Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/protestofjamesemOOmoon Cincinnati, Ohio, April 16, 1901. To the Honorable Board of Trustees of the Cincinnati Southern Railway. GknTtkmen : In the capacity of a tax-payer, I respectfully address this protest against the acceptance of a proposition by Mr. Samuel Spencer, president of the C., N. O. & T. P. Railway Co., lessees of the Cincinnati Southern Railway, dated February 28, 1901, for a sixty years’ extension of lease. I also protest against the acceptance of a supplementary prop- osition made by Mr. Morrison on behalf of the lessee company, for the following reasons, briefly stated in business terms : The proposed rental is inadequate. The length of the proposed extension is unreasonable. The absence of an effective amended covenant governingserv- ice charges with satisfactory guarantee of its full enforcement de- manded by all the commercial and industrial organizations of the city which have taken action. The absence of authority of law to make a loan of the money or credit of the city for any purpose. Supporting these reasons I briefly present facts disclosed by the records of your board and the official annual printed reports of the lessee company as connected with recent and current local history. The existing lease was awarded by your board to the lessee company as the best of thirteen bidders. The lease was divided into five periods of five years each. The rental, payable quarterly in cash, for the first period was $800,000 per annum ; for the sec- ond, $900,000; for the third, $1,000,000; for the fourth, $1,090,000, and for the fifth, beginning October 12, 1901, and closing same date, 1906, $1,250,000. It was executed and the property passed to the lessee October 12, 1881. The railway, while open for traffic at that time, was in an unfinished condition. Clause V. of the lease required at its ter- 2 ruination the entire line of railway to be in the condition of a first-class single-track railroad, complete in all respects. The cost of this obligation of said clause was counted as rental, in addition to the cash rental under Clause II. of the lease. As a part of the rental are requirements (described in lessees’ accounting as “ per- manent betterments to revert to the city of Cincinnati at the maturity of the lease ”) which will not attach to any extension ; the aggregate of this obligation will considerably exceed $3,000,000. The $12,000 per annum for maintenance of the trust, per Clause IX., was also a part of the rental. Presuming this, is to be .so treated in the proposition for extension, it w r ill not be further considered in this discussion and comparative statement. With the above explanation, we find the average yearly rental for the entire period of twenty-five years, to be paid in cash, was $i, 008,000 The average yearly rental to be paid in permanent bet- terments reverting to the city of Cincinnati at the maturity of the lease (partly estimated) is . . 132,000 Total average rental $1,140,000 Mr. Morrison’s proposition, on behalf of the lessee company, for a sixty-year extension of the lease from October 12, 1906, is for a completed, up-to-date railroad of the highest type, with- out requirements for permanent betterments, as under the exist- ing lease, is, for the first period of twenty years, $1,050,000 per annum; for the second period, $1,100,000 per annum; for the third period, $1,200,000 per annum. Compared with the average yearly rental of the present lease, it is less for the first period, $90,000 ; for the second, $40,000, and more for the third period — $60,000 per annum. These respective amounts, if annually placed in a sinking fund, and interest semi-annually computed at the rate of 3)^ per cent, per annum, will, at the end of sixty years, aggregate a net loss to tax-payers of $10,940,842.33. The existing lease was the result of competition soon after the South, its field of activity, devastated by war, was in the turmoils of reconstruction. It is now the scene of greater enter- prising prosperity than any other section of this country — possi- 3 bly exceeding any equal area of the world’s surface in such natural resources as guarantee, without limit, its continued growth ; its traffic now overtaxing the ability of railroads to move, and increasing as rapidly as facilities for handling can be provided. Is it possible that these changed conditions have reduced the rental value of this great property which you hold in trust for all the people of this city ? If not, comparison with the rental of $1,250,000 per year for the last period of the present lease (which has five and one-half years yet to run) will show a yearly reduction of $200,000 for the first ; $150,000 for the second ; and $50,000 for the third period. These differences for each period, if computed as above — semi-annually at 3^ per cent, rate, will at the end of the sixtjr-year extension show an aggregate loss to the tax-payers of $33,142,307.75. Of all the covenants of the present lease, the only one which has failed to serve the purpose intended is that portion of Clause VI. to protect the commercial and industrial interest of the city in preventing discrimination in service charges against it and roads terminating therein. The extension of the lease, instead of correcting this breach of the covenant, will perpetuate for sixty-five years its non-observance, thus annulling the cove- nant which was the paramount purpose of the city in its con- struction of the road. When the time arrives for the re-leasing of the road by com- petitive bidding, the Trustees, in the light of past experience, may formulate a covenant which will secure to the city, perma- nently, the advantages desired and made possible by its important strategical geographical location. In justice to the coming generation the period of a new lease should not exceed twenty-five years, as each succeeding generation should have the right to deal with resulting conditions as they develop. While development is so inten.se and progress is so rapid, it is unwise for one generation to anticipate the needs of the next, and to so legislate as to interrupt the freedom of those who come after and prevent such action on their part as may be necessary to protect their own best interest. There is no precedent, either National, State, or municipal, 4 for disposing of public property without public competition. The courts require it in the administration of private trusts under their jurisdiction. I therefore assert that no reasonable interpretation of the law under which you are now acting will justify the dis- posal and alienation of this property of such overwhelming mag- nitude, for a period nearly two and one-half times greater than the original lease. The National Government in promoting the building of the Union & Central Pacific Railroads, loaned its bonds to a large amount, secured by mortgage on the property, maturing in a much shorter period than is proposed for this extension. The public press was liberally used by those interested in de- preciating in the public estimation the value of the properties, hoping thus to influence Congress and the Administration (as now, in case before you, is being systematically done) to secure a reduction of the claim and its extension over a long period at greatly reduced interest or rental charge. To the credit of the Government the property was ordered sold at public competition. Iu each case, before the dates of sale arrived, full and satisfactory settlement and full payments were made. Quickly these prop- erties became immensely valuable, as compared with previous estimates. The city of New York has recently illustrated the power and value of public competition when dealing with great public in- terests. The contractor for its great subway electric transit sys- tem is required to make a bond for $6,000,000 secured by the de- posit of satisfactoty collaterals. The city issues $35, 000,000 bonds, the proceeds of which are to be used in payment as the work progresses in accordance with specifications, thus constantly increasing the security. The contractor pays the interest on the bonds, and in addition a sufficient per centum annually to pro- duce a sinking fund for their extinguishment at maturity, fifty 3^ears from date of contract, when the road, its equipment and going business, passes to the city free from debt ; the con- tractor securing reimbursement and profit from the use of the property between the time of completion of the work and ma- turity of the contract, which is for a ten-year shorter period than proposed for the extension of the lease of your property with a 5 going business of phenomenal earning power while yet in its in- fancy. The lessee company was a voluntary bidder, and doubtless had full information as to the obligations of the lease and physical condition of the property, in making its venture solely for profit ; precisely the same as any individual or corporation engaging in any business. The owners, whom you represent, reserved no control over and assumed no responsibility or risk for the man- agement of the property by the lessee company. It may be useful to group briefly some facts gleaned from its official reports. Clause VI. of the lease requires the lessee to “ provide and keep the said line of railway supplied with rolling stock and equipment, so that the business of the same shall be preserved, encouraged and developed, and that the same shall at all times be done with safety and expedition, and the public accommodated in respect thereto with all practical conveniences and facilities, and that all future growth of such business as the same may arise or be reasonably anticipated shall be fully provided for and secured, and that all reasonable efforts shall be used to maintain, develop and increase the business of said railway.” A paragraph in Mr. Spencer’s letter to your board of Febru- ary 28, 1901, accompanying copy of proposal for extension of lease, finds an admitted flagrant violation of the above vital obli- gation a reason for your continuing the property under the con- trol of his company sixty years after the expiration of the pres- ent lease. It reads as follows : “ For want of such expenditures and such equipment the business has already suffered during the past few years, and the effect is more keenly felt now than at any previous time.” Relating to a donation of $850,000 asked, another paragraph reads as follows : “If you say no, and require thus a strict ful- fillment of the contract, of course you will get it. The company will meet its obligations and the rental is amply secured.” A cursory examination and analysis of the official annual re- ports of the lessee company seem to disclose the following inter- esting facts : It organized with a capital of $3,000,000, 51 per cent, going to what was then known as the Krlanger Syndicate 6 and 49 per cent, to local subscribers. It developed later that the capital was inadequate for the business it had undertaken. Not- withstanding this, its official annual reports show that early in its history there was withdrawn as dividends $525,000.00. With- drawn by disbursements under receivership : Doughty over-issue et al $671,723.29 Charged from property account to loss account for or- ganization expenses 157,138.54 Aggregating $1,353,861.83, no part of which can be said to have been lost in the legitimate operation of the property. Had this large amount been invested in necessary equipments, as required by the business, also by Clause VI. of the lease, the revenue would have been so greatly increased as would have obviated the expenditure of $1,983,055.74 as shown in its annual reports was paid for mileage on rolling stock from December 31, 1886, to June 30, 1900, in excess of that received. Notwithstanding the handicap placed on the business of the lessee company by its failure to comply with the covenants of Clause VI., its annual reports show net earnings — 1898 $272,262.23 1889 483,005.50 1900 : 319,658.50 Aggregate net earnings for benefit of stockholders $1,074,926.2 3 Average for the three years, $358,308.74, or average per cent, per annum 11.45 011 the original investment, a result equaled by few, if any, railroad systems in the United States during the same period. The road was operated last year at 72.26 per cent, of the gross earnings. Had it been operated at the same percentage of the two previous years, 66.21 per cent., the surplus for stock- holders would have been $310,000 greater. Regarding increase in operating expenses, the official annual report of June 30, 1900, says : “ The increase of $256,678.95 in maintenance of way and structures was due chiefly to the cost of improvements required to be made to the property under the terms of the lease, such as renewals of bridges and culverts, with 7 permanent structures, new fencing, block signals, and arching of tunnels.” The approaching completion of permanent betterments re- quired by the lease now being expedited, will reduce operating expenses to the normal percentage, thus offsetting the increased rate of rental accruing during the last period of the lease which he mentions. Your position under the trust is peculiar ; representing this city in an important venture which is unique in municipal history, and which has attracted national attention of students of eco- nomics. The decision you must make involves a great responsi- bility, without precedent in the administration of a municipal trust. The law under which you are asked to act is not mandatory ; its use is subject to your discretion. The financial question involved during the period to be dealt with, though of stupendous proportion, is not paramount. The property was acquired to protect the city’s threatened industrial and commercial supremacy as the leading city of the great Ohio Valley, connecting it and railroads centering therein with the railroad systems of the South centering at Chattanooga. You are now asked to part with its control for sixty-five years with- out a shadow of protection for the future , without business competition and for an inadequate rental , to a te?iant who admits having violated the important protective clause of the present lease. It is pertinent to inquire who compose the lessee company, so energetically and persistently urging action to secure this great property at such time as competition for it is impossible. They are those who negotiated under the lead of Andrews & Taylor through the Board of Sinking Fund Trustees the so-called sale of 1896, but are now led by the two local directors and a few affili- ated local stockholders, with the same systematic organization, under well-paid literary agents engaged in artificially stimulating a fictitious public sentiment, hoping thereby to secure your favor- able action. I again ask, who are the lessee company ? My information is that on July 1, 1898, the shares of stock of the Cincinnati, New Orleans & Texas Pacific Railway Com- 8 pany appeared on the company’s transfer register in the following names, viz.: Southwestern Construction Company . . . 20,492 shares Present directors of the lessee company . . 13 shares Former directors of the lessee company . . 29 shares Local stockholders affiliated and acting with the lessee company 2,383 shares All other stockholders 7 >083 shares Total issued 30,000 shares The Southwestern Construction Company is a New Jersey corporation, probably formed for the purpose of evading the double liability feature of Ohio corporation laws, and acquired their first holdings of C., N. O. & T. P. Railway stock early in 1897 through the Central Trust Company of New York, one James C. Quiggle and others acting for the Andrews & Taylor Syndicate and their associates identified with the raid of 1896, issuing their own stock, share for share, in exchange for the stock of the C., N. O. & T. P. Ry. Co. The stock of the Southwestern Construction Company is held as follows : By the Southern Railway Company .... 166 shares By the Alabama, Great Southern Railway Company, Limited 8,333 shares By the Alabama, New Orleans, Texas & Pacific Junction Railways, Limited . . 4,487 shares By the C., H. & D. Railway Syndicate et al 7,509 shares Total issued : . . . . 20,492 shares It will be observed that about 70 per cent, of the stock of the C., N. O. & T. P. Co., represented by shares of the South- western Construction Company, appears to be owned by the above named corporations, who will, therefore, become the bene- ficiaries of any extension of the existing lease, competition not being possible. The original 51 per cent, of the C., N. O. & T. P. stock, subscribed for and issued to the Erlanger Syndicate, or their representatives, after several changes of ownership and con- trol, is now consolidated in the treasury of the Southwestern Construction Company, as above shown, and is believed to have cost its present owners little or nothing. The additional 29 per 9 cent, of C., N. 0 . & T. P. stock, represented by stock of the Southwestern Construction Company, and now owned as above stated, has been purchased from time to time, through local brokers from local stockholders, at market rates, some as low as 5 cents on the dollar, and probably has cost the present owners less than 35 cents, average. If the present owners of the 20,492 shares of the capital stock of the Southwestern Construction Company will offer to sell their holdings at cost, responsible local parties stand ready to form a syndicate to purchase it ail for cash, thus assuming all the obligations of the existing lease, and relieving the Spencer Syndicate of the alleged burdens and hardships of which they complain. Respectfully, JAMES E. MOONEY.