The State of Kentucky has, however, a very large floating debt which is now costing the State about $270,000.00 per annum for interest. In this section of the report, certain problems connected with the administration of this floating debt and with the handling of cash in the treasury will be referred to briefly.

The Treasury Condition and Policy as Regards Temporary Loans: Table I which follows shows the condition of the State treasury on the last day of each month during the fiscal year ended June 30, 1923. It shows the total cash balance of all funds together, the total outstanding warrants, and the net debt of the State. It is to be noted that there was a net debt, that the outstanding warrants exceeded the cash in the treasury, at all times so far as indicated by the figures prepared as of the first of each month. It is to be noted also that the outstanding warrants reach a maximum of $8,051,961.61, and do not at any time go below $4,901,395.72. The total amount paid out for interest on the warrants was, as stated above, over a quarter of a million dollars. The outstanding warrants are the only evidences of temporary indebtedness of the State. Vouchers and miscellaneous claims payable are not recorded. The total of these is ordinarily large.

TABLE I

SUMMARY STATEMENT SHOWING CONDITION OF THE
STATE TREASURY, BY MONTHS FROM
JUNE 30, 1922 TO JUNE 30, 1923

NOTE: The checks outstanding are not shown in the statement, and as a result the net deficit for each month cannot be proved exactly from the other two columns.

The Interest Bearing Warrant Method of Borrowing: Although the figure for interest payments is very large and represents an expenditure which should certainly be greatly reduced, it is believed that it may be actually less important as a cost of operating the State government than another cost of the present system which does not appear at all on the books. This other cost is the price paid for the uncertainty of contractors and persons who sell to the State as to whether or not the form of payment which they will receive from the State will be worth its face value.

At the present time, the Treasurer's Office does not usually pay General Fund claims of over $100.00 each, except salaries, otherwise than by issuing interest bearing warrants which the claimant must dispose of for himself if he wants to get cash. Many educational and road fund claims are similarly paid. Practically all business men do want cash and immediately take the warrants to the bank. The question then arises to whether or not the bank will accept the warrants at face value or will require a discount. Under present conditions the general fund warrants may be paid twenty or more months after their issue.

The warrants pay five per cent interest, which is a little high for the State of Kentucky to pay for borrowed money at this time, and still it is sometimes difficult to dispose of warrants. They are sold at par at the present time, but a short time ago they were selling below par. So long as there is any danger that they may sell below par, they are extremely objectionable because they disadvantageously affect prices and discourage close bidding for State contracts. It is certainly

true that the State pays dearly for any uncertainty as to the value of these warrants.

The practice of issuing interest bearing warrants is one of those time-honored customs which were originated at a time when entirely justified by the problems then to be met. It is one, however, which has long since been abandoned in most States, and it cannot be defended. Arrangements with one or more banking institutions could readily be made whereby the State could sell revenue notes to meet its requirements for cash in anticipation of revenue collections, and all of the objections to the interest bearing warrants would be done away with.

State Depositories and Handling Cash Balances: In the report on the State Treasurer's Office the depositing of State money in the various depositories is dealt with in full and it need not be discussed again here. The present methods of handling cash are shown to cost the State a great deal more for interest than is necessary. The greater part of the possible saving, however, will not be possible so long as the interest bearing warrant method of borrowing is continued. The large cash balances now carried through the year are necessary because there is no means of securing additional cash to meet the classes of payments for which warrants cannot be issued. The various funds cannot borrow from one another during the year because they do not take in any appreciable amount of additional cash till next year and so cannot repay borrowings when the creditor fund must have cash. It is estimated that the interest bearing warrant method of borrowing costs the State nearly $75,000.00 a year that can be saved. Further discussion of this subject is found in the report on the Treasurer's Office.

Proposed Methods of Reducing the Floating Debt: The proposal that the floating debt of the State be funded, covered. by a serial bond issue, has been made by various interested groups of citizens and State officials who are advocating a bond issue for other purposes. It is believed that no such

step is necessary or desirable in the case presented by the State treasury. It would not be desirable for the State to carry all the cash which it needs without any borrowing in anticipation of revenues unless some arrangement were made for the collection of revenues at more regular intervals throughout the year and earlier in the year. All the money needed to take the place of the interest bearing warrants can be secured to good advantage by the issuance of revenue notes in anticipation of collections. If an amendment to the Constitution is necessary to permit revenue note borrowing, such an amendment should be obtained without delay.

A very simple mathematical calculation will show that a bond issue will mean nearly double the interest charge that will be required with a system for short term notes in anticipation of tax collections because the latter method will involve the carrying of borrowed cash during only the period of the year when it is required. Allowing for an offset of four per cent on time deposits of unnecessary cash, the bond issue method must be estimated to cost at least $60,000.00 per annum more than the revenue bond or note method.

The plan of having the State revenue collected earlier in the year is one which deserves special consideration. Even if such collections were encouraged by discounts equal to the present payments for interest on the floating debt, it would. be highly desirable to offer the taxpayers an opportunity to pay their taxes earlier in the year so that those who had the money could realize the benefit of the discount.

Specially large inheritance tax collections are tending to reduce the debt by causing annual collections to exceed the anticipated total. The State should further reduce its floating debt by allowing a margin of not less than $200,000.00 between income and expenditure for some years to come. A reversal of the Supreme Court's decision appropriating a part of the inheritance tax to special funds would be desirable so that all of the extraordinary inheritance tax collections will apply to reducing the floating debt. The present irregular amounts going to the special funds are extremely undesirable from every point of view.

Conclusions and Recommendations: The fortunate freedom of the State from long term indebtedness is so far more important than the aggravating current deficit that the State should, on the whole, take pride in the financial condition of the treasury. On the other hand, the present good showing as regards bonded indebtedness is no excuse for not undertaking to improve the temporary indebtedness situation to the extent practicable.

Primarily the need for improvement lies in two directions, first, the reformation and modernization of the method of borrowing in anticipation of tax collections, and second, the improvement of the internal procedure in the Treasurer's Office in ways considered in the report on that unit. Also steps should be taken to accumulate more cash so that the needs for cash will be more nearly met out of revenue. The possibility of arranging for tax collections earlier in the year is still another matter which deserves consideration.

It is recommended:

(1) That an act be passed to prohibit the issuance of interest bearing warrants and to authorize borrowing on revenue notes issued in anticipation of tax collections, or if such an act would not stand under the present Constitution, that steps be taken to change the Constitution.

(2) That not less than $200,000.00 of estimated income in excess of estimate expenditures be allowed in the State budgets in order to reduce the treasury deficit.

(3) That an act be passed making it clear that the inheritance tax receipts are to be credited to the general fund only.

(4) That the proposal to issue serial bonds to cover the treasury deficit be not approved.