City Government 101: How are public improvements paid for?

(Editor’s note: This is the third of a four-part series on the function of city government.)

We have previously established that in Oklahoma, the most important stream of revenue for a municipality is sales tax. Of course, we all generally understand already how that works. So the common question is, “I pay my taxes, where are the benefits?” (If you do not pay your taxes, please stay tuned for my follow-up series, Tax Evasion 101.) The simple answer is, as always, “It’s complicated.”

For starters, a refresher: your income taxes go to the federal and state government and stay there. Your property taxes go to the county, school district, and CareerTech. Sales tax is tallied by retailers each month (according to a needlessly complex method) and sent to the state, who redistributes a designated portion back to the county and city. For every hundred dollars spent in Comanche, the state tax will be $4.50, Stephens County will add 70 cents, and the city will add another $4. You will pay the total tax of $9.20 or 9.2 percent. 

Every year, the city adopts a budget based on how much was made and spent in previous years and how much they expect to make in the coming year. Transparency in this process is paramount. Municipalities are required to hold a public hearing before adopting the budget for the year. A high-level summary must be published in a local newspaper, but a full version delineating each revenue and expense category is sent to the state auditor’s office, and published on their website. If the city needs to amend the budget by more than a specific amount, the amendment process must be done publicly as well.

In order to change or add any tax, the city council must put it to popular vote. The wording of the ballot proposal will define how the revenue is used and the effective duration. Of the 4 percent sales tax, Comanche reserves 2 percent for “the general functions of the municipal government” and 1.5 percent for capital improvements or emergency services. The remaining 0.5 percent is a “temporary” tax issued to pay for the city’s use of Waurika Lake for water.

Most new taxes that are added are added for a limited time span (generally 25 years) and a specific use. For example, the Waurika Lake tax went into effect in 2011 and will “roll off” in 2036. However, as a sales tax approaches its expiration date, you can generally expect a public vote to renew the same tax, or replace it with a new tax at the same or similar rate. In other words, the city will try to keep the total tax rate the same or slightly higher, never lower.

To recap, taxes generate a very small pie, the city gets less than half of that pie, and they have to further subdivide their piece among numerous municipal functions. The past 12 months, Comanche averaged just over $59,000 a month in sales tax revenue. That’s enough for a whopping 300 feet of road, if they’re lucky. Nowhere has inflation been felt more acutely these past years than in construction, and no one gets worse rates than government entities who have no choice but to pay them.

If you remember, the other major revenue source for Comanche is utility payments, which are similarly spread out. So, how do cities pay the massive price tags on major public improvements? The same way as any broke person: begging the federal government for money or spending money they don’t have.

Comanche is known for having a lot of success with grants. Generally, the way grants work is as follows: first, the state or federal government decides they need to spend an arbitrary 8 to 10-digit number on a vague goal, say, “health”. They then hand it off to one of their agencies to figure out how to spend that money. The agency then designs a grant program for “health”, with about three pages of special requirements and benefits followed by 37 pages of boilerplate. But if you have someone who knows what they’re doing, they can apply for and win the grant to fund just about any project, as long as they can remotely tie it to “health”. 

But generally, grants are going to be limited in award size and spread across a few dozen applicants. They are good for closing funding gaps or small improvements. A multi-million-dollar project, like a water treatment plant, will require a lot more cash up front. In these cases, the city can issue bonds or pursue loans. You will mostly see bonds in association with school districts, but municipalities may issue them as well. In order to do so, however, the city generally has to issue a new sales tax to pay them back in 25 years. The same goes for loans, which are usually also provided by higher government agencies; the city has to have some dedicated revenue stream on the books to guarantee repayment over the duration of the loan.

Issuing taxes is a double-edged sword, and not just because people grumble about them. Once it is passed, any revenue is untouchable except for the purposes specified. In instances where a tax is issued primarily for one specific project, the ballot language will usually include a more general use for leftover revenue—to return to the Waurika Lake example, the wording on the books allows anything extra to be spent on capital improvements related to the water system. But if the tax expires and the city does not use all of it, they have to find a new use for whatever is left that aligns with the original proposal. Earmarked funds can sit unused for years if no creative use is found. Alternatively, it’s a protected pot of money that can fund a specific use case for years down the road.

Because of the shifting economy, many cities are faced with an aging infrastructure that they simply do not have the money to maintain themselves, or did not at one point and now are playing catch-up. With few options and only able to take so much from their own residents, they are forced to game the incredibly contrived system that only works if it is gamed. And a city that finds themselves without the ability to play will find themselves on the sidelines.

(Matt Brooks has a B.A. in public policy from USAO. He is a research analyst for a non-profit and a website designer.)