Chapters on municipal administration and accounting

Preface

There is a growing appreciation of the fact that democracy, if successful, must be informed. The officer is asked not only to be true to his trust, but also to lay before the citizen a full and prompt account of all matters concerning which the pubUc has a right to know. Efficiency as well as fideUty is demanded of him who is given public position and pubHc honors.

Four fundamental principles of government have been established as a result of experience.

1. Effective cooperation must be based on intelligence.

2. Officers, whether democratic or autocratic, can exercise inteUigent direction over affairs only when fully apprised of the business to be administered.

3. Organized democracy can be made effective only so long and so far as it provides the means of regularly and currently bringing before its citizens the facts necessary to the exercise of the best judgment with respect to the fideHty and efficiency of those in positions of trust.

4. When the public may have the same information concerning public affairs that each member has concerning his private aff'airs there is no cooperative activity required for the highest welfare of a community that may not only be undertaken with advantage to the people but with honor to the trusted corporate servants.

Among the reasons which prompted this pubHcation are the following : There is at present Uttle Hterature available on the business aspects of government; a considerable number of the papers and addresses have been repeatedly requested and are not available ; the papers and addresses

Ti PREFACE

disclose a historical relation to three important movements, viz.: the work of the National Municipal League; the work of the Bureau of Census; and the work of the Bureau of Municipal Research. The first of these organizations, through its annual conferences, has done much to stimulate interest in the subject of municipal government; the second has rendered invaluable service in bringing together the comparable statistics of American cities and in applying uniform classification to methods of reporting; the third has undertaken a scientific fieldstudy of municipal organizations and of administrative methods and results with a view (i) to informing the pubHc with respect to official acts and community needs; (2) to cooperating with officials in applying to public business, methods that will both fix responsibility for waste and loss of public funds, and insure economy and fidelity; and (3) to developing progressively the power of enlightened public opinion through making available the data necessary to independent judgment, thereby enabling the beneficiaries of government to protect public funds and properties from waste and making citizenship an eS'ective agency.

Although prepared for many popular and successful bodies, differing widely in their special interest to the historian and pubHcist, and more particularly to the beginner, there may be a significance in these fragments that a systematic treatise could not have at this time of pioneer work and pioneer thinking toward constructive municipal reform.

F. A. C.

New York, February, 1909

I. The Genus Grafter — With Apologies

TO Bacteriology i

The grafter as an institutional parasite — The genus defined — Creatures of environment — How distinguished from other parasites — The two principal families of grafters — The grafter-vendor — The grafter- vendor not a serious menace — The grafter-trustee — Some of the most dangerous varieties — The grafter-trustee-guardiansis — The grafter-trustee-insuransis — The graf ter-trustee-incorporatus — Graf ter-trustee-politicus — Political grafting less profitable than private — The grafter exists because conditions are favorable to his existence — An uninformed society is the grafter's opportunity — Adaptations of the species — The modification of conditions — Condition favorable to grafting — Lack of information necessary to institutional control — The limit of control the limit of social organization.

II. How Municipalities put a Premium on

Graft i6

The social inducement to immorality — The institutional inducement to graft — Why servants become dishonest — Dishonesty will continue if encouraged — The grafter not to be blamed — The community at fault in not protecting honesty — How the grafter may be exterminated — Not by making war on the individual grafter — Must come through intelligent institutional control — The means of obtaining institutional control.

III. Who Pays for Graft and Inefficient

Government? 25

A wrong assumption — Democratic government an agent of the common man — Waste and loss the loss of the common man — A concrete picture of waste — vii

PAGE Pay-roll waste — Loss on supplies — Interest on graft — Subversion of revenues — The meaning of infidelity in municipal service — What the amount wasted would buy — The price paid by the poor.

IV. What we do not Know about the Affairs OF Our Cities

The subject of pay-rolls — The purchase of supplies and materials — The keeping of municipal stores — Municipal tools and equipment — Municipal repairs and replacements — Municipal revenues — The making of a municipal budget — The future of American cities.

V. The Financial Management of Municipalities

Preliminary observations — The method of acquiring funds to be administered — Current funds — Capital funds — Limits of borrowing — Advantages of borrowing capital funds — Reduction of expenditures — Increase of capital by revenue saving — Difference in methods of acquiring capital — Sale of securities and corporate stock

— Secured and unsecured loans — The administration of revenues and expenses — Definitions and use of terms

— Administrative purposes of revenue accounts — Determination of surplus and deficit — Methods of making revenues available — Devices for prompt collection — Delayed collections and temporary loans — Hypothecation of revenues and anticipation of tax warrants — Local assessments in lieu of revenues — Application of revenue receipts — Financial economy in administration — English methods — The American situation — Agencies of public municipal education — The administration of capital and loan funds — The capital balance sheet — "Capital funds" to be segregated — Capital assets to be protected — Capital assets not for realization — Classification for administrative purposes — Basis for judgment as to capital assets — Idea of protection fundamental — Administration of trust funds — Segregation of trust funds — Management of receipts and disbursements — Cash to be accounted by funds — Methods of financial control — Organization for financial control — Revenue control — Administrative discretionary control — English and American models — Centralization vs. decentralization

— Methods of control under a centralized system — Conditions under which decentralization is preferable.

CONTENTS ix

VI. Principles of Budget Making .... 67

Constituent elements in municipal governments — The budget as an instrument of control — Primary methods of control — Conditions precedent to the effective exercise of control — Electoral control — Representative control — Official control — Methods of obtaining information as a basis for exercise of control

— Information as a basis for control — The experience of private business — Safeguards of the past negative — Controlling purposes of the budget — Signification of limitation of authority to spend — Use of budget as instrument of positive control — Administrative accounts as means to end — Making of the budget — The preparation of estimates — Collateral inquiry — Publication of estimates of and examination of heads

— Formulation of tentative budget and taxpayers' hearing — Supplementary inquiry — The administrative importance of the budget — As related to methods of control — In the audit and vouching of claims — Transfers and revenue bond issues.

VII. A Business Man at the Head of a City's

Business Office 82

A business man's admission of failure — The lesson which his failure carries — Another side to the municipal institution — Why a business man may find himself helpless in a business office — Legal powers with which our business man was clothed — Legal means of enforcing powers — Conditions which have caused the business head to admit defeat — Administrative conditions essential to the intelligent exercise of powers

— A system which compels official ignorance — Lack of accounting records showing liabilities — No relation between the accounts in departments and those kept in central office — How organization and methods of administrative procedure may affect municipal debt — Doubt may be cast on legality of bonds — Increase of debt through failure to audit — The present audit of claims a farce — Claims passed for supplies without evidence of goods received — Inspections used to further graft — Debt increased by false charges to corporate stock — Extension through contracts — Inability of controller to fasten responsibility for infidelity — Sinking fund revenues may be diverted — General fimd revenues may be lost — Conditions under which central control may be made effective.

X CONTENTS

VIII. Municipal Accounts — A First Step toward Municipal Reform loo

The responsibilities of citizenship under democratic government — Popular control over the public corporation — Ideals of popular control — Failure to provide the means necessary to enlightened political judgment — Doctrines of laissez-faire — Conditions demanding increase in government activities — Provision of methods of control necessary — Accountancy as a guide to intelligent administrative and political control — The data of business — Facts that are not forthcoming — Classes of financial transactions — Relations of proprietorship and trusteeship — The progress of accounting science in response to administrative demands — Primitive methods of intelligence

— Evolution of modem methods — Developments of methods of control in British cities — First step toward a better corporate procedure — First application to municipalities — Limitations of cash accounts — Application of methods for obtaining better results — The lateness of accounting development in America

— Our agricultural condition — Recent growth of cities — Chaos and maladministration the result of ignorance — Legal steps taken — Checks and balances

— The need for accounts — A first premise to reform

— Need for accounts a need for complete and accurate information — Recent steps taken to install complete system of accounts — General adherence to inferior methods — Obstacles in the way of the introduction of better systems of municipal accounts — Divided responsibility — Social inertia — Labor and time necessary to revise old methods — Necessity for professional assistance and advice — The example of the private corporation — The benefits to be derived.

IX. Municipal Credit and Accounting Reform 124

An arraignment of present methods — The basis of credit — Information necessary to exercising investment judgment — The citizen's right to know — A prediction of reform — Responsibility of the past

— The present opportunity — Pre-consolidation records

— Lack of system — Multiplicity of processes — The completeness of operative data — Need for central control — Departmental subsidiary accounts — Essentials of a complete system — Magnitude of the task —

— An expression of confidence — An enlargement of powers — Enlarged responsibility of controller.

CONTENTS xi

CEUiP. PAGE

X. The Administrative Significance of a

Municipal Balance Sheet . . . . 137

The character of arguments used in challenging its significance — Defects in first form of argument — Specious character of the second form of argument — The affirmative side of the case — Two classes of problems to be considered — The purpose of accounts and reports which reflect municipal service rendered

— The constituencies to be appealed to — Character of intelligence needed — The need for municipal accounts and reports which reflect resources and liabilities

— Administrative questions to be answered with respect to resources and liabilities — Questions having to do with expenses of operation — Questions to be answered with respect to the funds provided for acquisition of public properties and equipment — The analogy of private accounting — The protection of municipal properties — The controlling purpose of the balance sheet — Conclusion.

XI. The Administrative Importance of Distinguishing between Revenues and Expenses AND Receipts and Disbursements IN Municipal Accounting . . . 155

What constitutes a complete system of municipal accounts — All data must be collected — Each transaction must be properly classified — All facts must be coordinated around problems of administration — Essential difference in the nature of expenses and revenues as distinguished from receipts and disbursements — Two general classes of accounts — The balance-sheet item "cash" — The operation account

— Different sources of revenue accounts and cash receipts — Accounting sources of expenses and disbursements — Difference in administrative purposes of the two classes of accounts — Purpose of expense and revenue accounts — Purpose of accounts of receipts and disbursements — Purpose of trust accounts — The reason why the "cash book" accounts are the principal ones kept in American municipalities — Cash the first asset to be guarded — Single entr\' the first accounting method — Complete double entry — Recent development of administrative accounts — Cities on a "cash basis" — Cash accounts do not give operative results — Sound judgment requires operative accounts — How a classified statement of cash xii CONTENTS receipts and disbursements may contribute to improved methods of accounting — Incomplete cash data better than none — Mistaken idea of progress — Evidence of the perception of a need — An aid to statistics — The distinction between revenues and expenses and receipts and disbursements essential to administrative efl&ciency.

XII. The Nomenclature and Phraseology of

Municipal Administration and Accounts 175

Principles determining scientific nomenclature — Relation of accounts and statistics to administration

— Problems of ownership — Problems of municipal operation — Problems of municipal trust — Information required to determine ability to meet financial obligations — Information necessary to the preservation of properties — Data pertaining to municipal economy and official control — Nomenclature and phraseology.

XIII. What Constitutes Reasonable Uniformity in Municipal Accounts and Reports 186

Common functions undertaken by municipalities

— Common corporate safeguards — Uniformity in the form of corporate organization of municipalities

— Uniformity of classification — Schedule of the committees — The larger work of the committee — Uniformity in principles of accounting — Administrative problems common to municipalities — Essentials common to accounts — Common classification of income and expenses — Common basis for classification of asset and liability accounts — Departmental accounts sho\\-ing relations of fidelity — Classification of cash receipts — Classification of disbursements — Conclu-

XIV. Municipal Ownership as a Form of Control 202

The transition from economic individualism to economic centralization — The newly developed interest in government control — Forms of control proposed — Doctrines of control as applied to cities — Arguments briefly stated — The question of success or failure of municipal industry a conditional one — Fundamental considerations — Conditions precedent to successful ownership and operation of enterprises —

SAP. PAGE

Administrative elements the same whether public or private — Efficiency, economy, and fidelity of government essential to success — Standards for judgment required — The problem of intelligent control — The character of organization — The means for promptly obtaining accurate information — Defective administrative control in cities — The establishment of standards for judgment — Enforcing responsibility for results — Conclusion.

XV. Chicago's Accounting Reform . . . . 219

Charles Waldo Haskins — The growth of Chicago

— The situation — Attitude of the mayor — The merchants' club — Defects in the system of administration — Financial and economic aspects — Faults in the financial system — Reform in accounts essential

— Features of the new system — Monthly reports as a feature — Saving effected — Increase in revenues — The work of audit and reorganization — Technical examination — The balance sheet — Classification of revenue accounts — Classification of expense accounts

— Conclusion.

XVI. The System of Accounts and Statistics

OF THE City of New York .... 244

The purposes of the investigation — Departments examined — Detailed reports on method — General criticism of the system — Charter provisions for financial control — Charter provisions for executive control — System of accounts needed for financial control

— Defects in the system of accounts looking toward financial control — An imperfect account of revenue accruals — Revenue books not in control and not currently balanced — Multiplication of records of expenditure — Failure to provide accounts and statistics needed by the board of estimate and apportionment — Defects in the general books and controlling financial accounts — Old accounts not analyzed — Defects in the system of accounts and statistics viewed in their relation to executive or operative control — Duty of mayor to keep himself informed — Inadequacy of office of commissioners of accounts — Methods by which a complete administrative accounting may be obtained

— How operative accounts may be controlled — Advantages and disadvantages of each form of control

— Mayor handicapped by present charter provisions — • Criticism and comment on the accounts of departments examined — General criticism restated — Bellevue and allied hospitals — The street cleaning departments — Docks and ferries — The Board of Education — Department statistics — Need for better reports.

XVII. Principles Governing the Making of a

School Report 263

The purpose of making reports — Departmental reports — Reports of subordinates — Special reports — What a published report should contain — What a superintendent's report should contain — What a report of a board should contain — Report as to service rendered — Report as to equipment used — Report as to financial relations and results — Premises summarized— The content of the "fifth annual report of the city superintendent of schools" — Principal subjects reported on — Chief criticism as to content — The report of the city superintendent considered from the standpoint of form — Outline report subject of principal interest — Adequacy of schools and departments of instruction to render service — Organization of the supervising and teaching staff — Principles of exposition — Statements of general results — General exhibit of number and location of schools and departments of instruction — Exhibit of organization for supervision of instruction — Teaching staff by boroughs — Teaching staff by classes and sexes — Comment on special topics — Should lay foundation for board's report — Why complete showing should be made — The "fifth annual report of the department of education " — Its form and method of presentation — Defective character of report — Analysis of published report — Content of the report as to service rendered — Defects in report of educational service rendered — Subjects for report on "Educational" service found in the law — Subjects for report on administrative service — Exhibit of statistics of school operation — General administration — Content of the report of the board of education pertaining to physical equipment provided for school purposes — Defects in report as to equipment — General subjects of interest with reference to equipment — Should establish units of comparison — Content of the report as to financial operation and financial results — Defects in financial report — Absence of comparative tables of cost — Statements of revenues defective — Lack of harmony with statements of comptroller — Statistics showing relations of economy — Expenses

XV incurred — Revenues accrued — Comparison of service rendered to cost — No additional cost if books are kept to give results wanted — No statement of assets and liabilities — Uses to be made of such statements — Conclusions.

XVIII. Accounting Methods of the Department OF Education of the City of New York 304

Character of organization — Accounting requirements

— The accounts kept by the board — Collateral records

— Financial statistics — False basis for expenses — • Information not taken from the accounts — The character of data on which the administration must rely

— Memoranda kept by bureaus — Uncontrolled records

— Incomplete data — Lack of unity in the system — Division of responsibility — Lack of central administrative purpose — Records of one department not coordinated with others — Difficulty in obtaining comparable facts — Lack of cooperation — On the part of the Bureau of Audit — On the part of the Board of Superintendents — Effect on service rendered — Work of schools hampered — Defects in classification — Advantage of uniform classification — Sites — Buildings

— Advantage of classified information — Basis of classification — A restatement of conclusions.

XIX. Administrative Need for Accuracy and Uniformity in the Accounts and Reports OF Hospitals 327

The hospital as a subject of analysis — Definition of a science — The scientific study of hospitals — What may be done by the scientific study of hospital activities — What may be done by the scientific study of hospital administration — The advantages of a hospital science to the individual institution — What may be done by the formulation of an effective system of accounting control.

XX. Eleemosynary Institutions and Accountancy 336

Philanthropy and corporate trusteeship — The view of the past — A new idea as to corporate responsibility — The race ideal of accountability and control.

xvi CONTENTS

XXI. An Agency of Citizen Inquiry — The

Bureau of Municipal Research . . 346

A bit of Franklin philosophy — The citizen's business— Incidents of corporate trusteeship — Some conditions which suggest inquiry — A statement of principles

— The work of the Bureau of Municipal Research — Systematic inquiry for facts — Methods of making facts available — A constructive programme — "Muck-raking" no part of the Bureau's work — Work of reorganization in progress — Powers unused made operative — Cooperation of official heads — New methods and procedure installed — The need for citizen support — The continuing need for an independent agency of citizen inquiry

— Needs of government, business needs — A citizen's business as defined by Governor Hughes.

CHAPTER I The Genus Grafter — with Apologies to Bacteriology ^

The "muck-raker" has done much to arouse; he has also done much to depress. To the average citizen he does not preach the gospel of hope but of political damnation. His graft descriptions have had much the same effect as would the circulation of a hand book on the ravages of consumption among the inmates of a hospital for incurables. The product of this feeUng has been the despair which exhibits itself in the social insanity of the anarchist and the apathy or paralysis of the patriot. The anarchist would apply to institutional infection the firebrand, urging that purification may be accomplished only by wholesale destruction. The average citizen has lost much of his power to respond to patriotic appeal. The attitude of the public toward the "grafter" is much the same as was the attitude of the inhabitants of yellow fever districts ten years ago. Through ignorance they suffered; through ignorance, towns were burned and established institutions were demolished in vain attempts to obtain relief. For this hopelessness of ignorance, science has found a remedy. Through the recognition of a germ, and the study of the conditions favorable to its survival, the scourge of fever has been overcome.

Being asked to speak on the subject of "The Grafter," I come to the Schoolmen of New York to talk in terms

' Address to the Schoolmen of New York, November 26, 1906.

2 THE GENUS GRAFfER

of science — to ask you to consider the grafter as a product of conditions which are favorable to his culture. Let us abandon the attitude of the ignorant and superstitious, and accept the evolutionary hypothesis of the survival of the fittest as a principle of research. Let us not accept as a conclusion that our condition is hopeless, until we have exhausted every resource: (i) in attempting to isolate and describe the grafter in such a way that he may be distinguished from his fellows; (2) to ascertain what conditions are favorable to his survival; (3) to determine who or what is responsible for these conditions and (4) whether conditions may be produced which will cause the grafter to disappear, or to exist in numbers so small and in form so emaciated as to be socially and institutionally harmless.

THE GRAFTER AS AN INSTITUTIONAL PARASITE

Generically, the verb to graft means to insert or install a rootless bud or detached scion into the succulent fibre of a self-supporting stem in such a manner that the bud or scion thus inserted may feed on the sap which it takes from the foster stalk. Generically a grafter is one who

knows how successfully to do this — one fined^*'^"* *" who, possessing skill in grafting, utilizes

it for his own support. Figuratively, the word grafter has been given a social and political significance. The political grafter is one who is an adept at instating a blood-sucking constituency (or himself) on some part of the body politic. Socially he is one who insinuates or weaves himself or his agents into some part of the web of community life in such manner that he is permitted to absorb a portion of communal substance and appropriate it to his own profit.

A grafter has been described as an institutional parasite.

THE GENUS GRAFTER S

The figure is instructive. Regarding the genus in this light it is found that, as with all microbes and animal pests, grafters have developed forms as varied as the social and institutional conditions on which they thrive. The corporate forms and institutional groups to which the germ in its many varieties has been found attached are both public and private. Nor are the

Creatures of ^ • ^ j i. i- i

environment zones restricted to particular occupations. The organic purpose of the institution infected may be business, education, philanthropy, religion, recreation, or general welfare. Institutional development has been one of specialization; it has classified individual workers and increased the limitations and restraints upon them in such a manner as to render them less able to take care of themselves and more in need of organized community protection. With each class or institutional form, we may find a species of the genus grafter which has adapted itself to the conditions there present, enabling the modified species not only to survive but to grow fat and strong. The distinguishing feature of the institutional parasite known as grafter is, that whereas a corporation, as a living organism, is a group of individuals each member of which is cooperating to attain a common end, a grafter (having found lodgment thereon) proceeds to divert the benefits of association to his own selfish purposes. In one sense a grafter is to a corporation what the parasitic insect is to the animal on which it feeds; How distin- in another sense he is sui generis in guished from that he gets his position of advantage by ot er parasites ^ deftness unknown to the lower forms of life. Possessed of highly developed reasoning faculties, reckoning on human sympathy and emotion as conditions with which he has to deal, his lust directs his faculties to devise the means by which he may successfully play on these sympathies and emotions and through them obtain the consent of the victim before he sucks his blood. This consent is expressed in form of legal and social conventions known as contracts, and therefore consent having been once obtained he claims his reward as a vested right, often using the machinery of justice as an instrument of subversion.

THE TWO PRINCIPAL FAMILIES OF GRAFTERS

The classes of legal conventions or contracts most frequently used by grafters are tw^o, viz.: those of bargain and sale, and those of trusteeship. The forms of graft that are carried on through contracts of bargain and sale are accomplished cither through the vendor taking advantage of individual or institutional ignorance or by reason of individual or institutional weakness. Ignorance is taken advantage of by misrepresentation vendor ^^~ °^ fraud. Weakness being relative (he being weak who is unable successfully to compete or protect himself), the superiority which gives to the grafter his advantage is commonly acquired through obtaining from society a legal privilege or monopoly which is protected by society itself as a proprietary right. Deftness is shown in the method of obtaining this privilege or right to take from society a portion of its substance. The right may be attained by bribery and corruption, or it may have developed through the appHcation of the ordinary rules of business. In either case the essential fact is the same — it is the impotence of the individual member of a great complex society, the constraint and comparative weakness of the purchaser, that is availed of by the vendor.

But as a social incubus, the grafter-vendor is not to be feared. The fraud and deception incident to a contract of purchase or sale may be readily detected through public inspection and through instruments of popular intelligence such as the press. This has recently been shown in the administration of the pure food law. Complaint is made concerning the exercise of monopoly powers — exactions by so-caUed Trusts; this again should enlist for society no sympathy. When a great political body The grafter- voluntarily permits its members to be vendor not a mulcted through one of its own corporate serious menace ^^ ^^^^^^ creatures, it is in the attitude of the logger who openly maintains a colony of body parasites in the belief that they are a sign of good health, but whose indifference is the more fully explained by reference to his own ignorance and indolence.

The forms of graft that are carried on through contracts of trust, on the other hand, should be subject for the greatest concern. Graft of this kind is no less than a

social crime and should be dealt with as is trust^e'^ ^^' ^^^^^^ ^^ murder. Having induced a victim

to confide properties, business or income to his care, the grafter-trustee proceeds in a stealthy, cowardly, sneaking manner to rob the one by whom he is honored and trusted. The faith reposed in him is the cover under which he hides while he saps the life-blood of his quarry. That we may better know the traits of this social parasite, let us study some of the species of the grafter-trustee in relation to the environment which has favored their growth.