reproduction of the physical property, and its present value—was
submitted to the Board of State Tax Commissioners as the work of
Professor Cooley, and in most of the literature descriptive of it, it
has been termed the "Cooley Appraisal."
After the completion of Professor Cooley's work, his figures were
submitted to Professor Henry C. Adams, who had been making a study of
the income accounts of the various companies, and to whom had been
assigned the duty of determining the non-physical or franchise values of
the properties.
Professor Adams has described[5] very fully the plan adopted for this
work, and this plan has been commented on so fully that any lengthy
description is deemed unnecessary. It appears to be perfectly proper,
however, to correct certain misstatements regarding this work.
When it was first determined to make the appraisal, Professor Cooley—not
Professor Adams—was requested to take charge. The assignment to
Professor Adams of the non-physical valuation was made after the
physical valuation was well under way.
The use of a negative or subtractive non-physical value was considered,
and advised by Professor Adams. The work was not undertaken with a view
of "increasing the assessments," but to put the Tax Commission in
possession of a figure which would represent the business value of the
property as well as the physical value.
Professor Adams held that the non-physical element of value was not a
simple commercial element, but included:
{to be a corporation,
The franchise {to use public property,
The possession of traffic not exposed to competition,
The possession of traffic through connections,
The benefit of economies due to density of traffic,
The value due to organization and vitality of industries served.
He also held that, as nothing visible or tangible gave support to this
value, it must be determined on the basis of information secured from
the income accounts of the company.
Without going into any complete description of Professor Adams' method,
it may be said that he made an analysis of the income accounts, and,
after providing for operating expenses and taxes, he deducted, as an
annuity properly chargeable to capital, a certain percentage of the
appraised value of the physical properties. Any remainder was
capitalized to give the true value of the immaterial element, or the
business value.
In the rates of capitalization and annuity used in 1902, there were
certain changes, making them differ from those used in 1900, and
certain changes in the detail of analysis of income accounts and
methods of determining the rates of interest which are entirely
immaterial to the present narrative. The work was of great importance
as being the first exposition of this method of obtaining non-physical
values. It was a fair, logical, and business-like attempt to determine
those elements which give a well-designed, economically-built, or
advantageously-located property a greater value as a money-earning
concern than the actual capital invested, or than the actual value
remaining in its physical property.
It will be seen that, in the case of a property in which the surplus
earnings depend on excessive rates for service, it will fail as a method
of determining a value for use as a basis of rate-making; and it fails,
in the form in which it was used in 1900 and 1902, to bring out those
negative or subtractive elements which may be determined from the income
accounts, in the case of properties which do not earn a fair return on
the investment. This, however, was due to the fact that the taxation
laws of Michigan made no provision for any reduction of value because
property was idle or non-productive, and any such deduction in the case
of corporation property would place it on a different basis from other
property. Professor Adams and his associates, therefore, applied only
positive values, where any such were found, although advocating the use
of negative values.
The writer has seen no criticism of Professor Adams' work which is not
apparently incited by, either the direct interest of corporations in
lowering valuations for taxation, or by an effort to confuse the subject
of valuation so as to discredit the work in the eyes of taxing
authorities. Any person competent to discuss the matter, who has given
Professor Adams' method careful thought, will be forced to the
conclusion that this was a long step in the direction of the final
solution of these important and perplexing elements of value.
History and Results of the Michigan Appraisal.
Based on the valuation of 1900, the Board of State Tax Commissioners was
enabled to comply with the statute in reporting to the Legislature. New
laws were passed, sundry suits were brought, and, finally, the case of
the Michigan Central Railroad _vs._ Perry F. Powers, Auditor-General,
and a number of other cases in behalf of other roads, were brought to
trial before the United States Court for the Western District of
Michigan.
This Michigan Central case was a suit to restrain the collection of
taxes based on the new assessment, the railroads claiming that their
property was assessed at full value, while general properties of the
State were assessed at a considerably lower percentage than full value.
This suit was essentially a valuation of the railroad properties as of
April, 1902. This work was done along the same line as the former
valuation, by a portion of the same staff. The old work was brought down
to date, and certain special studies were made, which resulted in a
change of right-of-way valuation, as has been related.
In the trial of the case of Michigan Central Railroad _vs._ Powers, the
two valuations were fully testified to by all the men engaged, and the
record relative to the appraisal fills several volumes.
Subsequently, in 1906, Professor Cooley was engaged by the
Attorney-General, and, re-assembling the staff, brought the work down to
date as of April, 1906.
There has been no permanent force engaged on the work in Michigan, and
the re-appraisals have only been made as actual necessity demanded.
_Market Value of Stocks and Bonds._—During the progress of the appraisal
of 1900 an independent force of men was engaged in studying the market
values of stocks and bonds of Michigan roads with a view to securing
information on every possible line that would aid the appraiser in
reaching proper conclusions, or enable him to check his figures. These
figures were used only as a check, and no report of the details of this
work was submitted.
_Error in Published Reports as to Michigan Work._—In several articles
descriptive of the Michigan work, one quite serious misstatement of fact
has inadvertently been made. The writer is not quite sure how or where
the wrong impression originated, but it has been noted in several
articles and editorials.
Substantially, all accounts are similar to that of Professor Taylor,[6]
which is:
"In looking over the notes and results of the work done in Michigan, it
was noticed that Mr. Cooley's engineers, car-men and other experts went
over the property of each railway company and enumerated and valued the
same, and then the railway company generally had its own men perform the
same work in order to check up the appraisal made by the State
authorities. Thus, this expensive work was unnecessarily duplicated."
Undoubtedly this statement was made in good faith, and has gained
currency by not having been corrected, but it is not the fact.
The Chicago and Northwestern Railway took immediate steps to make
surveys and secure data, as has been described, and made a complete
appraisal, using the Michigan forms. The result of this appraisal was:
Chicago and Northwestern, present value $8,551,530
State appraisal, present value 8,281,090
In this case the railroad had no records, and the work was of value to
them, not only as a check on the work of the State, but also as giving
them complete records of permanent way. It was not done independently
of, and after, the State work, but was organized so that the field work
of both railroad company and State was done at the same time.
No other complete work of valuation was done by the railroad companies.
During the trial of the cases, no contrary or different valuations were
set up. No special attack was made on the work, except to select here
and there some specific example of a building which was appraised at a
higher figure than cost, perhaps half a dozen in all, and to introduce
expert evidence, particularly on land and right-of-way values. Aside
from the money expended on the litigation, there were no expenditures by
the roads in checking up the work. On the contrary, a number of
managers, at their own expense, had typewritten copies of the final
report as to their own lines made, in order to file in their records.
It is a fact that only one of the seventy-eight roads made a complete
appraisal, covering 387.8 miles of main line, and none of the other
roads or mileage went to any considerable expense.
_The Cost of the Work._—No complete statement of the total cost of the
work of valuation in Michigan has ever been issued as a public document.
The cost of the work, including salaries of appraiser, engineers,
assistants, clerks, all expenses of the Board of Review, all expenses
connected with Professor Adams' non-physical appraisal, also all office
rent, stationery, supplies, telegraph, telephone, and railroad expenses,
printing and binding—in short every dollar chargeable to the Michigan
railroad appraisal of 1900—footed up to $70,604.21.
The exact mileage of roads in the State was:
Main track 7,082.35 miles.
Second track 164.83 "
Branches 730.92 "
Spurs and sidings 2,904.70 "
_________ ______
Total 10,882.80 miles.
Average cost per main-line mile $9.97
" " " total-track " 6.50
The exact figures of cost of the subsequent work of appraisal, or the
costs of the litigation, are not available to the writer. In a general
way, it may be said that the cost to the State of the railroad tax cases
was not far from $75,000, and that the expenses of the second and third
appraisals were less than $50,000, so that, to date, the entire cost to
the State of Michigan is less than $200,000 for the three appraisals and
the litigation growing out of them.
Some information as to details of costs may not be out of place. All
employees were paid a salary and required to provide their own
subsistence. Salaries ranged from $250 to $500 per month for experienced
men, from $125 to $250 for men with only a few years of experience, and
from $75 to $125 for assistants and clerks.
All traveling expenses (except hotel and subsistence) were paid, the
State issuing mileage books to all employees, and receiving a complete
check on the movements of every man through the mileage bureau. The
telegraph and long-distance telephone were used almost exclusively in
communication between the office and the men in the field, all bills
being paid by the State. All expenses of inspection by hand-car,
velocipede-car, etc., were paid by the State, except as the roadmasters
made trips with the inspectors.
The unvarying policy of the appraiser was to reimburse the companies for
all extra expenses incurred on account of the work, and to accept no
transportation or favors from any company.
TABLE 7.—GRAND SUMMARY OF RAILROAD APPRAISAL OF 1900 AS TO
SEVENTY-EIGHT INCORPORATED RAILROADS.
PHYSICAL APPRAISAL.
════╤══════════════════════════════════════╤═════════════╤═════════════
Item│ Subject. │ Cost of │ Present
No. │ │reproduction.│ value.
────┼──────────────────────────────────────┼─────────────┼─────────────
1│Engineering, 4% on items 2 to 25, │ $5,386,772│ $5,386,772
│ inclusive, and on item 33 │ │
2│Right of way and station grounds │ 27,745,313│ 27,745,313
3│Real estate │ 863,337│ 863,337
4│Grading │ 21,699,995│ 21,693,024
5│Tunnels │ 1,148,070│ 1,093,445
6│Bridges, trestles, and culverts │ 8,027,119│ 6,337,819
7│Ties (cross- and switch-ties) │ 11,139,924│ 6,148,748
8│Rails │ 28,703,012│ 21,865,994
9│Track fastenings │ 3,845,030│ 2,987,982
10│Frogs, switches, and crossings │ 1,469,781│ 1,040,120
11│Ballast │ 3,723,558│ 3,723,558
12│Track laying and surfacing │ 6,555,638│ 6,400,972
13│Fencing │ 2,763,595│ 1,627,790
14│Crossings, cattle guards, and signs │ 607,542│ 428,474
15│Interlocking and signal apparatus │ 501,883│ 448,686
16│Telegraph (30) telephones │ 258,985│ 134,797
17│Station buildings and fixtures │ 4,108,736│ 3,111,103
18│Shops, round-houses, and turn-tables │ 2,157,228│ 1,467,569
19│Shop machinery and tools │ 1,107,910│ 882,634
20│Water stations │ 725,670│ 522,135
21│Fuel stations │ 303,289│ 201,461
22│Grain elevators │ 1,336,794│ 1,609,043
23│Warehouses │ 258,646│ 183,910
24│Docks and wharfs │ 5,531,919│ 3,831,934
25│Miscellaneous structures │ 1,234,345│ 856,253
26│Locomotives │ 9,021,517│ 5,092,053
27│Passenger equipment │ 3,197,473│ 2,277,271
28│Freight equipment │ 19,734,240│ 13,690,587
29│Miscellaneous equipment │ 702,940│ 423,689
31│Ferries and steamships │ 1,725,000│ 1,095,500
32│Electric plants │ 93,061│ 89,898
33│Terminals. Included in Items 1 to 32 │ │
34│Legal expenses, 0.5% on items 2 to 25,│ 673,349│ 673,349
│ inclusive, and on item 33 │ │
35│Interest, 3% on items 1 to 34, │ 5,290,549│ 5,290,549
│ inclusive │ │
36│Miscellaneous│Organization, 1.5% on │ 2,645,277│ 2,645,277
│ expenses │ items 1 to 34, │ │
│ │ inclusive │ │
│ │Contingencies, 10% on │ 18,428,759│ 15,127,110
│ │ items 1 to 34, │ │
│ │ inclusive │ │
────┼─────────────┴────────────────────────┼─────────────┼─────────────
│TOTAL COST OF CONSTRUCTION AND │ $202,716,262│ $166,398,156
│ EQUIPMENT. │ │
│ │ │
37│Stores and supplies │ 1,474,829│ 1,474,829
│Average per main-line mile │ 28,263│ 23,495
│ " " total-track mile │ 18,627│ 15,290
│ │ │
│TOTAL VALUE OF NON-PHYSICAL ELEMENT │ │ 35,814,043
│ (H. C. ADAMS) │ │
════╧══════════════════════════════════════╧═════════════╧═════════════
_The Result of the Michigan Work._—Any undertaking must be judged by its
results. The Attorney-General's report for 1906, on pages 21 and 23,
states:
"These cases are among the most important in the history of the State.
They constitute the last step in subjecting railroad property in
Michigan to taxation on the same basis and at the same rate as other
property is taxed, and secure practical uniformity and equality of
taxation between railroad and other property.
"As a result of these cases the various railroad corporations paid in
taxes $4,787,478.15, and as penalty thereon $1,158,321.18, a total
amount of $5,945,799.43 for the years 1902, 1903 and 1904. The 1905 tax
being paid soon after the decision of the Supreme Court, nothing was
paid under the former law (specific tax on earnings) and, of course,
there was no penalty on the 1905 taxes as they were paid before May 1,
1906."
In short, the roads are paying to the State of Michigan an average of
$1,595,826.05 more per year than they paid under the old law, and to
date the State has received about $10,750,000 more from taxes than it
would have received under the old specific tax law.
Railroad development in Michigan has received no appreciable check, and
notwithstanding a 2-cent fare and the bearing of an equal burden of
taxation, the properties are maintained, and improvements,
double-tracking and betterment of general standards fully keep pace with
similar work in other States.
Of course, it must be recognized that other forces besides the appraisal
helped to bring this about. The appraisal of 1900 furnished the
information. Public opinion compelled the passage of the needed laws,
and the magnificent legal work of Attorneys-General Blair and Bird,
Congressman Townsend, and Judge Knappen, and their associates, loyally
supported by Professors Cooley and Adams and the appraisal staff, were
all factors in securing the decision of the Supreme Court of the United
States.
-----
Footnote 5:
Bulletin 21, U. S. Bureau of the Census, p. 78.
Footnote 6:
Bulletin 21, U. S. Bureau of the Census.
RAILROAD APPRAISAL OF THE STATE OF TEXAS.
_Authority for the Work._—In 1893 the Legislature of Texas enacted what
is known as the Stock and Bond Law, which was designed to control and
limit the total amount of stocks and bonds that may be issued on any
railroad property to the "reasonable value of said railroad property."
This law further provides that:
"It shall be the duty of the Railroad Commission to ascertain, and in
writing report to the Secretary of State, the value of each railroad in
this State including all its franchises, appurtenances and property."
The work of valuation in Texas antedates that in Michigan, and offers
some interesting opportunities for comparison of methods under somewhat
similar conditions, as far as the existing roads were concerned. The
work being in the hands of a permanent commission with very broad
powers, it has been possible to secure from recently built roads very
full and specific data as to construction, but with these later
valuations and with the current work of the department, this paper will
not deal.
The Commission of Texas interpreted the law to mean the estimated cost
of reproducing or duplicating the properties at the date of valuation,
allowing current market prices for all material and fair valuations on
all real property.
_Method of Physical Appraisal._—The Commission duly appointed engineers
to make these valuations. The railroads of the State were unfavorably
disposed toward the work, and were inclined to withhold information.
The Texas staff encountered the difficulty due to destruction or loss of
construction records, maps, and profiles. They had for their guidance
only the profiles, filed under a prior law, and were thus compelled to
depend wholly on original field work to secure their data. From a paper
by R. A. Thompson, M. Am. Soc. C. E.,[7] the following description is
taken:
"They [the engineers] with the profiles ... in hand, made a detailed
inspection of the railroads on the ground. The quantities of excavation
and embankment, where the actual quantities could not be obtained, were
estimated approximately from the profiles, using the center heights of
the cross-sections. The classification of the materials in excavation
was determined by inspection. Where original plans and estimates of cost
of the bridges, buildings and structures of all kinds could not be
obtained from the records of the railroads, their value was estimated
from measurements taken on the ground. The extent and acreage of the
right of way, the depot and terminal grounds, were determined by actual
measurement, or from maps furnished by railroads, or from city and
county tax records.
"After an examination of a railroad had been made by the engineers of
the Commission, its valuation was prepared on estimate sheets. Upon
sheets marked Estimate Sheet A ... were recorded the values of the right
of way and depot grounds, roadbed, track, bridges, structures and way
building for each mile, the value of ten miles being recorded on each
sheet.... On these sheets space was provided for the units and prices,
and columns for carrying out the values for each mile and the totals.
"The value of all rolling stock and equipment, and the value of such
properties as were properly applicable and chargeable to the entire
railroad, were recorded on a separate estimate sheet, only one sheet
being used for a railroad."
It thus appears that the general methods of securing the data and making
the field examination were quite similar to those adopted on the
Michigan work. The classification of items on the sheets is rather more
full than on the Michigan summary sheets, but apparently not so
completely in detail as the final compilation of work. In general,
however, the physical items included are complete in both cases. The
form in which the results are finally put up is radically different.
The following points of variations from the practices of the Michigan
appraisal are noted:
(_a_) The unit prices were current market prices.
(_b_) The value applied to right of way and real estate used for
railway purposes was in accordance with the current market
value of other property immediately adjoining, disregarding
donations or property acquired at less than value.
(_c_) No deduction was made on account of depreciation, as it
was considered that all structures must be maintained in
first-class, serviceable value, and renewed when necessary,
and no allowance was made for appreciation of roadbed.
(_d_) No allowance was made for franchise values of any kind,
except track rights in streets.
(_e_) No allowance was made for contingencies, except as made in
prices or quantities.
Their practice was in accord with the Michigan appraisal, in allowing
from 5 to 6% to cover legal and engineering expenses and
superintendence, and from 5 to 6% to cover interest during construction.
_The Result of the Texas Work._—The object sought in Texas was to secure
a capitalization in harmony with the actual investment in the physical
property; in short, to "squeeze out water."
Of course, all stock and bond issues outstanding in 1894 are still in
existence, except as a few roads have been sold out or re-organized. No
new issues of stock or bonds may be made on roads in excess of the
valuation. Consequently, new roads are limited to issues of bonds not
far from $15,000 per mile. The effect is shown by Table 8, from the
Railroad Commission's Report.
TABLE 8.—MILES OF RAILWAY IN OPERATION IN TEXAS, 1894 TO 1908,
WITH OUTSTANDING STOCKS AND BONDS.
═══════╤═══════════════╤═══════════════╤═══════════════╤═══════════════
On June│ Miles of │ Stocks │ Bonds │Total stock and
30th. │ railway in │ outstanding, │ outstanding, │ bonds
│ operation. │ per mile. │ per mile. │ outstanding,
│ │ │ │ per mile.
───────┼───────────────┼───────────────┼───────────────┼───────────────
1894│ 9,154│ $15,076│ $25,726│ $40,802
1895│ 9,291│ 14,874│ 25,420│ 40,294
1896│ 9,437│ 14,647│ 25,302│ 39,949
1897│ 9,484│ 14,320│ 24,793│ 39,113
1898│ 9,540│ 14,205│ 24,036│ 38,241
1899│ 9,702│ 13,997│ 23,562│ 37,559
1900│ 9,867│ 13,724│ 23,202│ 36,926
1901│ 10,154│ 12,922│ 22,649│ 35,571
1902│ 10,617│ 12,388│ 21,779│ 34,167
1903│ 11,029│ 11,971│ 21,464│ 33,435
1904│ 11,495│ │ │ 32,400
1905│ 11,662│ │ │ 33,418
1906│ 12,056│ │ │ 32,886
1907│ 12,577│ │ │ 32,142
1908│ 12,830│ │ │ 32,305
═══════╧═══════════════╧═══════════════╧═══════════════╧═══════════════
Total reduction, up to 1903, of stock per mile $3,105
" " " " " " bonds " " 4,262
─────────────────────────────────────────────────────
Total stock and bonds $7,367
E. L. Corthell, M. Am. Soc. C. E., speaking of results secured by the
Texas law, says[8]:
"The law, and generally its just operation, has cured many unmitigated
and notorious evils. Not only has the public in Texas been benefited,
but also the investor in railroad securities from the outside of the
State. The people of Texas now have just and uniform rates of
transportation, and the investor knows what he is purchasing, and may be
reasonably sure of a return on his investment."
Mr. Thompson says[9]:
"Another significant fact is that only a short time before the Stock and
Bond Law became effective about 39% of the railroads in Texas were in
the hands of receivers. To-day there is not a mile, of the 11,300 miles
in Texas, in the hands of receivers, and, with a few unimportant
exceptions, no railroad has been in the hands of receivers since the law
went into effect. The fact is that there has been no piece of
legislation, in this or any other State of the Union during the past
decade, which has been so fruitful of results and beneficent in its
action, alike to the railroads and the people."
-----
Footnote 7:
_Transactions._ Am. Soc. C. E., Vol. LII. p. 328.
Footnote 8:
_Transactions._ Am. Soc. C. E., Vol. LII. p. 346.
Footnote 9:
_Ibid._, p. 364.
RAILROAD APPRAISAL OF THE STATE OF WISCONSIN.