valuations grow out of or grow into cases at law. Under the prevailing
order, the litigants secure the services of the necessary expert
appraisers, who, in the course of examination, are subjected to
processes usually much better calculated to magnify than to harmonize
differences, and to cloud rather than to clarify issues, to the
detriment of the record, the confusion of the Court, and the attempted
discredit of the witnesses and their profession. Self-defense is
calculated to lead witnesses into undue reliance on rules and
mathematical formulas, as direct means of obtaining the desired result,
instead of aids for the final exercise of a right judgment as to the
real value of the property for the purpose intended, simply because it
is easier in dealing with attorneys to justify mere mathematical
processes than to support opinion resting on considerations of a general
character, not always readily measurable in figures. This tendency leads
also to under-valuations. A change in the process of Court procedure
relative to such expert evidence is needed, and the influence of the
Profession, both individually and collectively, might be used to secure
the appointment of such witnesses at the instance of the Court, instead
of the litigants, to the great advantage, both of society and of those
more immediately concerned.
C. D. PURDON, M. AM. SOC. C. E. (by letter).—A comparison of some of the
more important items in the Minnesota valuation may be of interest. In
the "Cost of Construction of Roadbed and Track," the principal items
are:
Land 25.46%
Clearing and grading 21.49%
Rails 12.72%
Bridges 7.01%
Ties 6.72%
These five items amount to 73.40% of the total cost, and "Adaptation and
Solidification of Roadbed" to 4.53%, the other twenty-three items
amounting to 22.07 per cent.
The estimated value of "Adaptation and Solidification of Roadbed" ranges
from $543 to $1,542.80 per mile, averaging $1,231.92, which includes 4½%
for engineering. If engineering is omitted, the average for all roads is
$1,124.95, and for "Carrying Roads"[48] $1,128.16.
The "multiplier" for cost of right of way was ascertained from the
market value of land in the vicinity, as shown by late transfers, and
the prices paid for right of way at about the same time; this cost
ranged from 195 to 891% of the market value. Taking "all roads," the
cost of land for terminals was 71.05% of the total cost of land for all
purposes, but only 3.78% of the quantity.
A. MORDECAI, M. AM. SOC. C. E. (by letter).—Mr. Riggs has done a
valuable service in preparing this very able and painstaking paper, as
the subject of the proper value of Public Service Corporation property
is one but lately demanding attention. When the country was undeveloped,
and the railroad companies struggling for existence, and often ahead of
the needs of the people, no criticism was made; but, during the last few
years, securities have increased so largely, the increased issue often
being manipulated so as to accrue to the benefit of a few individuals in
place of the great mass of original security holders, rates have been
made and defended on the plea that the increase was necessary to pay a
fair interest on the capital invested, and increases in assessments for
taxes were fought and criticized to such an extent by the companies that
the public seems to think it absolutely necessary to have some
investigating and regulating power. It argues that the history of the
past shows that we cannot depend on the officials themselves, not from
any desire to be dishonest or unfair, but merely that they cannot reach
the proper point of view. After years of struggling, they cannot see the
justice of being obliged to show their books or have their incomes
disturbed, while they see a neighboring factory, owned by a like
chartered company protected by patents and copyrights, greatly enlarged,
and the company paying a very handsome return on an ever-increasing
capital, without investigation of any kind.
No one supposes that any body of legislators or a committee selected
from one should understand the situation better than the managers
themselves, but the public, forced to look somewhere, demands that its
representatives try to regulate these matters and see that no abuses
occur, fully aware that the machinery is not perfect. It asks:
As to Capital: that the company can show proper value for the
securities issued, and, if an increase is made, the sum obtained
should be used for the betterment of the property;
As to Rates: the Courts have said that what the company is entitled
to ask is a fair return on the value of that which it uses for the
public convenience;
As to Taxes: what is the true value of the property of the company,
treating it with absolute equality, as compared with that of other
taxpayers?
It is to determine what these values are that the Engineer among others
has been called on. The literature on the subject is increasing, and
there are some decisions of the Courts which help, but there are yet
perplexing and intricate questions to be determined; not to be answered
by captious criticism and indignant retort, but by an honest effort to
arrive at some common ground of fairness to both State and Corporation;
for, after all, the Corporation is a part of the State, a great
distributor of money, a large taxpayer, its stockholders men of worth
and capacity, and there should be no desire to penalize it or interfere
with its legitimate prosperity. The Corporation is surely dependent on
the State and the good will of the people for its welfare. Mistakes have
been made, no doubt, just because this common ground has not been
reached, and the writer thinks that it is largely within the province of
the Engineer to establish it.
In arriving at either of these values, the chief tangible asset is the
value of the physical property. This can be determined with a great
degree of accuracy, and though by no means alone representing any of the
values, it seems to be indispensable as a basis and starting point. The
balance sheets of the Corporation commence with a statement of the cost
of road, plant, etc., and must be checked to permit correct deductions
from the results of operation shown in them; and, for purposes of
taxation, they would seem to be particularly reliable.
The Engineer called on to make such a valuation for whatever purpose
should, under like conditions, value each item the same for all, but it
does not follow that every item, including the percentages added, should
appear in the total valuation for all purposes. There are legitimate
charges in valuations made to determine capital which should not appear
in one made for assessment for taxes. Unit prices should not change, but
the purpose for which the valuation is made should properly be
considered in arriving at the final figure.
To or from this valuation, especially if made to determine proper
capital, there must be added or subtracted certain values for intangible
property, often found by a study of the income account of the
Corporation. This makes the official ask: Why make a valuation of the
physical property at all if your final result depends on the income?
Because it is one item which cannot be manipulated; it does not change
materially from year to year; it is not dependent on rates or income; it
forms a very large item in the assets of the Corporation; and it is a
sound basis on which to stand.
For the purpose of determining the proper amount of securities, the cost
of reproduction at present prices would seem to be the value sought;
whereas, for taxation purposes, or to determine a proper selling price,
the present value is what is required, allowance being made for
depreciation. A railroad, for instance, might be considered as an
instrument for transporting passengers and freight, and, though the ties
are not new, the rails worn, and the locomotives of an old type, they do
their work just as safely and expeditiously, and, if no account is to be
taken of the cost of maintenance, the road might be considered to be
worth as much as if new.
The officials of the Corporation are generally perfectly willing to give
any facts or to furnish access to any records they may have, but are not
willing to state their opinions as to prices, depreciation, etc. The
Engineer is making the valuation, not they; and they reserve the right
to criticize, at the proper time, both the results and the conclusions
drawn from them. The Engineer should be absolutely fair and just, not
using improperly the information obtained, but endeavoring to reach
results which appear to be unquestionably correct. He must divest his
mind of the innate desire to minimize the consequences of his decision
to the Corporation, on the one hand, or to favor the State or his
employer, on the other; it may be difficult, but on his ability to do
this depends the success or failure of his work.
Considering the subject generally: in making the valuation of the
physical property, the organization should consist of one man in charge,
and under him a field organization and an office organization. The
property, if large, should be divided into convenient districts, with a
division engineer and necessary assistants in charge of each. Care
should be taken that these assistants are competent men, though they are
often hard to obtain for temporary work of this character, and there is
not sufficient time in which to weed out and perfect an organization.
They should be men of experience on the particular class of work to
which they are assigned, and should be tactful and courteous. Stress
should be laid on keeping plain, neat notes, not too crowded; on
watchful care of the party working in the field, to prevent accidents,
and on the necessity of absolute correctness in calculations and
figures, in the multitude of which it is surprising how many mistakes
will creep in unless special care is taken to check every step
thoroughly. The office engineer should be equally competent, and
accustomed to systematizing and analyzing, so that the results will be
arranged systematically, not only as considered by themselves, but as
far as possible according to the classification of the Interstate
Commerce Commission, so that, no matter where made, they can be easily
compared.
The work, if large, should be standardized. Everything to be reported
should have a form for the purpose. These should be as concise as
possible, calling attention to the essential information, but not in too
much detail. Unit prices should be established after proper
consideration.
_Reproduction Value._—In ascertaining the reproduction value, the aim
should be to obtain prices for which the material could be purchased and
the work let to responsible parties at the date of the valuation. Real
estate and depreciation are probably the two items in which there will
be the largest differences in opinion as to values, and both should be
determined by the personal examination of experts, following some
prearranged system. One founded on the Somers system might do for the
land, and certain percentages of depreciation per year, varying for the
three conditions of good, fair and poor, for the structures and
equipment, but the results in any case should be examined and passed
upon by some one person so as to eliminate the individual equation as
far as possible.
It is when the figures thus reached are before him that the Engineer
finds himself confronted with many perplexing problems. To what items
should percentages be added, and in what amounts? A small change in such
items often makes a large difference in the total. There is not much
trouble about general expenses, legal expenses, engineering, etc., as
these are undoubtedly proper items to be added, and the amounts of the
percentages are not difficult to determine from sufficient study of the
property. Opinions on such matters will not vary greatly, but there is a
difference with regard to such items as leasehold interests,
solidification, contingencies, interest and taxes during construction,
commissions and discounts on securities, working capital, value of the
good will, and considering the property as a "going concern," about
which opinions will differ much more widely.
Leases from the company are like any other book asset. Leases to the
company should be considered as the land is considered. What is the
present value of the leasehold interest for the remainder of the term
for which the rental is fixed?
_Present Value._—In ascertaining the present value, it would seem that
something should be allowed for solidification, the amount depending on
the manner in which the work was built, its age, the likelihood of
damage by the elements, etc. Possibly a percentage of appreciation on
the value of the earthwork and masonry would be the fairest manner in
which to consider it. Due care must be taken, however, to give proper
credit to good work and not put a premium on inferior construction.
A percentage should be allowed for contingencies in all cases, but this
is not necessarily the same for every piece of property. The estimate is
made on a completed piece of work, consequently, if done with proper
care, this item should not be as large as if the estimate were made for
work to be constructed; but there are many things, not seen by the
estimating engineer or disclosed by available records, which must be
covered by this item, such as buildings bought with the land and
afterward destroyed, damages paid for reasons not now apparent,
difficulties encountered in excavating wet or hard material, amounts
spent in dredging, in artificial and difficult foundations, losses
during construction on account of strikes, washouts, etc. These are
perfectly legitimate charges, and are likely to have occurred, and
proper allowance should be made for them.
It would seem that interest and taxes during construction is a
legitimate charge, and therefore, in the cost of reproduction,
sufficient amounts should be added to cover it. Care should be taken to
make the time long enough, as engineers are often too sanguine as to the
length of time necessary to complete a certain piece of work. It is true
that a part of a railroad, for instance, may be completed and opened for
operation, but the net revenue derived would be very different from that
of the completed road with its terminals and connections.
A new corporation can rarely market its securities at par, not only on
account of the chances taken by the investor, but also because, being
human, he likes to think he is buying at a bargain, getting something a
little below its value; consequently, inducements vary from a small
discount on bonds to a share or two of stock thrown in. To what extent a
reasonable discount is a proper charge against construction may be
considered an open question. It might seem fair that a certain fixed
percentage be allowed in valuations, to determine capital for
commissions and necessary discounts, varying according to the amount of
the securities. This need not cover the whole amount of the discount,
but only that portion which experience would consider essential in
marketing unquestioned securities.
Consideration of the items working capital, good will, etc., may not
properly belong to the Engineer, but rather to the Statistician, except
as the former hears of such items being used as an argument against the
necessity for a valuation of the physical property of a corporation. It
is often asked, for instance, how can a value be placed on the property
of the Pennsylvania Railroad Company, with its great commercial
position, its magnificent terminals, and its splendid organization, all
the result of the expenditure of much time and money? It is certainly a
difficult problem, but the Pennsylvania Railroad is one of the greatest
properties in America, possibly in the world, and because the proper
valuation of this property is surrounded with difficulties it does not
follow that the valuation of the properties of all other public service
corporations are equally troublesome. The very difficulty of the task
shows the importance of having firm ground for the first step. Having
that, it may not be as hard as imagined to take others.
Thus it is seen that there are many perplexing questions for the
Engineer to consider, and many details for him to work out, in doing
which Mr. Riggs' paper will materially help. Above all, the Engineer
must aim to be impartial; he must arrive at such a point of view as to
see both sides with equal distinctness, and judge fairly and justly,
trying to determine some well-defined laws and formulas which will serve
as a basis in ascertaining the values desired.
W. B. RUGGLES, M. AM. SOC. C. E. (by letter).—In his discussion Mr.
Lavis quotes the case assumed by the _New York Sun_, of two bridges over
the Ohio River—one between Cincinnati and Newport and one 20 miles
below, between villages, etc.
In 1898 the writer was employed by the Board of Supervisors of
Cincinnati to put a valuation on its Ohio River bridges for purposes of
taxation, and the many points of view, as to their cost and their actual
value to the owners and to the communities, were at that time, and have
been frequently since, considered by him. In this particular valuation
the duties of the Engineer were comparatively simple and plain, for, as
there were sure to be controversies on two points at least, first, as to
the right of the city to levy any tax on the bridges as such, and
second, as to whether any control by the city extended to the center of
the river, informally but generally recognized to be the division
between the cities for police and similar purposes, or only to the
northerly low-water mark, the limiting boundary to the "Territory
Northwest of the River Ohio," as recognized by the ordinance of 1787, it
appeared to the Board to be advisable, in the earlier stages of their
efforts, to avoid, as far as reasonable, any controversies concerning
details of the valuation, and the writer was instructed to give the
bridge companies the benefit of any doubts.
The railroad bridge of the Cincinnati Southern Railway, the one lowest
on the river and having the little village of Ludlow at its southern
end, and thus most nearly filling the conditions of one of the assumed
structures of the _Sun_, is, with its railroad, the property of the
city, and the Supervisors believed that, under the terms of the lease to
the operating company, it should not be taxed.
Of the other four bridges, the Cincinnati and Covington Elevated Railway
and Transfer Bridge—commonly known as the Chesapeake and Ohio Railway
Bridge—the Covington and Cincinnati Suspension Bridge, the Central
Railway and Bridge Company's Bridge, and the Newport and Cincinnati
Bridge, commonly known as the Pennsylvania Railway Bridge (all noted in
the order of occurrence, passing up the river), the writer had official
or semi-official reports giving such details of at least the principal
features of the structures that in a measure they supplied quantities,
weights, and some prices; those lacking were either calculated from
actual measurements taken on the structures or supplied from plans
furnished by the companies, since, as the several companies relied on
defeating the efforts of the supervision on legal grounds, they conceded
values which otherwise might have been strenuously contested. As long as
the writer knew anything of the results, the Board of Supervisors was
unsuccessful in its purpose to get the bridges, as such, on the tax
duplicates; but that has no particular bearing on the points raised in
this discussion. Of the five bridges, three are primarily railroad
bridges. The Cincinnati Southern Bridge has one footway only, on which
it formerly collected tolls; all the others have footways and wagonways,
and the three above the Chesapeake and Ohio Railway Bridge carry
electric railways. The Newport and Cincinnati (Pennsylvania Railway)
Bridge has all the features of steam and electric railways, wagonways
and footways. In some particulars these bridges differ greatly, for
instance, the bed-rock of the river lies at the surface of the most
easterly (Pennsylvania Railway) bridge, and for each successive bridge
is found deeper, as the river is followed westward, the river-span piers
of the Chesapeake and Ohio Railway Bridge being 54 ft. below low water
and those of the Cincinnati Southern Railway Bridge being likewise very
troublesome.
The two bridges with exactly the same uses—double footways, wagonways,
and electric lines—are the adjacent Suspension and Central Bridges, one
having the City of Covington and the other the City of Newport at its
southern terminus, but these differ most widely as to valuation. The
Suspension Bridge, as reported to the writer by the late W. Hildenbrand,
M. Am. Soc. C. E., with the consent of his company, was valued at only a
little short of $1,000,000 as reinforced; that of the Central Bridge
Company, as reduced from the reports of the engineers, was very nearly
one-third, only, of that amount, both without any right of way, as real
estate was in all cases listed separately. At that time, however, the
traffic over the Suspension Bridge, counted in persons and vehicles
passing over its several lines, was not far from as relatively greater
than that of the Central Bridge as its valuation was higher, and it was
more indispensably necessary, as the writer views it, than either the
Central Bridge above, or the Chesapeake and Ohio Bridge below it, for in
the thirty odd years of its use (it was completed in 1867), the
adjoining communities had adjusted their lines of traffic to it, while
that passing over the other two bridges occurred more because of little
differences of convenience (not, however, to be considered otherwise
than an important provision in traffic of such magnitude).
Disregarding other differences, such as the unit prices of 10 or 11
cents per lb. for iron paid by the Suspension Bridge Company in the time
of the Civil War, compared with 4.47 cents per lb. for the new cable
wire or 3.32 cents per lb. for the new structural steel, it appears to
the writer that the element of more or less indispensable use by a
community, as well as the greater freedom of movement in the river below
by reason of there being no piers in the stream, are elements of value;
but that they are items to be reduced to figures for the purpose of
taxation is not so clear, any more than that there is equity in any
demand that might be made that the New York Central and New York, New
Haven, and Hartford Railroad Companies should be taxed on the additional
$22,000,000 expended in the electrification of their lines about New
York City for the comfort, convenience, and edification, not of the
patrons of the roads alone, but of the public at large, without—as just
concluded by an eminently able board—any marked economies in operation.
There is no question in the writer's mind that any one line of railroad
is several times more valuable to each individual in inland regions,
such as Mexico and Arizona, than an equal mileage in Connecticut with
its Sound harbors, steamship lines, good wagon roads, and numerous but
non-competing railways, partly because of the relative usefulness, for
which no practicable substitute could be found, and partly because these
newer States have not entered on all these multifarious lines of
governmental activities, such as policing and safeguarding for public
health and the like, and, much as funds are everywhere desirable, could
possibly defer for a time some of these developments of civic zeal. It
does not appear, therefore, that the discriminations in valuations
disclosed by the author's Table 1 are altogether without a good basis in
relative convenience, although clearly extreme; but, as the law of most
States is understood by the writer, such discriminations may not usually
be made with strict regard for the legality of tax assessments.