A REVIEW OF THE SPECIAL LIEN BOND SITUATION [with DISCUSSION]

The subject assigned to me is an interesting one because of the recent growth in importance of lien bonds, and the fact that ultimate experience with these bonds is so limited that definite conclusions are hard to form. Unquestionably, lien bonds issued for water works purposes have a better record during the depression than general bonds, and this fact alone has led to an increasing favor and an increasing number of issues of all kinds of lien bonds. It is becoming more and more important that the exact nature of this method of financing be analyzed correctly, and its soundness determined. It is just as important to point out the dangers which might develop in this system as in any other system which becomes popular and, therefore, likely to be overexpanded. There are several different kinds of bonds which might fall within the definition. I should define a special lien as a municipal bond, payable out of the revenues derived from a particular utility or property, and not a general obligation of the municipality which issues it. There are bonds which are both made a lien on utility revenues, and also a general obligation of the municipality, but these should be classified rather in the group of general bonds than in that of lien bonds. In current use, a lien bond is properly defined as such, even though it is not secured by a mortgage on the utility or property, but is only a lien on the revenues of such utility or property, which, under the law authorizing the issue, must be devoted solely, after the payment of expenses and maintenance, to the payment of interest and principal of the bonds. It is true that in such a case there really is no lien at all in the legal sense; there is merely a right to have the public officials apply this money to the payment of principal and interest, but popularly this right is spoken of as a lien. There are many lien bonds which are also secured by a direct mortgage on the utility or property, and in such cases, where a public utility is involved, it is not unusual to provide