results to come from the introduction of scientific procedure.
What is this procedure from which so much has been realized that it has been adopted by the national government, forty-seven of forty-eight states^ every large city, and many counties and smaller units of government? And what tests can be applied by the lay citizen to the appropriating procedure of his own community to determine to what extent it comports with modem practices?
1, The estimates of expenditures for the fiscal period must be submitted to the legislative body as a carefully prepared program in which the needs of each city activity are correlated with the needs of every other activity, i.e., the budget must comprehend a thoroughgoing work program.
Early budget requests were merely independent estimates submitted by public departments without regard to the needs of the other departments and of the city as a whole. The legislative body, having no intimate and continuous knowledge of all work done by the city, was scarcely in a position to weigh the merits of each request and correlate them into a well rounded
2


STANDARDS OF FINANCIAL ADMINISTRATION
3
program in which no activity was out of balance. In consequence heavy appropriations were given those departments that had the greatest oratorical or political influence, and less colorful departments, perhaps having even more pressing requirements, were neglected. For example, health and education might be well supported while street cleaning and rubbish removal were neglected, or vice versa.
Such inequalities can be eliminated only when the chief executive,—that is, the mayor, the city manager, or in some few cities the city commission,— having an intonate knowledge of detail, carefully weighs the needs of each public activity and presents to the legislative body—which represents the taxpayers—a program which is susceptible of a minimum of justifiable modification.
2. The estimated costs of this program should be balanced with available or expected income.
In financial matters a city is little different from a private citizen, and when either consistently permits outgo to exceed income serious difficulties are ahead.
S. Every principal activity conducted by a city should stand alone as an appropriation unit, and indicate the department conducting it.
It is not proper to give a department head a large sum of money to be expended according to his best judgment, for such judgment may not conform to that of the taxpayers who pay the bill. For example, take police. In addition to general administration, the activities include record keeping, criminal identification, foot patrol, traffic control, detection, etc. The superintendent of police may be best qualified to indicate the emphasis that shall be placed on each of these services; presumably the legislative body and the public will
follow his recommendations. However, so long as the theory prevails that the taxpayer is entitled to determine the purposes for which his money shall be spent, the budget should be so arranged that these purposes and the amounts appropriated for them are clearly indicated.
4. The estimates of both revenues and expenditures should be stated in terms that can be understood by both citizens
_and the legislative body.
It is not sufficient that a department should make a request for so much money to conduct a particular activity, —that would result in lump sum appropriations. Those concerned with appropriating public funds and paying the bills are entitled to know the basis of the estimates, i.e., how much is to be spent for personal services, contractual services, supplies, materials, equipment, etc. In turn, each of these principal classifications should be further subdivided as to number of men to be employed, with their salary or wage rate under the heading personal service, what type of contractual service it is proposed to engage, and what kind of supplies, materials or equipment is to be bought. In modem budget practice these classifications are uniform throughout all departments, with the result that the departments speak the same financial language when making requests and permit the responsible authorities to compare detailed budget requests with the expenditures of the previous year and with similar expenditures in other departments.
Such detailed request is not necessarily the unit of appropriation, but rather is used to support the larger unit of appropriation which is ordinarily the activity, except with respect to salaries and wages.
5. Within reason the budget through the appropriation ordinance should con-


4 NATIONAL MUNICIPAL
trol and appropriate all of the funds belonging to the city.
Cities have a practice imposed by charter and state law—sometimes with very little reason back of such legislation—of segregating their income into a number of funds, to be devoted to a specific purpose. For example, the revenues from taxation and miscellaneous sources are usually designated as the operating fund and sometimes divided into numerous minor funds, all. of which must be spent for current operation or minor permanent improvements, although there is nothing to prevent acquiring major permanent improvements also, and in fact such procedure is to be advocated in some instances. Money from the sale of long term securities is usually segregated for the specific purposes for which the bonds were issued. Money raised by special assessments for benefits assessed must be used to meet the cost of the specific benefits incurred. In addition, frequently there are trust funds, each kept separate, the income of which is to meet the future cost of pensions, gifts for specific purposes, etc. The maintenance of these more important funds is justifiable, but wherever feasible their income and expenditures should be included in the budget procedure and the appropriation ordinance to insure both being under proper control and in order that the budget may be a reasonably complete picture of the city’s operations.
6. There should be an ample time schedule for the budget procedure.
The estimates should be prepared several months prior to the beginning of the fiscal year, with adequate time for their review and correlation by the executive, and for consideration and adoption by the legislative body. All budget action should be completed before the beginning of the fiscal year. The executive might well have a
REVIEW SUPPLEMENT [February
permanent agency assisting in budget study.
7. Public hearings should be provided.
In addition to the executive and
legislative bodies affording a hearing to the department heads, the legislative body should provide for one or more public hearings upon the tentative budget, with ample advance notice to the public of the time and place of such hearings. A budget exhibit provided by a city deserves special credit, in judging of the adequacy of budget procedure.
8. The budget should contain adequate comparative and supplementary data.
Data relative to appropriations and expenditures for two or more preceding years are invaluable; also supplementary information relative to the city’s finances, by funds, etc. A summary should be prepared, and accompanying the transmittal of same by the executive to the legislative body might well be a budget message, concisely setting forth the major facts about the budget for the ensuing year.
Provision should be made also for transfers, contingencies, salary schedules, etc. The city should adopt an adequate appropriation ordinance.
9. After the budget has been enacted as an appropriation ordinance, procedure should be established to insure the funds being spent in accordance with the wishes of the appropriating authorities.
One of the principal weaknesses of present budget procedure is found in an absence of thorough-going control over expenditures. The principal step that can be taken in the direction of budget control is to insure that liabilities are not incurred unless properly authorized. This is a relatively simple procedure if cities will undertake it.
It is customary to provide that no order from a department and upon a vendor is valid unless it is approved by the city controller. The controller,


5
1928] STANDARDS OF FINANCIAL ADMINISTRATION
incident to such approval, charges the amount of the order against the appropriation of the department, correcting his books when the actual figure is obtained from the invoice. In the meantime this charge is called an encumbrance. These encumbrances deducted from the actual cash balance in the appropriation give the remaining amount that the department has still to spend. With this control, it is impossible for the department to run up bills in excess of appropriations.
It is equally important that the department does not spend all of its money the first few months of the fiscal year. To control this, a system of allotments is coming into use. Monthly or quarterly each department is required to deposit with the controller for his approval a program for expending the balance of the available appropriation. If the proposed expenditures exceed one-twelfth, or one-quarter, of the total, some explanation must be forthcoming.
There are numerous other elements that go to make up a sound budget procedure and which will eventually be incorporated in the budget procedure of the future. However, it is at present unfair to judge the budget procedure of a city government by improvements that have not yet been generally adopted.
Briefly, among such improvements is the desirability that the budget estimates present a complete picture of what is eventually hoped to be accomplished by any department with some indication as to how far that hope can be realized by the appropriation requested and granted. For example, the public health authorities have a fairly clear idea of the reasonable limits of public health work as measured in the possible reduction of the morbidity and mortality rates. To accomplish these ends, it may be estimated that
such a sum of money must be expended. When future health officers present their budget estimates to the chief executive, it may be expected that they will outline what a complete program would cost and what per cent of that program is being met by the appropriations they expect to secure. Thus an important administrative problem will be placed squarely before the public, who can say how much public health they wish to purchase.
Also public officers will submit estimates not only in terms of activities, but in units of work to be done and in unit costs of such work. Many public services are easily measurable in units of service. For example, it will be impossible for a superintendent of street cleaning to request such a sum of money for the hand brooming of streets. He will be compelled to estimate so many thousands of square yards of street to be hand broomed at a given unit cost, showing how the total compares with the units of work of the years previous and the unit cost compares with prior unit costs, and possibly even with such figures of other cities. The budget will then furnish a yardstick by which the effectiveness of a city government can be measured by the public.
Further, possibly inter-departmental services will be charged for. For example, every public water department is furnishing large quantities of water to school buildings, public offices, the fire department, and even to semipublic institutions free of cost. On the other hand, it enjoys a freedom from taxation that would be imposed upon a utility owned by private citizens. Efficient management and accurate costs will require that public utilities owned by the city be put upon a business basis, showing these charges and credits, and operating as nearly as possible like privately owned utilities.


6 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February
II. Financing Current Activities
In financing current activities, the city obtains its revenues from many sources,—taxes, licenses, fines, forfeits, subventions or grants from the state and other units, donations and gifts, pension assessments, sale of privileges, etc.
It would be impossible in the scope of this paper to discuss each of these sources of revenue and the criteria of its proper assessment and collection. This discussion is confined entirely to the methods of assessment of property taxes, which usually comprise from 60 per cent to 90 per cent of municipal revenue devoted to the purposes of current operation.
Also, it is necessary to confine the tests to the actual procedure by which taxes are levied, ignoring any question of the justice of the incidence of taxation. The chief elements of a modem assessing system have been set forth so thoroughly in the numerous assessing manuals that it will be sufficient to mention them only briefly.
1. There should he a single authority imposing the assessments for taxation purposes, having a long term of office and being as completely divorced from politics as possible.
The difficulty with the prevailing assessment organization as found in most cities is that the assessing authorities, usually a board of some sort, are closely connected with the political life of the community. The public so far has demanded the right either to elect its assessors or to have them appointed for such short terms that they are sub-jecttopoliticalinfluences. Assessments honestly and accurately arrived at can scarcely exist until the assessor fixing them is beholden to no influence for his job, except that which accrues through merit. It is suggested that the selection of the assessor might be left to the
merit system, the incumbent holding office as long as the character of the service warrants, or at least for a very long term.
2. Assessments should be made at (he true cash valve of both real and personal property.
Unless property is assessed at its full value as defined by state law or charter, there will always exist loop holes for under-' or over-assessment. Occasionally assessors make use of a percentage of the full cash value, but that percentage should be uniform over all parcels of property within the city. It is impossible to compare the relative equity of assessing unless such uniformity is enforced.
S. There should be separate assessments of land and improvements.
The relative equity of assessments can never be determined unless lands and buildings appear separately on the assessment rolls. When the two items are combined in one it is impossible to determine the unit foot value that has been placed upon the land, or the cubic or square foot value that has been placed upon the buildings. A procedure that does not -separate these items has not yet laid the groundwork of an effective and fair assessing system.
4. The district, block and lot system should be used for describing property for assessment purposes.
This method of describing property in its simplest form is not essential to equitable assessment, but is an aid to it. When the block and lot descriptions are used it is relatively easy for any enquirer to locate property in which he is interested and compare the assessment, and the intentional or unintentional omission of properties is made difficult.
5. Land value maps of the entire city should be prepared and published.
Land value maps are designed to


7
1928] STANDARDS OF FINANCIAL ADMINISTRATION
show the unit front foot value of the land frontages of every block in the city. The presence of such maps is the greatest assurance against unequal assessment. Any interested citizen can examine the maps on file in the assessor’s office and determine the unit foot values that were utilized in the assessment within a block. With very little calculation the total of any land assessment of any parcel of property can be determined and checked against the actual assessment as appearing on the assessment rolls, and be compared with any other property desired. The publication of such land value maps is always highly desirable, since it stimulates a widespread interest in the land values determined upon by the assessing authorities.
6. Tax maps are an absolute essential to a complete, assessing system. They should give ths exact dimensions of every parcel of property within the city on such scale as can be readily used.
These maps naturally serve as the fundamental basis of assessment and from them the assessors can check their assessment rolls to insure that every parcel of property is properly recorded.
7. Unit foot rules for measuring land values should be adopted and followed.
In every city many lots correspond to some standard depth, usually 100 or 120 feet. It is therefore customary for assessing authorities to determine upon a standard unit of measurement,—a single inside front foot for the prevailing depth. For the value of property that deviates from the established depth, a depth table is used. For example, let us assume that the assessors establish a 100-foot rule for downtown property, since most real estate is of that depth. Land near the street is of greater value than land at a distance from it and therefore a lot having less depth than 100 feet would be of greater
proportionate value than the actual depth related to 100 feet would indicate, and depths under or over 100 feet would be measured by a standard depth table. Many such rules have been established, but all of them are similar in character. Land value maps always indicate the front foot value at the middle of the block in terms of the adopted depth.
8. Additional rules covering corner influence, plottage, triangular and irregular shaped lots, alleys, and other minor variations in values should be determined upon.
The most important of these rules relates to comer influence. It is obvious that many parcels of property located at the junction of two streets are of greater value than property in the middle of the block, but this corner influence, as it is called, is always difficult to determine. If the matter is left to the opinion of the assessor formulated without some rule, one may be sure that values are not equitably determined and comparisons are made impossible. For that reason considerable thought has been given to corner influence rales for business property particularly.
Plottage rules are established to take into consideration the different utility of property because of peculiarities of size. For example, a piece of property located immediately adjacent to a railroad might be used for a coal yard. Its value for that purpose, however, would be greatly reduced if it were so narrow that it did not have adequate space for both storage and roadway.
Certain rules have also been worked out covering triangular and odd shaped parcels, alleys, etc.
9. There should be a standard classification of buildings with the establishment of unit factors of value for each class.
The valuation of buildings opens


8 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February
large avenues for favoritism and inequality because buildings in the same neighborhood may and will have large variation in cost, although land values may be more or less uniform. The greatest injustice may be done in fixing assessments, yet the aggrieved property owner find himself estopped from redress because of the large element of personal opinion that enters into a building valuation. However, these opportunities will be reduced to a minimum if buildings are classified into large groups according to character, and each such class further subdivided as necessary. For example, it would be relatively simple to throw certain types of residences into a half dozen or more classes. Downtown office buildings, factories, hotels, etc., are similarly susceptible to grouping. The cubic or square foot factor of each group can then be fixed and from it the assessed value of each building determined. There will, of course, be minor deviations from these established classifications and values, but they will be relatively unimportant as compared to the equity that is secured.
10. Rules of economic and structural depreciation should he adopted and used.
Structural depreciation is easily understood. It is the reduction in the value of property due to wear and tear, age, and physical decay not made good by maintenance. No matter how well a building is repaired and maintained, it eventually wears out and its value is lessened accordingly. The structural life of buildings has been fairly well established and the value reduced according to age tables.
Of more importance is the matter of economic depreciation, due to inadequacy, obsolescence, or supersession. Probably most buildings find their way to destruction from this cause rather than because of actual physical depreciation. Every large city has many
buildings that for the reasons enumerated are not suitable to the land upon which they are placed, and the income of which is not commensurate with the investment involved. Some reduction in assessment must be made because of this economic deterioration, but rules governing it are difficult of formulation and allowances are usually made in the good judgment of the assessors.
11. Cooperation should be had with property owners infixing the assessments.
Probably one of the most important steps the assessing officials can take in their duty of annual assessment of property is to obtain the cooperation of the owners in determining upon relative valuations. Such cooperation may be through real estate boards and dealers, and other citizen agencies.
12. In assessing personal property, a personal return should be required to be filed by each taxpayer.
Such return form should be sworn to by the taxpayer, and in event he refuses or fails to file same, the assessor should fix a satisfactory minimum valuation, subject to annual increases until protest is made.
13. Ample opportunity should be provided for a review of tentative assessments, and the hearing of complaints.
III. Financing Permanent Improvements
Permanent improvements are ordinarily financed through the issuance of bonds, or assessment for special benefits conferred. While special assessments may be paid in cash by the property benefited at the time the construction work is done, more frequently they are liquidated in installments, in which case bonds are issued and the proceeds used to pay the contractor. In consequence, it may be said that every city pays for its principal public improvements by the issuance of bonds. The rules governing the issuance of bonds


9
1928] STANDARDS OF FINANCIAL ADMINISTRATION
are more or less determined by common sense, and for that reason it is relatively easy to indicate certain fundamental tests that should govern in every instance in which a city incurs funded debt.
1. Except in unusual emergency, such as flood, fire, etc., debts should be incurred only for a -permanent improvement.
It is hardly necessary to expatiate on this axiom. A city is no more justified in issuing bonds for current expenses than is the private individual.
2. The term of the bonds should never exceed the life of the improvement for which they are issued.
It is reasonable to expect taxpayers to pay for improvements during the life of the benefits that they receive. In examining the outstanding bonded indebtedness of cities, it frequently develops that bonds are still unpaid covering schools, bridges, equipment, etc., that have long since been razed, abandoned, replaced, or junked.
S. If term bonds be issued, a sinking fund or reserve should he maintained for their retirement.
At least enough money should be deposited in the sinking fund annually so that such installments plus the annual earnings thereon will be sufficient to pay the bond at maturity. Unless such a fund be set up, one of two alternatives is presented,—either to pay the entire debt in one lump sum at maturity, or to refund the issue. The former method would put an undue load on one year’s debt charges, and in the case of a large bond issue be practically impossible, and the latter would effectually postpone payment probably past the life of the improvement.
4. In general, preference should be given to serial bonds over term bonds, except in large cities, where a study of the market should be made as to saleability of each type.
Many erroneous figures have been circulated with respect to the relative cost of serial and term bonds, always in favor of the former. In actual practice the cost of any bond is determined by the amount of the bond, the rate of interest, and the time elapsing before maturity. These elements all being considered, the cost is precisely the same on a serial and a term bond provided the sinking fund earn at the same rate of interest as the bond carries. Should the sinking fund earn at a higher rate, the term bond is actually cheaper; if at a smaller rate it is more expensive. This last statement is predicated on the assumption that the market at the time of the sale is as equally favorable for one type as for the other. Such equality does not always exist. In some markets one type may be sold at a lower rate of interest than the other type. In the case of large cities, consideration should be given to the favorableness of the market in determining the type of bond to be sold. Ho ever, in smaller communities preference should be given to serial bonds to obviate the necessity of maintaining a sinking fund with its attendant bookkeeping and investment of funds.
The term of a bond should not be too long, regardless of the type. In either the serial or sinking fund the difference in annual cost between bonds issued for a period of, say, fifty or sixty years, and those issued for, say, thirty or thirty-five years, is so small that there is no justification for assuming additional interest burdens over a period of years while decreasing annual payments by immaterial amounts.
5. The rate of interest should be fixed as close to the market as possible.
It is a generally accepted fact that the larger the premium paid on a bond the larger the base rate of interest which the city must pay. A bond selling, at say 105, must, according to


10 NATIONAL MUNICIPAL
authorities, carry a larger base rate of interest than a bond with the same security behind it selling at par. Sound policy suggests that the buyer should fix the rate.
6. Provision should be made for proper advertisement, sale and delivery of bonds.
In order to assure competition and the lowest rate of interest to the city, it is essential that wide publicity be given to each bond sale.
7. A public improvement program financed by bond issues, should be prepared for a considerable number of years in advance.
The value of budgeting current income and outgo has been discussed. In recent years, however, equal merit of budgeting public improvements has been brought to the fore.
Naturally, such improvement budgets must be longer than for one year, although they will need periodic revision. If a city insists upon picturing its requirements for public improvements for only a short period in advance, it must necessarily plunge into proposals that cannot be afforded with the result that its improvements are out of balance. Any city, with careful study, can determine the major projects that will be before it in the coming decade. Within reason the cost of these projects can be ascertained. Information is also to be had as to the possible increase in the assessed values of the community and the amount of bonds that may be issued and the current revenues that can be devoted to permanent improvements over that period. Under these circumstances, it is the better part of wisdom carefully to set up a list of these major projects with provision for their gradual financing.
8. Wherever and to whatever extent possible a city should proceed on a pay-as-you-go basis.
The purpose of bonds is to meet requirements for improvements that can-
REVIEW SUPPLEMENT [February
not be met from current revenues. However, there is no doubt that cities have overlooked the sensible use of this type of financing and have utilized the incurrence of debt as a means of securing improvements that could and should have been paid for by current revenue. Many public improvements in a city are of a recurring nature, such as schoolhouses, fire and police stations, street repairs, etc., which should be taxed for currently, leaving a future generation to meet new requirements as they come along and leaving the bond margin free to take care of emergencies and projects of unusual magnitude.
9. In assessing the cost of local improvements the procedure should be based upon definitely established principles that will insure uniformity and equality in spreading the assessment.
Should the city at large pay a certain percentage of the assessments on certain types of improvements,—as for example, municipalities often assume the cost of intersections in assessing street paving,—this ratio of amount paid by general taxation to the amount paid by special assessment should be maintained generally on all improvements of the same type. Further, prescribed rules should determine how special assessment districts are to be established, and all districts should be laid out in accordance with those principles. This would eliminate the size of districts fluctuating with the whims of the authorities responsible. Finally, in principle, the basis of assessment should be according to measurable benefit, rather than upon some ad valorem, square foot, or other arbitrary rule.
IV. Collection, Custody and Disbursement of Funds
Originally, the treasurer of any government was an important officer,


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1928] STANDARDS OF FINANCIAL ADMINISTRATION
since he was both a custodial and accounting officer. In modem governments it is customary to fill these positions separately. With the transfer of the control of public funds to the controller or auditor, the office of treasurer has become purely a custodial position and its importance has decreased accordingly. Today, the treasurer takes in and disburses the money as directed by the control authority, and his office becomes one largely of detailed routine in which defalcations can occur only by actually absconding with funds in his possession.
1. The first test of sound treasury procedure involves appointment rather than election as a means of fitting the office.
Sound arguments cannot be advanced for the election of a city treasurer. He determines no major policies, and as a purely administrative officer he should be selected for a long term by appointment and solely on the merit of conducting the technical routine of collecting, holding and disbursing funds.
2. The funds in the treasurer’s possession should be consolidated so far as consistent with practical administration.
In depositing public funds it is entirely proper that separate deposits be made of certain revenues that must be devoted to specific purposes,— particularly cash belonging to the sinking fund, proceeds of the sale of bonds, special assessment receipts, pension and other trust receipts, public utilities revenues, and general receipts. Many cities, however, go far beyond these elementary distinctions in depositing money and make segregations of actual cash in the bank when only a proper accounting control is required. In consequence, when cash is temporarily short in one fund, it is necessary to borrow money at interest although the city may have ample resources in
other funds, which is obviously a needless and expensive procedure.
3. Cash deposited in hanks should earn a maximum interest rate.
Larger cities so arrange their checking accounts and their deposit of funds that a substantial return is secured from interest. Such, however, is not always the case, and the failure to make the most of this opportunity of supplementing city revenues is a sound criterion of the inefficient conduct of the treasurer’s office. Periodically, depositaries should be selected upon the basis of the highest interest rates bid.
4. The collection of minor revenues should be properly controlled.
This is a very general test and one difficult of application by citizens examining the character of their government. No treasurer’s office is so organized that all public receipts can be paid directly to it. To attempt such consolidation would be to cause undue annoyance to citizens making payments to the city and would serve no practical purpose. Individual departments must continue to collect their revenues for general services, as utilities, and for the numerous small services that may be grouped under the head of departmental charges. Such revenues, however, should be carefully audited by the controlling authorities and assurance had that the receipts are transmitted promptly to the city treasury.
5. All taxes should he pre-billed, and mailed to the taxpayer.
No privately owned public utility would be permitted to treat the public with such indifference as attends the assessment and collection of taxes. Often a citizen is compelled to spend hours in line to secure his tax bill and spend a similar length of time in getting to another window to make payment, whereas if payment is not made with exceeding promptness heavy


NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February
12
penalties are imposed for a brief period, after which his property may be sold for cumulative charges. Progressive municipalities are remedying this situation by pre-billing all taxes and mailing the bills to the citizens in ample time to make the payment. Payment by check is ordinarily permitted. This procedure is not only a convenience and safeguard to the taxpayer, but speeds up collections and reduces the amount of delinquent taxes.
6. All taxes and other charges should be collected currently.
One of the acid tests of efficiency in collection is whether taxes are collected within a reasonable time after they are due. This test may be applied also to such charges as special assessments, permits, and other departmental charges. One reason for the strained financial condition of some cities is the failure to enforce prompt collection, particularly with respect to personal property taxes, and it is obvious that unless such collections are promptly and impartially made, political capital may be the reward for the treasurer at the expense of the long-suffering and honest but uninformed public. The greatest of ignorance usually prevails as to the actual collection of taxes levied.
7. The sale of ‘property for delinquent taxes should be made a judicial procedure, in which any surplus received over and above taxes and penalty reverts to the property owner.
The procedure governing the sale of property for delinquent taxes works hardship and injustice to the property owner in many j urisdictions. It is now a generally accepted principle that the delinquent taxpayer should never have to deal with other than the city government during the period available for redeeming his property. When this period has elapsed—which should be much longer than generally prevails,—
the property should be sold only in accordance with a judicial practice similar to that involved in the foreclosure of a mortgage, and the property owner should receive any surplus that remains after the delinquent taxes and imposed penalties have been deducted.
V. Controlling Financial Transactions
In present day government the controller is an important officer. His duties are twofold. First, is that of record keeping which involves the recording of all transactions affecting the municipality. The second is auditing, which involves the use of discretion in insuring a complete record of transactions and the honest and wise expenditure of this money. The first is purely administrative and requires no determination of policy, and as such the position may properly be filled by appointment. The second involves the determination of policy and a control over the acts of other elected and appointed officers. As such, it is entirely proper that the position should be filled by election, or by appointment independently of the officers to be controlled. For that reason, it is impractical to set up any standard of selection as a criterion of organization, such as was done with the office of city treas-„urer. The discussion of criteria will, therefore, be limited entirely to procedure.
1. Accounts should be centralized in the controller's office.
It is a first requisite of efficient accounting that it be maintained under a single jurisdiction. This means that all revenues, both major and minor, should be controlled by the controller’s office. It also means that appropriation ledgers will be maintained in the controller’s office rather than in the several city departments, so that a complete statement of the financial


13
1928] STANDARDS OF FINANCIAL ADMINISTRATION
condition of the city may be taken from the controller’s books without recourse to subsidiary records maintained in other places.
2. Municipal accounting should be maintained on an accrual basis.
Many municipalities concern themselves only with cash receipts and cash disbursements, and have little or no control of revenues that will become due in a fiscal period or of obligations incurred Which are not yet paid. The greatest forward step that has been made in municipal accounting has been the establishment of such control over revenues accrued but not yet collected and liabilities incurred but not yet paid that a complete statement of the city’s financial condition with respect to these items, as well as with respect to cash, can be presented.
Such control contemplates a complete, accurate and current record of the several general classes of financial transactions,—current, capital, special, trust, etc. This includes adequate records of general departments including quasi-independent boards, etc., utilities, bonded debt and debt margin, tax limits, special assessments, pension funds, etc. A corollary of such records is a report to the public setting forth this information in concise and understandable form.
3. Controlled inventories of the city’s supplies, materials, equipment and real estate should be maintained.
Most cities take an occasional inventory, sometimes annually, of all physical property owned. Such inventories are often included in the financial statement. However, these inventories can he currently maintained and controlled on the books of record so that the unwarranted loss of any property will be detected. Only with such records can a complete balance sheet of the city’s assets and liabilities be prepared.
4. Unit and job costs of city services should be available.
No American city at the present time reports to the public the unit cost of the numerous activities undertaken on behalf of the city. Until such records are available, it will be impossible to check accurately the character of government being rendered. It will be a stimulus to sound administration when the public can compare the amount and cost of work done in a community for any year with the year previous and with similar activities undertaken by other cities.
5. Payrolls should be under complete control.
Such control involves the checking of all payrolls by the civil service authorities to assure that persons being paid by the city are properly employed, and the periodic checking of labor payroll clerks who can assure that the persons employed are actually on the job.
6. All accounts of the city should be audited continuously or periodically by auditing authority independent of the controller’s office.
Sometimes such audits are made by state authorities, but more often through the employment of qualified private accountants.
7. Periodic reports to be made to the public to include a complete operating statement and balance sheet.
Only complete records can produce adequate reports, and the existence of a properly prepared operating statement and balance sheet is in itself a criterion of a sound accounting procedure, assuming that the items appearing on each are taken from books of record and not from memoranda documents.
8. An operation audit is fully as important as a cash audit.
A cash audit verifies expenditures as to their legal regularity and correctness of invoices as to additions, extensions, etc. An operation audit reviews ex-


14 NATIONAL MUNICIPAL
penditures as to the value to the community of the services performed.
VI. Centralized Purchasing
In many governmental jurisdictions each department is permitted to purchase supplies, material and equipment on its own initiative. While such procedure is highly satisfactory to such departments, since it allows wide discretion in the type of goods purchased and almost invariably results in expeditious purchasing, numerous abuses abound. Goods are purchased which are of a better quality than the proposed use justifies; goods are purchased from friends instead of in the open market; the prices paid more nearly approximate retail than wholesale prices; the benefits of quantity buying are lost; goods are purchased by trade name rather than under specifications that predetermine the quality; inspection is often poor, etc.
For these reasons and many others, many municipalities are taking a leaf out of the experience of private business and have centralized purchasing. The procedure of centralized purchasing is quite detailed, but some of the more outstanding features that may be used as criteria are as follows:
1. All 'purchasing, accept possibly highly technical and certain lands of raw materialsfor municipal industries, should be centralized in a single authority, appointed upon merit and preferably under civil service.
This would assure the benefits of central purchasing for all departments of the city government.
2. Purchases should be made in accordance with standard specifications, both as to use and quality.
Honest purchasing cannot be made unless every vendor knows exactly the quality of goods on which he is submitting bids. On the other hand, the city cannot be sure that it is obtaining
REVIEW SUPPLEMENT [February
its full value for the price paid unless it understands specifically the qualities of the goods it is buying. Specification for use is less well understood. It simply means that the goods shall be most suitable for the purposes for which they are required.
The specifications themselves should, of course, be open so as to permit competition from all manufacturers.
S. All purchases should be in as large quantities as consistent with economical use.
Only in this manner can the advantages of wholesale prices and the interest of a large number of vendors be secured. These advantages can best be secured when the purchasing agent calculates well in advance the total quantities of important articles to be bought by the city and enters into a purchase agreement for such goods, and by collecting the orders of the departments for minor goods and buying them not oftener than once a week for each type of supply involved.
4. The inspection of goods purchased must be thorough.
This usually involves the maintenance of a corps of inspectors by the purchasing department to cover large items and the deputization of certain individuals in the departments to check minor items delivered directly from the vendors. Incidentally, facilities should be provided for the scientific testing of goods to insure their compliance with specifications.
5. The usual legal provision permitting purchases in small amounts without competition should not be abused.
6. The amounts of all orders should be immediately entered upon the appropriation ledgers of the finance department as an encumbrance against the proper appropriation, and should be paid promptly when the invoice is finally presented.
The former assures sound financial control by the city; the latter assures a


15
STANDARDS OF FINANCIAL ADMINISTRATION
1928]
maximum of economy through the city taking all available discounts, as well as more favorable bids by vendors who are assured of prompt payment.
7. A central house storeroom should be provided for the distribution and storage of minor articles in current use by departments, and all storage yards of every type should be under the purchasing authority in order that the quantity distribution of supplies may be made in an economical manner,
The need for a storeroom for articles in current use is obvious. Many small articles are requisitioned in small quan-
tities by departments and it is advantageous to have them on hand for immediate distribution. Also in this way larger quantities can be purchased at reduced prices. The question of the control of storage yards is still a subject of discussion. At the present time in most cities each important department maintains a storage yard in which the usual construction materials will be found. The centralization of these yards under one authority would permit a reduction in inventory and also provide for shorter hauls on materials.


Full Text

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BY LENT D. UPSON C. E. RIGHTOR AND Reprinted from Supplement to the NATIONAL MUNICIPAL REVIEW February, 1928. Vol. XVII, No. 2 PUBLISHED BY NATIONAL MUNICIPAL LEAGUE 261 Broadway, New York, N. Y.

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STANDARDS OF FINANCIAL ADMINISTRATION By LENT.D. UPSON, Erector md C. E. BIGHTOB. Chi+$ Aaaounhrrt Ddroir Bureau of &asrnmentd had THE purpose of this chapter is to enumerate some of the more important and generally accepted qualities, both of organization and procedure, that characterize sound financial administration in an urban community. Public finance covers a wide scope of community endeavor, and obviously the criteria of correct practices must be expanded in minute detail if the numerous ramifications of the subject were to be explored to final conclusions. Such minuteness is impractical in any discussion intended for the use of the lay citizen, and this discussion, therefore, is limited to the general divisions of public finance,-particularly to budgeting public needs, financing current activities, financing permanent improvements, collection, custody and disbursement of funds, controlling financial transactions, and purchasing. I. BUDGETING PUBLIC NEEDS Every unit of government, regardless of type or location, collects and disburses revenue for presumably public purposes. Usually some more or less regular process is followed in preparing the estimates of expenses and in having these estimates approved by a legislative body. . These authorizations are commonly spoken of as the budget, and the process by which the estimated income is correlated with estimated expenses and the latter finally authorized is called the budget procedure. Whether this process of correlation and the resulting budget are good depends upon the amount of care that is given to the procedure. As almost a first step in the direction of the more efficient expenditure of public funds (excepting, of course, rated many years previously) the public turned to the introduction of scientifk budget measures,-that is, carefuJ planning and control of public expenditures. High hopes, that, hav6 been largely justified by experience, were had for the results to come from the introduction of scientific procedure. What is this procedure from which so much has been realized that it has been adopted by the national government, forty-seven of forty-eight states; every large city, and many counties and smaller units of government? And what tests can be applied by the lay citizen to the appropriating procedure of his own community to determine to what. extent it comports with modem practices? 1, he estimates of e&enditurcw jm thefiscal period must be submitfecE to the legidative body a~ a carefully prepared program in which the nee& of each city activity are correlated with the ne& of euey other adiwity, i.e., the budget must comprehend a thoroughgoing work program. Early budget requests were merely independent estimates submitted by public departments without regard to the needs of the other departments and of the city as a whole. The legislative body, having no intimate and continuous knowledge of all work done by the city, was scarcely in a position to weigh the merits of each request and correlate them into a well rounded Civil M?lVitX, Which had been h8UgU

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STANDARDS OF FINANCIAL ADMINISTRATION 9 program in which no activity was out of balance. In consequence heavy appropriations were given those departJpenta that had the greatest oratorical or political influence, and less colorful departments, perhaps having even more pressing requirements, were negld. For example, health and educstion might be well supported while street cleaning and rubbish removal were neglected, or vice versa. Such inequalities can be eliminated only whes the chief executive,-that is, the mayor, the city manager, or in some few citiee~ the city codion,having an intimate knowledge of detail, carefully weigha the needs of each public activity and presents to the legislative body-which represents the taxpayera-a prognun which is susceptible of a minimum of justifiable modification. 2. The ssiimcrted oasts of thia program shouLf be balcmosd with avadabk 07 eapctedittunni3. In financial matters a city is little different from a private citizen, and when either consistently permits outgo to erceedimome eerious difficulties are ahead. 3. Epmy principal a&vi& amduct& by a cityshoddstand alotu ad an appropticdion WCiL, and in&ieate the liepa* rnsnt Oondudinq it. It is not proper to give a department head a large sum of money to be expended according to his best judgment, for such judgment may not conform to that of the taxpayers who pay the bill. For &le, take police. In addition to general administration, the activities include record keeping, criminal identification, foot patrol, trdc control, detection, etc. The superintendent of police may be best qualified to indicate the emthat shall be placed on each of these services; presumably the legislative body and the public will follow his recommendations. However, so long as the theory prevails that the taxpayer is entitled to determine the purposes for which his money shall be spent, the budget should be so arranged that these purposes and the amounts appropriated for them are clearly indicated. 4. The astimufm of bdh revenues and expenditurm shozcid be stated in lenns that can be undmsfood by both citizens It is not s&cient that a department should make a request for so much money to conduct a particular activity, -that would result in lump sum appropriations. Those concerned with appropriating public funds and paying the bills are entitled to how the basis of the estimates, ie., how much is to be spent for personal services, contractual services, supplies, materials, equip ment, etc. In turn, each of these principal clsssifi,mtions should be further subdivided as to number of men to be employed, with their salary or wage rate under the headi,ng personal service, what type of contractual semce it is proposed to engage, and what kind of supplies, materials or equipment is to be bought. In modern budget pradice these classifications are uniform throughout all departments, with the result that the departments speak the same financial language when making requests and permit the responsible authorities to compare detailed budget requests with the expenditures of the previous year and with similar expenditures in other departments. Such detailed request is not necessarily the unit of appropriation, but rather is used to support the larger unit of appropriation which is ordinarily the activity, except with respect to sdaries and wages. 5. Within rewon the budget through the appropriaiion ordinance sM con_and the legiSIative body.

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4 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February trol and appropriate aU of the funds belonging to the city. Cities have a practice imposed by charter and state law-sometimes with very little reason back of such legislation-of segregating their income into a number of funds, to be devoted to a specific purpose. For example, the revenues from taxation and miscellaneous sources are usually designated as the operating fund and sometimes divided into numerous minor funds, all, of which must be spent for current operation or minor permanent improvements, although there is nothing to prevent acquiring major permanent improvements also, and in fact such procedure is to be advocated in some instances. Money from the sale of long term securities is usually segregated for the specific purposes for which the bonds were issued. Money raised by special assessments for benefits assessed must be used to meet the cost of the specific benefits incurred. In addition, frequently there are trust funds, each kept separate, the income of which is to meet the future cost of pensions, gifts for specific purposes, etc. The maintenance of these more important fuds is justifiable, but wherever feasible their income and expenditures should be included in the budget procedure and the appropriation ordinance to insure both being under proper control and in order that the budget may .be a reasonably complete picture of the city’s operations. 6. There should be an ample time schedule for the budget procedure. The estimates should be prepred several months prior to the beginning of the fiscal year, with adequate time for their review and correlation by the executive, and for consideration and adoption by the legislative body. All budget action should be completed before the beginning of the fiscal year. The executive might well have a permanent agency assisting in budget study. 7. Public hearings sMd be provided. In addition to the executive an4 legislative bodies affording a hearing to the department heads, the legislative body should provide for one or more public hearings upon the tentative budget, with ample advance notice to the public of the time and place of such hearings. A budget exhibit provided by a city deserves special credit, in judging of the adequacy of budget procedure. 8. The budget should contain adequate cornparatbe and supplrmentcrry data. Data relative to appropriations and expenditures for two or more preceding years are invaluable; also supplementary information relative to the city’s hnces, byfunds, etc. A summary should be prepared, and accompanying the traqsmittal of same by the executive to the legislative body might well be a budget message, concisely setting forth . the major facts about the budget for the ensuing year. Provision should be made also for transfers, contingencies, salary schedules, etc. The city should adopt an adequate appropriation ordinance. 9. After the budget has been enacted as an appropriafion ordinam, procedure should be established to insure the funds being spent in accordance with the wish of the appropriating authorities. One of the principal weaknesses of present budget procedure is found in an absence of thorough-going control over expenditures. The principal step that can be taken in the direction of budget control is to insure that liabilities are not incurred unless properly authorized. This is a relatively simple procedure if cities will undertake it. It is customary to provide that no order from a department and upon a vendor is valid unless it is approved by the city controller. The controller,

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lQaS] STANDARDS OF FINANCIAL ADMINISTRATION 5 incident to such approval, charges the amount of the order against the appropriation of the department, correcting his books when the adual figure is obtained from the invoice. In the meantime this charge is called an encumbrance. These encumbrances deducted from the actual cash balance in the appropriation give the remaining amount that the department has still to spend. With this control, it is impossible for the department to run up bills in excess of appropriations It is equally important that the department does not spend all of its money the first few months of the fiscal year. To control this, a system of allotments is coming into use. Monthly or quarterly each department is required to deposit with the controller for his approval a program for expending the balance of the available appropriation. If the proposed expenditures exceed one-twelfth, or one-quarter, of the total, some explanation must be forthcoming. There are numerous other elements that go to make up a sound budget procedure and which will eventually be incorporated in the budget procedure of the future. However, it is at present unfair to judge the budget procedure of a city government by improvements that have not yet been generally adopted. Briefly, among such improvements is the desirability that the budget estimates present a complete picture of what is eventually hoped to be accomplished by any department with some indication as to how far that hope can be realized by the appropriation requested and granted. For example, the public health authorities have a fairly clear idea of the reasonable limits of public health work as measured in the possible reduction of the morbidity and mortality rates. To accomplish these ends, it may be estimated that such a sum of money must be expended. When future health officers present their budget estimates to the chief executive, it may be expected that they will outline what a complete program would cost and what per cent of that program is being met by the appropriations they expect to secure. Thus an important administrative problem will be placed squarely before the public, who can say how much public health they wish to purchase. Also public officers will submit estimates not only in terms of activities, but in units of work to be done and in unit costs of such work. Many public services are easily measurable in units of service. For example, it will be impossible for a superintendent of street cleaning to request such a sum of money for the hand brooming of streets. He will be compelled to estimate so many thousands of square yards of street to be hand broomed at a given unit cost, showing how the total compares with the units of work of the years previous and the unit cost compares with prior unit costs, and possibly even with such figures of other cities. The budget will then furnish a yardstick by which the effectiveness of a city government can be measured by the public. Further, possibly inter-departmental services will be charged for. For example, every public water department is furnishing large quantities of water to school buildings, public offices, the fire department, and even to semipublic institutions free of cost. On the other hand, it enjoys a freedom from taxation that would be imposed upon a utility owned by private citizens. Efficient management and accurate costs will require that public utilities owned by the city be put upon a business basis, showing these charges and credits, and operating as nearly as possible like privately owned utilities.

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6 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February II. FINANCINQ CURRENT ACTIVITIES In financing current activities, the city obtains its revenues from many sources,-taxes, licenses, fines, forfeits, subventions or grants from the state and other units, donations and gifts, pension assessments, sale of privileges, etc. It would be impossible in the scope of this paper to discuss each of these sources of revenue and the criteria of its proper assessment and collection. This discussion is confined entirely to the methods of assessment of property taxes, which usually comprise from 60 per cent to 90 per cent of municipal revenue devoted to the purposes of current operation. Also, it is necessary to conhe the tests to the actual procedure by which taxes are levied, ignoring any question of the justice of the incidence of taxation. The chief elements of a modern assessing system have been set forth so thoroughly in the numerous assessing manuals that it will be sufficient to mention them only briefly. 1. There should be a single authority impo&ng the assessments for taxation purposes, hawing a long term of ofice and being as completely divorced from politics as possible. The difficulty with the prevailing assessment organization as found in most cities is that the assessing authorities, usually a board of some sort, are closely connected with the political life of the community. The public so far has demanded the right either to elect its assessors or to have them appointed for such short terms that they are subject to polit icalinfiuences. Assessments honestly and accurately arrived at can scarcely exist until the assessor fixing them is beholden to no influence for his job, except that which accrues through merit. It is suggested that the selection of the assessor might be left to the merit system, the incumbent holding office as long as the character of the service warrants, or at least for a very long term. 2. Assessme?& should be made ai the true cash due of both red and personal propert!/. Unless property is assessed at its full due as defined by state law or charter, there will always exist loop holes for under-or over-assessment. Occasionally assessors make use of a percentage of the full cash value, but that percentage should be uniform over all parcels of property within the city. It is impossible to compare the relative equity of assessing unless such uniformity is enforced. 3. There should be separaie assessmenis of land and improvemenls. The relative equity of assessments can never be determined unless lands and buildings appear separately on the assessment rolls. When the two items are combined in one it is impossible to determine the unit faot value that has been placed upon the land, or the cubic or square foot value that has been placed upon the buildings. A procedure that does not -separate these items has not yet laid the groundwork of an effective and fair assessing system. 4. The district, block and lot system should be used for describing property for assessment purposes. This method of describing property in its simplest form is not essential to equitable assessment, but is an aid to it. When the block and lot descriptions are used it is relatively easy for any enquirer to locate property in which he is interested and compare the assessment, and the intentional or unintentional omission of properties is made difficult. 5. Land value maps of the entire city should be prepared and published. Land value maps are designed to

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19aSJ STANDARDS OF FINANCIAL ADMINISTRATION 7 show the unit front foot value of the land frontages of every block in the city. The presence of such maps is the greatest assurance against unequal assessment. Any interested citizen can examine the maps on file in the assessor’s office and determine the unit foot values that were utilized in the assessment within a block. With very little calculation the total of any land assessment of any parcel of property can be detennined and checked against the actual assessment as appearing on the assessment rolls, and be compared with any other property desired. The publication of such land value maps is alwap highly desirable, since it stimulates a widespkd interest in the land values determined upon by the assessing authorities. 6. Tax mapa are an abaol& essenlial to a oompld! assessing system. They should give Us exact dimemiom of every parcel of property within the city on such sd as can be readily wed. These maps naturally serve as the fundamental basis of assessment and from them the assessors can check their assessment rolls to insure that every parcel of property is properly recorded. 7. Unit foot riilea for measuring land In every city many lots correspond to some standard depth, usually 100 or la0 feet. It is therefore customary for assessing authorities to determine upon a standard unit of measurement,-a single inside front foot for the prevailing depth. For the value of property that deviates. from the established depth, a depth table is used. For example, let us assume that the assessors establish a 100-foot rule for downtown property, since most real estate is of that depth. Tand near the street is of greater value than land a,t a distance from it and therefore a lot having less depth than 100 feet would be of greater valw should he adopled und fdlowed. proportionate value than the actual depth related to 100 feet would indicate, and depths under or over 100 feet would be measured by a standard depth table. Many such rules have been established, but all of them are similar in character. Land value maps always indicate the front foot value at the middle of the block in terms of the adopted depth. 8. Additional rules covering corner influence, phtdage, triangular and irregular shaped lots, alleys, and other minor variations in values should be determined upon. The most important of these rules relates to corner influence. It is obvious that many parcels of property located at the junction of two streets are of greater value than property in the middle of the block, but this corner influence, as it is called, is always difficult to determine. If the matter is left to the opinion of the assessor formulated without some rule, one may be sure that values are not equitably determined and comparisons are made impossible. For that reason considerable thought has been given to corner influence rules for business prop.arty particularly. Plottage rules are established to take into consideration the different utility of property because of peculiarities of size. For example, a piece of property located immediately adjacent to a railroad might be used for a coal yard. Its value for that purpose, however, would be greatly reduced if it were so narrow that it did not have adequate space for both storage and roadway. Certain rules have also been worked out covering triangular and odd shaped parcels, alleys, etc. 9. There slwuld be a standard ctassiJcation of buildings with the establishment of unit factors of value for each ch9.9. The valuation of buildings opens

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8 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February large avenues for favoritism and inequality because buildings in the same neighborhood may and will have large variation in cost, although land values may be more or less uniform. The greatest injustice may be done in fixing assessments, yet the aggrieved property owner find himself estopped from redress because of the large element of personal opinion that enters into a building valuation. However, these opportunities will be reduced to a minimum if buildings are classified into large groups according to character, and each such class further subdivided as necessary. For example, it would be relatively simple to throw certain types of residences into a half dozen or more classes. Downtown office buildings, factories, hotels, etc., are similarly susceptible to grouping. The cubic or square foot factor of each group can then be fixed and from it the assessed value of each building determined. There will, of course, be minor deviations from these established classifications and values, but they will be relatively unimportant as compared to the equity that is secured. 10. Ruh of economic and structural depreciation should be adopted and wed. Structural depreciation is easily understood. It is the reduction in the value of property due to wear and tear, age, and physical decay not made good by maintenance. No matter how well a building is repaired and maintained, it eventually wears out and its value is lessened accordingly. The structural life of buildings has been fairly well established and the value reduced according to age tables. Of more importance is the matter of economic depreciation, due to inadequacy, obsolescence, or supersession. Probably most buildings find their way to destruction from this cause rather than because of actual physical depreciation. Every large city has many buildings that for the reasons enumerated are not suitable to the land upon which they are placed, and the income of which is not commensurate with the investment involved. Some reduction in assessment must be made because of this economic deterioration, but rules governing it are di5cult of formulation and allowances are usually made in the good judgment of the assessors. 11. Cozperation should be had with property Owners injixing the assessmenk. Probably one of the most important steps the assessing officials can take in their duty of annual assessment of property is to obtain the coiiperation of the owners in determining upon relative valuations. Such cooperation may be through real estate boards and dealers, and other citizen agencies. la. In assessing personal property, a personal return should be required to be filed by eqch taxpayer. Such return form should be sworn to by the taxpayer, and in event he refuses or fails to file same, the assessor should fix a satisfactory minimum valuation, subject to annual increases until protest is made. 13. Ample opportunity should be probided for a review of tentative assessments, and the hearing of complaints. 111. FINANCING PERMANENT IMPROVEMENTS Permanent improvements are ordinarily financed through the issuance of bonds, or assessment for special benefits conferred. While special assessments may be paid in cash by tbe property benefited at the time the construction work is done, more frequently they are liquidated in installments, in which case bonds are issued and the proceeds used to pay the contractor. In consequence, it may be said that every city pays for its principal public improvements by the issuance of bonds. The rules governing the issuance of bonds

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lSS] STANDARDS OF FINANCIAL ADMINISTRATION 9 are more or less determined by common , sense, and for that reason it is relatively easy to indicate certain fundamental tests that should govern in every instance in which a city incurs funded debt. 1. Except in unwual emergency, such 01 #d, $re, etc., debts shozcld be incurred onlp for a permanent improvement. It is hardly necessary to expatiate on this axiom. A city is no more justified in issuing bonds for current expenses than is the private individual. exceed the life of tiu improvemend for which thq are issued. It is reasonable to expect taxpayers to pay for improvements during the life of the benefits that they receive. In examining the outstanding bonded indebtedness of cities, it frequently develops that bonds are still unpaid covering schools, bridges, equipment, etc., that have long since been razed, abandoned, replaced, or junked. 8. If tenn bonds be issued, a sinking fund or re.?m!e shoul& be maintained fm their retire7n#lt. At least enough money should be deposited in the sinking fund annually so that such installments plus the annual earnings thereon will be sufficient to pay the bond at maturity. Unless such a fund be set up, one of two alternatives is presented,-either to pay the entire debt in one lump sum at maturity, or to refund the issue. The former method would put an undue load on one year's debt charges, and in the case of a large bond issue be practically impossible, and the latter would effectually postpone payment probably past the life of the improvement. 4. In general, preference should be given lo serial bonds over term bonds, except in large cities, where a study of the market should be made m to saleability of each tgpe. 9. Th temL Of zhe bonds Should Me?' Many erroneous figures have been circulated with respect to the relative cost of serial and term bonds, always in favor of the former. In actual practice the cost of any bond is determined by the amount of the bond, the rate of interest, and the time elapsing before maturity. These elements all being considered, the cost is precisely the same on a serial and a term bond provided the sinking fund earn at the same rate of interest as the bond carries. Should the sinking fund earn at a higher rate, the term bond is actually cheaper; if at a smaller rate it is more expensive. This last statement is predicated on the assumption that the market at the time of the sale is as equally favorable for one type as for the other. Such equality does not always exist. In some markets one type may be sold at a lower rate of interest than the other type. In the case of large cities, consideration should be given to the favorableness of the market in determining the type of bond to be sold. Ho, sver, in smaller communities preference should be given to serial bonds to obviate the necessity of maintaining a sinking fund with its attendant bookkeeping and investment of fund-. The term of a bond should not be too long, regardless of the type. In eiher the serial or sinking fund the difference in annual cost between bonds issued for a period of, say, fifty or sixty years, and those issued for, say, thirty or thirtyfive years, is so small that there is no justification for assuming additional interest burdens over a period of years while decreasing annual payments by immaterial amounts. 5. The rate of interest should bejxed close to the market as possible. It is a generally accepted fact that the larger the premium paid on a bond the larger the base rate of interest which the city must pay. A bond selling, at say 105, must, according to

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10 NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February authorities, carry a larger base rate of interest than a bond with the same security behind it selling at par. Sound policy suggests that the buyer should fix the rate. 6. Provision should be made for proper advertisement, sale and delivery of bonds. In order to assure competition and the lowest rate of interest to the city, it is essential that wide publicity be given to each bond sale. 7. A public improvement program financed by bond issues, should be prepared for a considerable number of years in advance. The value of budgeting current income and outgo has been discussed. In recent years, however, equal merit of budgeting public improvements has been brought to the fore. Naturally, such improvement budgets must be longer than for one year, although they will need periodic revision. If a city insists upon picturing its requirements for public improvements for only a short period in advance, it must necessarily plunge into proposals that cannot be afforded with the result that its improvements are out of balance. Any city, with careful study, can determine the major projects that will be before it in the coming decade. Within reason the cost of these projects can be ascertained. Information is also to be had as to the possible increase in the assessed values of the community and the amount of bonds that may be issued and the current revenues that can be devoted to permanent improvements over that period. Under these circumstances, it is the better part of wisdom carefully to set up a list of these major projects with provision for their gradual financing. 8. Wherever and to whwer extent possible a city should proceed on a payas-you-go basis. The purpose of bonds is to meet requirements for improvements that cannot be met from current revenues. However, there is no doubt that cities have overlooked the sensible use of this type of financing and have utilized the incurrence of debt as a means of securing improvements that could and should have been paid for by current revenue. Many public improvements in a city are of a recurring nature, such as schoolhouses, fire and police stations, street repairs, etc., which should be taxed for currently, leaving a future generation to meet new requirements as they come along and leaving the bond margin free to take care of emergencies and projects of unusual magnitude. 9. In assessing the cost of local improvements the procedure should be based upon de$nii!ely established principles that will insure unijwrnity and equality in spreading the assessment. Should the city at large pay a certain percentage of the assessments on certain types of improvements,-as for example, municipalities often assume the cost of intersections in assessing street paving,-this ratio of amount paid by general taxation to the amount paid by special assessment should be maintained generally on all improvements of the same type. Further, prescribed rules should determine how special assessment districts are to be established, and all districts should be laid out in accordance with those principles. This would eliminate the size of districts fluctuating with the whims of the authorities responsible. Finally, in principle, the basis of assessment should be according to measurable benefit, rather than upon some ad valorem, square foot, or other arbitrary rule. IV. COLLECTION, CUSTODY AND DISBURSEMENT OF FUNDS Originally, the treasurer of any government was an important officer,

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lSaS] STANDARDS OF FINANCIAL ADMINISTRATION 11 since he was both a custodial and . accounting officer. In modern governments it ia customary to fill these positions separately. With the transfer of the control of public funds to the controller or auditor, the office of treasurer 4aa become purely a custodial position and its importance has decreased accordingly. Today, the treasurer takes in and disburses the money as directed by the control authority, and his office becomes one largely of detailed routine in which defalcations can occur only by actually absconding with funds in his possession. 1. Th6 *.d test of mnd treasury procedure inooloes appointment r& than election ds a meam of fling the om. Sound arguments cannot be advmced for the election of a city treasurer. He determines no major policies, and as a purely administrative officer he should be selected for a long term by appointment and solely on the merit of conducting the technical routine of collecting, holding and disbursing funds. 9. Th6 funds in th4~ trecwurer's pos8e.scpion should be oo~olidofcd so far aa am.&hi with pradicd administration. In depositing public funds it is entirely proper that separate deposits be made of certain revenues that must be devoted to specific purposes,particularly cash belonging to the sinking fund, proceeds of the sale of bonds, special assessment receipts, pension and other trust receipts, public utilities revenues, and general receipts. Many cities, however, go far beyond these elementary distinctions in depositing money and make segregations of actual cash in the bank when only a proper accounting control is required. In consequence, when cash is temporarily short in one fund, it is necessary to borrow money at interest although the city may have ample resources in other funds, which is obviously a needless and expensive procedure. 3. Cash deposited in banh should earn a muximum intermt rate. Larger cities so arrange their checking accounts and their deposit of funds that a substantial return is secured from interest. Such, however, is not always the case, and the failure to make the most of this opportunity of supplementing city revenues is a sound criterion of the inefficient conduct of the treasurer's office. Periodically, depositaries should be selected upon the basis of the highest interest rates bid. 4. The coUedh of minor revenues should be proper13 controlled. This is a very general test and one difficult of application by citizens examining the character of their government. No treasurer's office is so organized that all public receipts can be paid directly to it. To attempt such consolidation would be to cause undue annoyance to citizens making payments to the city and would serve no practical purpose. Individual departments must continue to collect their revenues for general services, as utilities, and for the numerous small services that may be grouped under the head of departmental charges. Such revenues, however, should be carefully audited by the controlling authorities and assurance had that the receipts are transmitted promptly to the city treasury. 5. All taxes should be pre-billed, and mailed to the taxpayer. No privately owned public utility would be permitted to treat the public with such indifference as attends the assessment and collection of taxes. Often a citizen is compelled to spend hours in line to secure his tax bill and spend a similar length of time in getting to another window to make payment, whereas if payment is not made with exceeding promptness heavy

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penalties are imposed for a brief period, after which his property may be sold for cumulative charges. Progressive municipalities are remedying this situation by pre-billing all taxes and mailing the bills to the citizens in ample time to make the payment. Payment by check is ordinarily permitted. This procedure is not only a convenience and safeguard to the takpayer, but speeds up collections and reduces the amount of delinquent taxes. 6. All taxes and other charges should be collected currently. One of the acid tests of e5ciency in collection is whether taxes are collected within a reasonable time after they are due. This test may be applied also to such charges as special assessments, permits, and other departmental charges. One reason for the strained financial condition of some cities is the failure to enforce prompt collection, particularly with respect to personal property taxes, and it is obvious that unless such collections are promptly and impartially made, political capital may be the reward for the treasurer at the expense of the long-sufTering and honest but uninformed public. The greatest of ignorance usually prevails as to the actual collection of taxes levied. 7. The sale of property for delinquent taxes should be made ajudicial procedure, in which any surplus received over and above taxes and penalty reverta to the property owner. The procedure governing the sale of property for delinquent taxes works hardship and injustice to the property owner in many jurisdictions. It is now a generally accepted principle that the delinquent taxpayer should never have to deal with other than the city government during the period available for redeeming his property. When this period has elapsed-which should be much longer than generally prevails,12 NATIONAL MUNICIPAL REVIEW SUPPLEMENT February the property should be sold only in accordsnce with a judicial practice similar to that involved in the foreclosure of a mortgage, and the property owner should receive any surplus that remains after the delinquent taxes and imposed penalties have been deducted. V. CCYNTROUING FINANCIAL TRANSACTIONS In present day government the controller is an important o5cer. Hi duties are twofold. First, is that of record keeping which involves the recording of all transactions affecting the municipality. The second is auditing, which involves the use of discretion in insuring a complete record of transactions and the honest and wise expenditure of this money. The first is purely administrative and requires no determination of policy, and as such the position may properly be filled by appointment. The second involves the determination of policy and a control over the acts of other elected and appointed officers. As such, it is entirely proper that the position should be filled by election, or by appointment independently of the officers to be controlled. For that reason, it is impractical to set up any standard of selection as a criterion of organization, such as was done with the office of city treas.urer. The discussion of criteria will, therefore, be limited entirely to procedure. 1. Accounts should be centralized in the controlh's ofice. It is a first requisite of efficient accounting that it be maintained under a single jurisdiction. This means that all revenues, both major and minor, should be controlled by the controller's office. It also means that appropriation ledgers will be maintained in the controller's office rather than in the several city departments, so that a complete statement of the financial

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lM] STANDARDS OF FINANCIAL ADMINISTRATION 13 condition of the city may be taken from the controller’s books without recourse to subsidiary records maintained in other places. 2. Municipal accounting should be d~ned on an accrual hasip. Many municipalities concern themselves only with cash receipts and cash disbursements, and have little or no control of revenues that will become due in a fiscal period or of obligations incurred which me not yet paid. The greatest forward step that has been made in municipal accounting has been the establishment of such control over revenues ac~ved but not yet collected and liabilities incurred but not yet paid that a complete statement of the city’s financial condition with respect to these items, as well as with respect to cash, can be presented. Such control contemplates a complete, accurate and current record of the several general classes of financial transa&ions.-current, capital, special, trust, etc. This includes adequate records of general departments including quasi-independent boards, etc., utilities, bonded debt and debt margin, tax limits, special assessments, pension funds, etc. A corollary of such records is a report to the public setting forth thie information in concise and understandable form. 3. Controlled inventwies of the city’s supplies, maien‘ab, equipment and real date should be maintained. Most cities take an occasional inventory, sometimes annually, of all physical property owned. Such inventories arc: often included in the financial statement. However, these inventories can he currently maintained and contrulled oil the books of record so that the unwarinnted loss of any property will be detected. Only with such records can a complete balance sheet of the city’s assets and liabilities be prepared. 4. Unit and job coskr of city services should be available. No American city at the present time reports to the public the unit cost of the numerous activities undertaken on behalf of the city. Until such records are available, it will be impossible to check accurately the character of government being rendered. It will be a stimulus to sound administration when the public can compare the amount and cost of work done in a community for any year with the year previous and with similar activities undertaken by other cities. 5. Payrolla should be under complete control. Such control involves the checking of all payrolls by the civil service authorities to assure that persons being paid by the city are properly employed, and the periodic checking of labor payroll clerks who can assure that the persons employed are actually on the job. 6. All accounts of the city should be audifed continuozurly OT pediedy by auditing authority indepednt of the controlh’a ofice. Sometimes such audits are made by state authorities, but more often through the employment of qualified private accountants. 7. Periodic reports to be made to the public to include a comphte operating statement and balance sheet. Only complete records can produce adequate reports, and the existence of a properly prepared operating statement aiid balance sheet is in itself a criterion of a sound accounting procedure, assuming that the items appearing on each are taken from books of record and not from memoranda documents. 8. An operation audit is fully as importaid ua a cash audit. A cash audit verifies expenditures as to their legal regularity and correctness of invoices as to additions, extensions, etc. An operation audit reviews ex

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14 penditures as to the value to the community of the services performed. VI. CENTRALIZED PURCHASING In many governmental jurisdictions each department is permitted to purchase supplies, material and equipment on its own initiative. While such procedure is highly satisfactory to such departments, since it allows wide discretion in the type of goods purchased and almost invariably results in expeditious purchasing, numerous abuses abound. Goods are purchased which are of a better quality than the proposed use justifies; goods are purchased from friends instead of in the open market; the prices paid more nearly approximate retail than wholesale prices; the benefits of quantity buying are lost; goods are purchased by trade name rather than under specifidations that predetermine the quality; inspection is often poor, etc. For these reasons and many others, many municipalities are taking a leaf out of the experience of private business and have centralized purchasing. The procedure of centralized purchasing is quite detailed, but some of the more outstanding features that may be used as criteria are as follows: 1. All purehaping, mpt possibly highly technical and certain kinds of raw for municipal indmtries, should be centralized in a single authority, appointed upon merit and preferably under civil seruice. This would assure the benefits of central purchasing for all departments of the city government. 2. Purchases should be made in accordance with standard spec$catwns, both ~9 to we and quality. Honest purchasing cannot be made unless every vendor knows exactly the quality of goods on which he is submitting bids. On the other hand, the city cannot be sure that it is obtaining NATIONAL MUNICIPAL REVIEW SUPPLEMENT [February its full value for the price paid unless it understands spedcally the qualities of the goods it is buying. Specification for use is less well understood. It simply means that the goods shall be most suitable for the purposes for which they are required. The specifications themselves should, of come, be open so BS to permit competition from all manufacturers. 3. All purchases should be in ~9 large qua&& as &hat with eormomical use. Only in this manner can the advantages of wholesale prices and the interest of a large number of vendors be secured. These advantages can best be secured when the purchasing agent calculates well in advance the total quantities of important articles to be bought by the city and enters into a purchase agreement for such goods, and by collecting the orders of the departments for minor goods and buying them not oftener than once a week for each 4. The inapection of goods purchased mst be thorough. This usually involves the maintenance of a corps of inspectors by the purchasing department to cover large items and the deputization of certain individuals in the departments to check minor items delivered directly from the vendors. Incidentally, facilities should be provided for the scientific testing of goods to insure their compliance with specifications. 5. The usual bgal pr& permitting purchases in 84 amount8 Without comp&on should not be abused. 6. The amounts of aU orders should be immedialely entered upan the appropriation bdgers of theJinance department (19 an emumbranee againat the pope7 appropridion, and shoul& be paid prompffy when the invoice bjinally presented. The former assures sound financial control by the city; the latter assures a type of supply involued.

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19B] STANDARDS OF FINANCIAL ADMINISTRATION 15 maximum of economy through the city taking dl available discounts, as well as more favorable bids by vendors who are assured of prompt payment. 7. A central home storeroom should be provided for the distl.ibution and storage of minot articles in wren# me by departmenk, ad aU &age yards of every tgpe rM be under &?, purchng autWg in order that the quantity d&ribution of supplies mag be made in an wolunntcal manner. The need for a storeroom for articles in current use is obvious. Many small articles are requisitioned in small quantities by departments and it is advantageous to have them on hand for immediate distribution. Also in this way larger quantities can be purchased at reduced prices. The question of the control of storage yards is still a subject of discussion. At the present time in most cities each important department maintains a storage yard in which the usual construction materials will be found. The centralization of these yards under one authority would permit a reduction in inventory and also provide for shorter hauls on materials.