Profit Sharing

of profits above a certain fixed minimum between the operating company and the city. Under the old law, an operator might make 6, 8, 10, 15 or 20 per cent. profit, and the city would receive no more in the last than in the first case. It was also true that if the rental was too small there was no way by which the city would receive a share of the unexpected profits. Yet it is practically impossible to determine in advance what the profits will be and to fix a rental which will be adequate from the viewpoint of the city and still fair to the operating company. Further, it is usually true that the profits vary from year to year and are normally much larger during the later years than at the beginning.

Attempting to meet these various conditions and difficulties, the commission worked out a profit-sharing plan. It provides that there will be deducted from income all operating expenses, taxes, payments to reserve and amortization funds and a return upon the the investment not to exceed in any case 6 per cent. The remainder is to be divided equally between the company and the city. In other words, if the company were to make 9 per cent. in any one year after paying all charges except interest and dividends, and if the agreement fixed 5 per cent. as the point at which a sharing of profits should begin, the city would get 2 per cent, and the company 5 per cent, plus 2 per cent., the latter as an extra divided to its stockholders. If only 7 per cent. were earned, the city would get 1 per cent, and the company I per cent., or 6 per cent. in all.

The theory upon which this plan is based is that the city, by permitting a company to lease its property or to use its streets, has become a partner in the enterprise, and that as such it ought to have a share of the profits above a fair return to capital. Further, when the city and the company are partners and share profits, each is more likely to consider the rights and interests. of the other.

Special attention should be called to the use which may be made of the profits thus accruing to the city. It has been customary to turn over to the general city treasury all such receipts from public utilities. As a result the users of such services as water, gas, electricity and transportation have paid an indirect

tax, a sort of tax upon consumption. The commission considers that this is improper and unjust, that rapid Use of Profits transit should be furnished at cost as nearly as possible and that all receipts from the traveling public over and above cost should be used to improve, extend or multiply transportation facilities.

The commission's plan provides, therefore, that all funds received from such sources or from the rental of any rapid transit property or rights shall be used first to pay interest and sinkingfund charges upon municipal bonds issued to build or equip rapid transit lines, and that the remainder shall go into "the Rapid Transit Fund" to be used only for the construction, equipment or operation of rapid transit lines; it is not to be used to decrease taxation. In case the city's share of the profits shall be sufficient to warrant a reduction in fares, it may be utilized for this purpose. For example, if the city's share should be equivalent to 20 per cent. of the gross earnings upon a five-cent fare basis, the fare could be reduced thereafter to four cents. Of course, this would result in a reduction of the city's share of the net profits for the following year, the passengers having received the benefit directly.

In the original Rapid Transit Act of 1891, no provision was made for municipal construction or ownership; only private management was contemplated. When the board Private Capital advertised its first line and offered a franchise for sale to the highest bidder in 1892, none appeared. In 1894, the act was revised and municipal ownership introduced as an alternative. The Rapid Transit Board was not authorized, however, to exercise discretion in the selection of a method, for it was directed to offer a franchise for sale only if "it shall not have been determined by vote of the people . . . that such railway or railways shall be constructed for and at the expense of such city . . ." After the adoption of plans and routes, the question was submitted to the voters in November, 1904. The result was overwhelmingly in favor of municipal ownership, the vote being 132,647 for and 42,916 against. Whether this vote, taken in the old City of New York before the boroughs of Brooklyn, Queens and Richmond were annexed, bound the board

to municipal ownership of all lines until another referendum authorized private ownership, is a question which has been much discussed. It has been generally admitted, however, that no franchise should be or could be granted until amendment of the law was secured.

In view of the imperative need of more rapid transit and of the various safeguards thrown about the grant, the commission believed that the public was ready to entrust to it the power to grant a franchise to a private company. The proposed amendment to the law provided for the restoration of that power, and it met with practically no opposition. The commission may proceed, therefore, either to construct and equip with public funds or to allow a company to do so, subject to the limitations already enumerated. Under certain conditions the city may operate also, but the statute contemplates private operation as a general rule and municipal operation as the exception.

Assessment

The most novel feature of the whole scheme is the construction of lines from funds raised by assessment of cost in part or in whole, upon the property benefited. It has Construction of been stated that the increase in land values in Lines by Special northern Manhattan and the Bronx, due to the construction of the present subway, would not only have built the entire line but would have equipped it, provided rolling stock, built power-houses and paid every other capital expense, and left a margin. Is it not fair and just that the property directly benefited by the construction of a rapid transit line should bear at least a part of the cost of constructing that line? The principle has been applied to a multitude of public improvements, such as sewers, streets, parks, water-works and paving. Why should it not be applied to an improvement which more immediately and directly benefits property than any one of those just named? An increase in transportation facilities inevitably increases the value of real estate and brings population. This is not necessarily true of streets, sewers, parks or paving. It is true that without them people can not live, but no matter how elaborate the system of streets, sewers, parks, etc., may be, they will amount to little unless there are transportation facilities. Not infrequently officials of transportation companies have

formed or have become interested in real-estate enterprises adjacent to new railroad lines in order to obtain for themeslves or their companies a part of the increased value of land which the construction of new lines has caused.

Let no one think for a moment that the landowner is burdened in any way or that he is deprived of anything to which he is entitled by a rapid transit assessment. If the city builds a line or permits its streets to be used for its construction, and thereby increases the value of the adjoining land very considerably, the net gain to the community is the increase in value less the cost of making the increase. If the landowner gets all of the net gain, he has obtained not only all there is to be had, unless he takes from the community or from others, but he has obtained a profit which he has in no way aided in making any more than have other citizens and certainly not more than those who are to use the line and thus make its operation possible. Hence, by allowing the landowner to have all of the net increase, the community has not deprived him of anything, but has made him a present of something to which he is not entitled as a matter of legal right or equity.

If the construction development of rapid transit lines by special assessment is to be adopted in a few cases, it ought to be followed as uniformly as the facts will permit. Otherwise all localities will not be treated with equal justice. If, for example, one suburban locality with little population is provided with a rapid transit line by special assessment, and another locality with similar conditions is provided with a line without special assessment, the landowners in the first locality get only the net increase in values, while those who happen to live in the favored locality get much more. This is neither just nor expedient, for all parts of the city should be given equal treatment and none selected for special favors.

Construction by special assessment also provides a method whereby all sections of the city may be provided with rapid. transit upon a fair basis. Without it certain localities are given rapid transit at the expense of others. Take for example, the present subway. It runs the length of Manhattan and to the northern part of the Bronx. The Brooklyn branch barely ex

tends beyond the business center of that borough. The line was built from the proceeds of the city bonds without any assessment, and the operating company is paying the interest upon these bonds and a sinking fund of one per cent., sufficient to retire the bonds in about fifty years. Now the residents of northern Manhattan and the Bronx who ride the entire length of the island are carried at a loss normally. But this loss is more than offset by the profit made from carrying those who ride only a short distance in lower Manhattan. Eliminating the traffic to and from Brooklyn, which is not only self-supporting but very profitable, this means that all of the profitable business in the heart of Manhattan is used for the benefit of two narrow areas. The property owners in these districts have seen their land increase enormously in value without an expenditure of one dollar upon their part. They have been given rapid transit for a five-cent fare from the Bronx to lower Manhattan and Brooklyn. But because there is not a sufficient amount of short-distance riding in Manhattan to carry long lines in Brooklyn and the Bronx, Brooklyn has been deprived and the Bronx has been blessed abundantly.

Let us suppose that a part of the cost of the northerly branches had been paid for by special assessment. In the first place, the landowners would still have reaped a handsome profit. Secondly, the Bronx would have had a five-cent fare as it has now. But as there would be no interest and sinking fund to pay upon the amount raised by special assessment, the operating company could extend the zone of five-cent fares further into Brooklyn or further into the Bronx if the latter were thought to be desirable. The only other way it can be done, is to rent rapid transit lines at less than interest and sinking fund, raising the deficit by taxation. But who would attempt to justify the taxation of the city at large when the result would be that landowners in certain limited area would reap a large, unearned increment therefrom?

Much more might be said regarding construction by special assessment, its numerous advantages, the various precedents and the beneficial results to the city socially and financially; but the time and space allotted me will not suffice.

Reference has been made to the part which the provision in the