3 3 £• * ; 
 
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 C o V A ^ 
 
 Reprinted from the Proceedings of the American Political Science Asso 
 
 ciation, Chicago, December 28-30, 1904. 
 
 STATE SUPERVISION OF LOCAL FINANCE. 
 
 JOHN A. FAIRLIE. 
 
 Mr. Bryce cites as one of the merits of our federal system of 
 government, that the separate states can try experiments in 
 legislation and administration; and that other states profit by 
 the experience of those who first introduce new methods. 
 Both of these statements can be supported by important evi¬ 
 dence ; but the benefits derived in this way have been much less 
 than they might have been, owing to the lack of means for 
 bringing the results of experiments in one state to the atten¬ 
 tion of other states. This Association can in some measure 
 supply this need, and reduce the enormous waste in experi¬ 
 mental legislation, by furnishing a clearing house for the in¬ 
 terchange of notes on the work of the various states. And 
 this paper is a small contribution in that direction, calling at¬ 
 tention to some significant legislation in a number of states, 
 and showing the correlation of measures apparently un¬ 
 connected. 
 
 Local administration in the United States during the first 
 half of the nineteenth century developed steadily in the direc¬ 
 tion of a completely decentralized regime. Our constitutional 
 system inevitably made the local authorities subject to the state 
 legislatures; and there was always a large amount of legisla¬ 
 tive control limiting the scope of local action. But within 
 the limits of powers conferred by the legislature there came 
 to be no administrative supervision over the acts of the local 
 officials. 
 
 During the last half century there has been in evidence a 
 counter wave, making its way slowly and with difficulty, and 
 as yet far from overcoming the earlier tide; but nevertheless 
 
2 
 
 gaining in force as time goes on. In many branches of admin¬ 
 istration there have been established state officers and boards 
 with varying powers of inspection and supervision over local 
 officials. This has been the case in the field of health regula¬ 
 tion (of which we have just heard), in charity administration, 
 in school management and in local finance. 
 
 It is with the movement towards state administrative super¬ 
 vision in the last named of these fields that this paper is con¬ 
 cerned. It is proposed, first to describe what has been ac¬ 
 complished in those states where most has been done; and then 
 to consider the general principles of a wise policy in this mat¬ 
 ter. What has been done has been mainly in reference to 
 Taxation and Accounting. What will be said as to a general 
 policy will consider also the question of local indebtedness. 
 
 TAXATION. 
 
 Local authorities in this country have only such power of 
 taxation as is conferred by the legislatures. And as yet no 
 local authority in this country has been given power to deter¬ 
 mine for itself what kind of taxes it should levy, but may levy 
 only those taxes specifically authorized by statutes. There is 
 therefore no room for administrative supervision in this direc¬ 
 tion, since the local authorities have no sphere of independent 
 action. 
 
 As to the rate of taxation local discretion is also closely 
 limited. For some taxes, notably the tax or license for the 
 sale of liquors, the state law specifies the rate as well as the 
 nature of the tax. For the general property tax more lee¬ 
 way is given; but on the one hand the local authorities are 
 compelled by statute to levy taxes to meet certain expendi¬ 
 tures, and on the other hand are usually restricted as to the 
 aggregate tax rate; and between this Scylla and Charybdis 
 a narrow course must often be steered. Under these circum¬ 
 stances again there is little opportunity for administrative 
 supervision; and none has developed. 
 
 When, however, we turn to the assessment of property for 
 the general property tax, we find a wide field for local dis¬ 
 cretion, and in recent years significant steps in the direction 
 
 f 
 
of administrative supervision. Under the methods prevailing 
 in the early part of the nineteenth century, local assessors had 
 complete freedom in the valuation of property, not only for 
 local taxes but also for state taxes. It was in reference to 
 the state taxes that the first step was taken in the direction of 
 administrative supervision^ Beginning apparently in Ohio 
 in 1825, state boards of equalization have been established in 
 most States, with power to change the aggregate valuation of 
 counties so as to equalize the apportionment of the state tax. 
 These state boards of equalization differ widely in their or¬ 
 ganization ; but none of them have the necessary means to per¬ 
 form their work satisfactorily. In some states they have been 
 composed only of ex-officio members, elected to other positions, 
 and therefore unable to give much attention to their duties in 
 regard to assessments. In several states the boards are com¬ 
 posed of a large number of members, elected in local districts, 
 who give only a small part of their time to this service,—the 
 extreme case being found in Ohio, where it is composed of 
 forty members, who meet once in ten years. In a few 
 states, as New York and California, there is a small number 
 of salaried members, giving most of their time to this work 
 and that of direct assessment; but even in these cases it is 
 impossible for the board to make a complete investigation of 
 the local assessments that would be necessary for an accurate 
 equalization. 
 
 Tax commissioners and economists have discussed at length 
 the failures and defects of these boards of equalization. More¬ 
 over they do not come strictly within the subject of this paper; 
 and have been noted simply as the first stage of supervision/ 
 which paved the way for later centralizing developments. 
 We may therefore proceed to consider the latter, considering 
 them in the logical rather than in their chronological order. 
 
 It may be noted here that these centralizing tendencies in 
 relation to local taxation have been but one aspect of more 
 general changes in the tax laws. And it may be said that it 
 was only after the States had introduced some control over the 
 administration of assessments for state revenue, that the 
 importance and complexity of the work of local assessors and 
 
1 
 
 the need for effective supervision over their local duties was 
 understood. 
 
 Effective state supervision over local assessing officers seems 
 ; to have been first established in Indiana. In 1891 there was 
 established in that state a State Board of Tax Commissioners, 
 consisting of two salaried members in addition to the ex-officio 
 members of the former State Board of Equalization: to pre¬ 
 scribe all forms of books and blanks used in the assessment 
 and collection of taxes; to construe the tax and revenue laws 
 of the state and give instructions to local officers when re¬ 
 quested ; and to see that all assessments of property were made 
 according to law; and to visit each county in the state at least 
 once a year to hear complaints, collect information and secure 
 compliance with the law. Besides carrying out these manda¬ 
 tory powers, the State Tax Commissioners have since 1894 
 annually called the county assessors of the state to an annual 
 conference. 1 
 
 v'ffn 1896 a board of Tax Commissioners was established in 
 New York with somewhat less authority including the pow6r 
 to investigate and examine methods of assessment within the 
 state; to furnish local assessors with information to aid them; 
 and to ascertain whether the local assessors faithfully dis¬ 
 charged their duties. 
 
 A Michigan statute of 1899 provided for a board of Tax 
 Commissioners with power: to exercise general supervision 
 over the local assessing officers; to confer and advise with 
 them as to their duties; to visit each county in the state once 
 a year, to hear complaints and secure the full assessment of 
 all property in the state. They were also empowered to sum¬ 
 mon and examine witnesses under oath, to inspect the local 
 assessment rolls, to change the assessment and to add to the 
 rolls property not assessed. 
 
 And a Wisconsin statute of the same year provided for a 
 Tax Commissioner with two assistants to have general super¬ 
 vision over the system of taxation throughout the state, with 
 specific authority to require reports from local officers. Two 
 
 1 Rawles: Centralizing Tendencies in the Administration of Indiana, 
 273, 276. 
 
5 
 
 years later added powers were conferred: to supervise local 
 assessors and boards of review; to advise and direct local as¬ 
 sessing officers, and to initiate proceedings to enforce the laws 
 against negligent or delinquent officials; and to visit the 
 counties and investigate the methods of local assessors. An¬ 
 other statute of 1901 created the new office of county super¬ 
 visor of assessment, with powers of supervision over town and 
 city assessors. 
 
 These administrative measures have not solved all of the 
 difficulties connected with the assessment of property for taxa¬ 
 tion ; but in most of these states they have brought about a de¬ 
 cided improvement both in methods and results. Statistical " 
 results are less striking in New York than in the other states, 
 partly perhaps because the powers of the state tax commis¬ 
 sioners are less, and partly because of the subsequent develop¬ 
 ment of special taxes for state revenues which has apparently 
 caused a relaxation of the supervision of local assessments, 
 now used mainly for local purposes. But in Indiana the as¬ 
 sessed valuation of real estate was increased by 44 per cent, 
 in one year after the new system went into effect." In Michi¬ 
 gan the assessed valuation of property has increased over 60 
 per cent, from 1899 to 1903. 3 And in Wisconsin where the 
 most thorough system of supervision has been established, 
 local assessments more than doubled in three years. 4 And it 
 may be further noted that in each of these three states the 
 aggregate assessed valuation of property is from 30 to 50 
 per cent, larger than in the neighboring state of Illinois, 
 whose population and wealth is more than double that of the 
 other states, but where there is no efficient system of 
 supervision. 
 
 Years before these recent measures for the supervision of 
 local assessors there began the policy in many states of a 
 more complete centralization in the assessment of special 
 
 2 $ 553 , 937,744 in 1890; $898,600,323 in 1891. Rawles, 276. 
 
 3 $968,189,097 in 1899; $1,537,355,738 in 1903. 
 
 4 $648,035,848 in 1899; $1,369,811,147 in 1902. Report Wisconsin Tax 
 Com., 1903, p. 10. 
 
5 
 
 classes of property, especially railroads and more recently other 
 transportation companies and also telegraph and telephone 
 companies. In fact only in Rhode Island, New Mexico and 
 Texas are railroads still assessed only by local authorities. In 
 some cases this centralization of assessment has been part of 
 the movement to secure such taxes for the state treasury; but 
 in a number of states—notably in Indiana and Illinois since 
 1872—the state assessment of such property has been used for 
 purposes of local taxation. Usually this centralized state as¬ 
 sessment has been established only for the property of cor¬ 
 porations extending over a large number of local taxing dis¬ 
 tricts; but in New York, under a law of 1899, the state Tax 
 Commissioners assess for local taxation the value of special 
 franchises in the public streets, which are for the most part 
 held by local companies; and in 1901 the Indiana Tax Com¬ 
 mission was given charge of the assessment of street and elec¬ 
 tric railways. The New York Franchise Tax Law has been 
 of great value in drawing attention to a large amount of 
 wealth that had previously escaped taxation; but it may be 
 questioned whether the separation of the franchise from other 
 property elements or the complete centralization in the assess¬ 
 ment of distinctly local property is necessary or altogether 
 advisable. In other states the value of such special franchises 
 is now often included (without additional legislation) in the 
 general assessment of the owners in the ordinary course of 
 valuing property for taxation. 
 
 AUDITING AND ACCOUNTING. 
 
 State supervision over local accounts is as yet less developed 
 than state supervision over local assessments. This is per¬ 
 haps not surprising in view of the fact that in most States 
 fthe accounts of state finances are very far from satisfactory. 
 It is true there have been state Auditors and Comptrollers 
 since the establishment of state governments—and in some 
 cases similar officers in colonial times. But the functions of 
 such officers have often been limited; while primitive methods 
 of book-keeping established in the days of insignificant finan¬ 
 cial transactions have remained in use after expenditures have 
 
7 
 
 come to be counted in millions of dollars, and in the face of 
 the development of systematic accounting in private and cor¬ 
 porate business. Indeed the imperfect and inadequate ac-^ 
 counting methods of the larger cities have often been some¬ 
 what better than those of the states within which the cities 
 are located. 
 
 But within recent years there have been significant measures 
 taken both to establish satisfactory accounting systems for 
 the state finances, and also to establish state supervision over 
 the accounts of local officers. It is only the latter part of 
 this development that can be here considered. 
 
 Massachusetts seems to have been the first state to have 
 undertaken any effective control over local accounts. And 
 here the supervision has been confined to officers of the coun¬ 
 ties, which in that state hav$ never developed any vigorous 
 local autonomy. Thus appropriations and tax levies for each 
 county except Suffolk have long been voted by the legislature, 
 although this is largely a matter of form and the estimates 
 and proposals of the county commissioners are regularly 
 adopted. In 1879, however, the commissioners of savings 
 banks were authorized and required to inspect the books and 
 accounts of most of the county officers, with power to require 
 uniformity in methods of keeping accounts and financial re¬ 
 ports in accordance with prescribed forms. In 1887 the 
 state supervision was made more effective by placing it in 
 the hands of a newly established office of controller of county 
 accounts, whose duties included the accounts of some officers 
 previously exempted. 
 
 Valuable results have come from this supervision of county 
 accounts. Irresponsible methods disclosed in the 70’s have 
 been corrected; and important reforms have been introduced. 
 Governor Bates two years ago testified to the good that has 
 been devised from the uniform system of accounting estab¬ 
 lished in the counties; 5 and endorsed a similar supervision over 
 municipal accounts. 
 
 5 R. H. Whitten: Administration in Massachusetts, 149-151 (Columbia 
 University Studies in Political Science, vol. 8). Annual Message of Gov¬ 
 ernor Bates, January 8, 1903. 
 
8 
 
 One of the youngest states in the far west was the next to 
 follow up these partial measures of the old Puritan Common¬ 
 wealth, by establishing a comprehensive system of state super¬ 
 vision over local accounts. The Constitution of Wyoming, 
 adopted in 1890, provided for the office of State Examiner to 
 examine the accounts of certain state officers, clerks of courts, 
 county treasurers and such other duties as the legislature 
 might prescribe. This was followed by the enactment of 
 statutes, which before long placed under the supervision of 
 this officer the accounts of every public officer in the state 
 handling public funds; authorized him to establish a uniform 
 system of book-keeping by the state and local officials, and to 
 examine their accounts; and made provisions for further action 
 in cases of defalcation discovered through his examinations. 
 The same officer has also supervision over banks and other 
 private financial institutions. 
 
 “ The examination of public accounts is technical and em¬ 
 braces the checking of every item whether great or small, the 
 subsequent footing of the cash accounts, and finally their 
 summation. Every account paid is closely examined, the 
 nature of the expense ascertained, the legality of the bill in¬ 
 quired into, and the amount is finally checked to the stub of 
 the warrant issued, and also entered in the proper column of 
 the expense register. Whether or not the officer conducted 
 the affairs of his office in conformity with the statute is also 
 made a subject of inquiry. 
 
 “ The examination made, a written report setting forth the 
 results accompanied with criticisms, requirements and recom¬ 
 mendations is prepared and filed with the Governor and a copy 
 thereof filed with the officer or officers whose accounts were 
 the subject of investigation. Should it appear that there had 
 been violations of law in the conduct of any office, the ex¬ 
 aminer must report thereon, and he has authority to enforce 
 his rulings. In case of defalcation or embezzlement, his 
 findings are absolute, until reversed by the district or other 
 court having jurisdiction. 
 
 “ In case of the default of any treasurer and the inability 
 of such officer to replace funds illegally used within the time 
 
9 
 
 designated by the examiner, the examiner shall at once assume 
 charge and in all respects he becomes the legally constituted 
 treasurer of the state, county, municipality, or school dis¬ 
 trict, as the case may be. 
 
 “Another important feature is the meeting of the examiner 
 with the constituted boards authorized to make the annual tax 
 levy. At such time the expense budget for the ensuing year 
 is carefully canvassed and reductions made wherever possible. 
 This paves the way for a reduced levy of taxes, and frequently 
 the total levy may be reduced from one-fourth to one mill 
 or more as compared with the previous year.” 6 
 
 Striking evidence may be adduced of the benefits resulting 
 from this system of supervision in Wyoming. In 1892 the 
 expenditures of the twelve counties in the state were $412,000, 
 while only two counties were on an approximate cash basis, 
 the others generally allowing their expenses to exceed their 
 revenues and issuing illegal warrants to pay bills. In 1899, 
 with thirteen counties, the total expenditures had been re¬ 
 duced to $295,000; and every county was on a cash basis with 
 a surplus at the end of the year. 7 Several Governors of the 
 state have specially commended the work of the State Ex¬ 
 aminer in their messages to the state Legislature. 8 9 
 
 Other states near Wyoming soon followed its example to 
 some extent. Montana and North Dakota have each created 
 the officer of State Examiner, with power to examine books 
 and prescribe accounting methods in county officers, as well 
 as state institutions. South Dakota, Nebraska and Kansas 
 have provided a less effective supervision,—in the two first 
 named through the State Auditor; in the last named through a j 
 State Accountant. 0 More recently (in 1903) Nevada has es¬ 
 tablished a more intensive system of control. A State Board 
 
 6 H. B. Henderson, in Nat. Mun. League, Conference in Good City 
 Govt., 1900, pp. 251-252. 
 
 7 H. B. Henderson, in Nat. Mun. League, Conference in Good City 
 Govt., 1900, p. 251. 
 
 8 Governor Wm. A. Richards in 1899, and D. F. Richards in 1903. 
 
 9 Nebraska, Laws of 1893, ch. 15; Kansas Laws of 1895, ch. 247. 
 
TO 
 
 of Revenue must approve the debts of local governments, pre¬ 
 scribe the forms for financial reports to the State Comptroller, 
 and employ an examiner to inspect the accounts and records. 10 
 And in the same year the extreme southern state of Florida 
 created the office of State Auditor, whose chief duty is to pre¬ 
 scribe the form of county accounts and see by inspection that 
 they are properly kept. 11 
 
 ^ In the State of Flew York something has been accomplished 
 in the same direction. Beginning in 1892 the State Comp¬ 
 troller has been given power to audit certain accounts of 
 county treasurers, including the court and trust funds and 
 the accounts for the inheritance tax; while the State Excise 
 Commissioner has similar authority over the accounts for the 
 liquor tax. The introduction of the Comptroller’s audit dis¬ 
 closed inextricable confusion in the various accounts of county 
 treasurers, and that within a few years before there had been 
 defalcations or shortages in thirty-three of the sixty counties 
 in the state. A uniform system of book-keeping has now 
 been introduced for these special funds, which with the 
 regular audit discovers and often prevents deficits and 
 defalcations. 12 
 
 In 1903 a statute was enacted requiring all cities in the 
 state with less than 250,000 population to make uniform finan¬ 
 cial reports to the Secretary of State. But as no provision 
 was made for uniformity of accounts or for an examination 
 or audit of the books of the city officers nothing has as yet 
 been accomplished under this provision. 
 
 Until two years ago this movement towards state super¬ 
 vision of local accounts was confined to the less important states 
 and to such partial measures in the larger states as have been 
 noted. But in 1902, the state of Ohio enacted the most im¬ 
 portant law on the subject yet adopted. This provided for a 
 uniform system of accounting, auditing and reporting for every 
 
 10 Laws of 1903, chs. 78, 123. 
 
 11 Laws of 1903, chs. 14, 71. 
 
 12 Fairlie: Centralization of Administration in New York State, pp. 185- 
 186 (Columbia Univ. Studies in Political Science, vol. 9). 
 
II 
 
 public office in that state, under the supervision of a newly 
 established bureau of inspection in the office of the Auditor 
 of State. The act requires separate accounts for every ap¬ 
 propriation or fund, and for every department, institution, 
 public improvement, or public service industry; provides for 
 full financial reports to the Auditor of State; and authorizes 
 annual examinations of the finances of all public offices, with 
 power to the examiners to subpoena witnesses and examine 
 them under oath. 
 
 To carry out the provisions of the act three deputies and 
 a clerk were appointed by the Auditor of State, all of whom 
 were former county auditors and experienced in local methods. 
 These, with the assistance of expert accountants who had given 
 special attention to municipal accounting, and after a thorough 
 investigation of existing practices, prepared complete systems 
 of accounting which have been installed throughout the state 
 in the offices of county auditors and treasurers, city auditors 
 and treasurers, village clerks and treasurers, school district 
 clerks and treasurers, and township clerks and treasurers. The 
 first examinations of the accounts are now being made by the 
 examiners of the bureau; and from theif reports comparative 
 statistics of local finances covering the whole state of Ohio 
 will be published. 
 
 This brief description of these various measures must bring 
 into clearer light their significance and the tendency which they 
 illustrate. No one considered by itself, nor even all that has 
 been done in any single state, may seem of very large import¬ 
 ance. But when the detached and apparently disconnected 
 pieces have been brought together, it must be evident that in 
 the aggregate they indicate a distinct movement towards state 
 supervision of local finance. We may therefore inquire into 
 the rationale of such a movement, and consider to what extent 
 it should be encouraged. 
 
 In some respects the movement may seem in conflict with 
 general principles which are still declared to be fundamental 
 in our American system of government. It must be admitted 
 at least that it is not consistent with the most extreme demands 
 
12 
 
 for local autonomy; and that state control is not so clearly 
 justified in this field by a general state interest, as is the case 
 in state supervision of health administration, schools, or the 
 local management of state finances. 
 
 If however, instead of unreasoned ideas, we apply the prin¬ 
 ciples of such political thinkers as John Stuart Mill and Henry 
 Sidgwick, it will be seen that this movement is in entire 
 ) accord with a rational political philosophy. These writers 
 recognize fully the advantages of locally elected authorities 
 for matters of local interest, as well as for the sake of the poli¬ 
 tical education of the people. But they also point out the ad- 
 . vantages of central supervision, not only where the interests 
 of the larger governmental units are directly concerned, but 
 also because of the more complete information and the larger 
 degree of technical efficiency which the higher government 
 can command. 13 
 
 Both of these latter factors support state supervision in the 
 two branches of local finance that have been noted. The as¬ 
 sessment of property with any approach to equality of treat¬ 
 ment calls for a high degree of expert skill, and the compari¬ 
 son of conditions over a wide area. A uniform system of 
 accounting is essential for accurate information on public ex¬ 
 penditures, and for the comparison of outlay with returns in 
 u the many branches of local administration. And state control 
 over the accounts of local public authorities is certainly as im¬ 
 portant as the control that has been established in most states 
 over the accounts of private corporations, such as railroads, 
 banks and insurance companies. It may also be noted that the 
 state supervision established over local finance does not re¬ 
 strict local management where local control is essential,—in 
 determining the amount and distribution of expenditures. 
 
 In conclusion attention may be called to another branch of 
 local finance where a system of state administrative supervision 
 is urgently needed,—over the loans and debts of local authori¬ 
 ties. The need for some control here is already recognized 
 in the constitutional and statutory debt limits established. 
 
 13 Mill: Representative Government, ch. 15. Sidgwick: Elements of 
 Politics, ch. 25. 
 
i3 
 
 But these arbitrary limits do not and cannot adjust themselves 
 to the varying needs and conditions of different local com¬ 
 munities. There is a great difference between a debt incurred 
 for water works, which will be met by the revenue from the 
 undertaking, and a debt for parks which must be paid from 
 general taxation, and a debt for street paving that may be 
 worn out in ten years. To decide whether additional debt 
 may be safely incurred can be determined wisely only after a 
 careful examination of a complex financial situation, involv¬ 
 ing a study, not merely of the aggregate amount of existing 
 debt, but also of the provisions for meeting this debt and of 
 the resources of the local government concerned. Such an 
 examination requires expert technical knowledge, which is 
 entirely absent from the present crude legislative limitations, 
 and can only be supplied by a permanent administrative 
 authority.