Introduction to City Financing
Gas taxes, bonds, fees, property taxes, fines, tax increment funding, business license fees… Government finance in Oregon is complicated. Questions come up all the time like, ‘Why can’t the money used to refurbish PGE Park or to build the street car or the Esplanade be used to help the schools or feed and shelter the homeless?” In response to questions like these, we prepared this brief introduction to city financing.
In response to past ballot measures that limited property tax growth, City operating revenues have had to diversify to maintain the base necessary to meet the service demands of citizens. While property taxes have declined as a percentage of operating revenues, user fees and elastic revenues, such as business license and franchise fees, hotel/motel taxes, and building permit fees, have increased. Until 2001, expenditures for services rose faster than the rate of inflation due to the number of service requests. Since 2001, the City has had to reduce costs and service levels. This is a result of decreased revenues compared to inflation that resulted from the impact of the current economic recession on city, county, state and federal budgets, as well as escalating costs coming from the health care industry.
HOW THE BUDGET IS STRUCTURED
The City’s budget has two main components: General Fund and Non-General Fund. In order to fully understand how the City finances its projects and programs, it is important to know the difference between them.
Taxpayer dollars are deposited in the General Fund, along with utility license fees, business license fees, transient lodging taxes, state shared revenues (from cigarette and liquor taxes), interest income, and miscellaneous revenues and beginning cash balances. This portion of the budget is comprised largely of discretionary funds, since the Mayor and City Council can allocate the funds to programs and services in any area. In other words, there are few restrictions on how these resources may be allocated.
General fund dollars are used to support such City services as police, fire and parks, as well as planning, community development and administrative support services.
Often referred to as dedicated funds, the non-discretionary funds include grants and donations, contract revenues, revenues from services, and other revenues specifically dedicated for a particular purpose. For example, building or inspection fees may only be used to support the delivery of those specific services but may not be used to support programs or services funded from discretionary resources. Likewise, the fees collected from park usage may only be used to support parks programs. Large projects like the Eastbank Esplanade and the Portland Streetcar are funded primarily by dedicated revenues from a combination of sources. The city, state and federal transportation funds that were used on these projects, for instance, could not have been used on non-transportation projects or programs.
- To understand the difference between general and non-general funds, take a look at the stub of your paycheck. There you will see a total for your gross earnings, or your revenue. However, your actual paycheck amount is somewhat less. Taxes, social security, workers compensation, and possibly medical premiums are all deducted from your total revenue and directed elsewhere. Those deductions represent your non-discretionary dollars; they are dedicated and unavailable for you to use now as you please but they are still part of your gross revenue. Your net paycheck, on the other hand, represents your own personal general fund, which is largely at your discretion to spend.
- Going further, let’s look at an analogy for understanding the difference between discretionary and non-discretionary funds within your personal general fund – your own checkbook. Some funds in your checking account may be non-discretionary. For instance, if you have money automatically withdrawn to pay your mortgage or certain other bills, or funds automatically withdrawn and deposited to a savings account, those funds could be called non-discretionary, or dedicated funds. They aren’t available to pay for other expenses as you choose.
- On the other hand, any funds remaining in your checking account after those automatic withdrawals are made would be similar to general fund discretionary dollars. You can use them, at your discretion, to pay for expenses as you choose.
- You may have obligations or plans for the discretionary dollars in your checking account, such as paying bills or making a special purchase. Similarly, the City Council may have ongoing programs such as police or parks programs that it wishes to fund or special one-time purchases it wishes to make. But, like you, the Council can only do these things with General Fund, discretionary dollars.
One-time v. On-going funding
Further finance restrictions may apply depending upon whether or not a program or funding resource is ‘one-time’ or ‘on-going’. Under existing City financial policies, on-going programs, such as basic police and fire services, may not be funded using one-time resources. One-time resources can be grants or beginning fund balances. These funds are only available one time, and will not be available in the future. One-time projects are usually completed within one year, or may require an initial outlay of seed money until an on-going funding source is identified. In some cases, a one-time project may not require additional funding. The City Council exercised its one-time funding authority when it supported Early Childhood Development until the Children’s Levy revenues begin in FY2003-04. If the Levy had not been approved, the programs would have been phased out.
A third concept commonly used to describe funding sources is closely related to the concept of discretionary versus non-discretionary funding. The term is ‘fungible’, or flexible, and is used when determining if resources from one bureau or fund may be used to fund services, projects or activities in another bureau or fund. For the most part, fungible resources may be used for discretionary type purposes. Generally, resources collected for a specific use, such as water and sewer fees, are not fungible and may not be used to support general government purposes. This becomes relevant when discussing how specific capital projects might be funded. For example, the sewer fees that are dedicated for construction of the Westside Combined Sewer Overflow (CSO) project can be used only for sewer-related projects. On the other hand, property taxes and the fees collected from telecommunications franchises and business licenses have no such restrictions. In this example, property taxes are fungible, while sewer fees are not.
Funding City Projects and Services
The development of city projects and the actual delivery of services require an involved and comprehensive approach to funding. Funding sources and their uses may cross multiple bureaus or funds – the ‘fungible’ approach mentioned earlier. While this approach may be confusing to those who view it from the outside, it is very effective and efficient when attempting to leverage limited city resources in support of major projects or programs. The City Council has been very successful in using specific funds to support multi-bureau projects. Recent examples of this approach will be illustrated later in this document.
Specific projects may be funded from a multitude of sources, with each source of funds having its own limitations. The most common types are Tax Increment Financing (TIF), Local Improvement Districts (LID), grants (federal, state or private), General Fund discretionary funds, payments or contributions from other governments, and program revenues. LID funds are generated by an agreement whereby property owners in an area surrounding a project tax themselves for improvements to the area. The idea behind this type of financing is that the improvements will spark growth in property owners’ businesses and/or an increase in property value.
The same idea is true for Tax Increment Financing, commonly known as TIF. Under this type of financing, the City targets an area for development and designates it an Urban Renewal
Area. The property taxes accruing to the City General Fund at the time of the designation are capped for the life of the district at the amount being earned under the current assessed value (AV). Any property taxes that accrue above this level because of the AV growth may only be spent in that Urban Renewal Area for specified capital projects and improvements, not programs and services.
These types of efforts are generally called bricks and mortar projects, and funding is usually targeted at redeveloping and revitalizing specific geographic areas of the City. The redevelopment is focused on projects and activities that will accelerate improvement of the areas at a rate above that which might take place without the focused investment. Existing Urban Renewal Areas include the Interstate Corridor, Lents, Gateway Regional Center, Convention Center, Central Eastside, South Waterfront, South Parks Block, Downtown Waterfront, Airport Way and the River District.
Federal grants are another significant source of funds for city projects and programs. They are always very specific in their use. The City may receive grants to support transportation efforts, police functions, housing efforts, parks projects, or planning.
Revenues generated by City programs are very often limited in their use as well. For instance, according to City financial policies and bond covenants, revenues collected from the City’s parking garages may only be used to support transportation programs and projects. The City’s partial financing for the Streetcar came from this source.
Another significant source of funding comes from private industry and other public institutions. The City often partners with members of the business community in order to bring projects to fruition. For example, the expansion of light rail to Portland International Airport was made possible through the active participation of Bechtel Corporation. The City’s partnership with Portland State University resulted in the shared-use facility known as the 1900 Building.
Successful examples of the effective use of leveraging resources from multiple sources include:
Although the Oregon Convention Center is owned and operated by Metro, its success directly affects the economic health of the City. The Convention Center’s expansion was financed through a unique mix of funds from three separate governmental entities. Resources from Metro totaled $5.0 million, Tax Increment Financing totaled $5.0 million, and the remaining over $100 million was funded through a combination of hotel/motel taxes and car rental fees. General taxpayer dollars were not used to fund the project. The vast majority of the funding comes from visitors to Portland and from facility events. Financing the expansion of the Convention Center focused on using projected revenues from anticipated increases in tourist and convention activities.
The Esplanade, which gives citizens long-denied access to the East bank of the Willamette River, has received national attention and many design awards since its completion. It was financed through a combination of $4.9 million in federal (transportation) grants (that were dedicated for specific uses), $24.0 million in Tax Increment Financing and Local Improvement District funds, and only $346,000 in City of Portland General Fund discretionary resources. Put another way, the City, with an investment of only $346,000, leveraged a project worth over $29 million.
The Portland Classical Chinese Garden grew out of a friendship between Portland and its sister city Suzhou, China, a city renowned for its exquisite gardens. The Garden is a wonderful showcase for Chinese culture and has become one of the most popular tourist destinations in Portland. It has anchored a number of improvements to the Old Town/Chinatown area.
A non-profit organization brought funds together from a mix of sources for the construction of this facility. The private sector donated approximately $6.0 million to the project. Another $6.6 million was financed through the use of Tax Increment Financing, which cannot be used to pay the on-going costs of city programs and services. Approximately $255,000 in one-time City General Fund support was also used. The project has anchored a number of improvements to the Old Town/Chinatown area.
The idea for the Portland Streetcar first emerged in the Downtown Plan of the 1970s, when creative Portlanders talked about a "circulator" - a public transit system to carry people through downtown neighborhoods, quickly and reliably.The Portland Streetcar is the first modern streetcar operating in the United States.
The streetcar is another example of a project that was financed through a combination of funds from private industry and governmental resources without affecting the general citizenry.
Revenues from City parking garages funded the largest portion of the investment, $30.5 million. As pointed out earlier, these revenues may only be used for transportation-related activities.
Another $17.1 million was realized through Tax Increment Financing and the establishment of a LocalImprovement District. $6.3 million came from federal and state sources and only $1.8 million came from the City’s General Fund. The City funds were one-time and would not have been available to fund the on-going costs of existing programs.
The Rose Garden, a 20,000-plus seat state-of-the-art arena, is home of Oregon’s only professional sports franchise. It was financed primarily by private industry. Over $200 million in funding
came from Oregon Arena Corporation (the Blazers). The remaining $5.0 million in resources was paid by the City, but actually came from a ticket surcharge paid by facility users.
Originally called Multnomah Stadium, this facility was dedicated in 1926. Despite several minor renovations over the years, it had fallen into disrepair. Because of its historic and cultural significance, the City could not let the facility continue to deteriorate and become a liability. Seismic and structural upgrades were funded through several sources, none of which were drawn from City General Fund discretionary resources. The major component of funding the improvements to this facility were from a combination of hotel/motel taxes (paid primarily by visitors to Portland), rental car fees (also paid primarily by visitors to Portland), and a portion of the ticket price for stadium events. The City’s general fund contributed no resources to this effort. The costs are largely passed on to visitors of Portland.
The City’s Responsibilities
As you can see, financing City projects and programs is complicated and the potential for confusion is great. However, there is another important question that residents ask. They want to know how the City chooses its projects and programs (for example, why the city spends money on bicycle lanes instead of on schools and textbooks, or why we discuss burying the water reservoirs instead of healthcare for seniors and the disabled.) The answer lies in the division of responsibilities that has evolved between local, regional, state and federal governments
Simply put, an agreement known as Resolution A
states that the City of Portland will primarily provide urban services to its citizens, while Multnomah County will primarily provide social services. This means that the City is responsible for public safety (law enforcement and fire), transportation infrastructure and management, parks and recreation, and water and sewer services. The County’s responsibilities to the residents of Portland include libraries, health and human services, corrections, animal control and bridge maintenance. Many of the County’s programs rely on supplemental funding from the State of Oregon.
Neither the City nor the County is responsible for primary funding of local public schools. This responsibility was given to the state legislature in 1990, when Oregon voters approved Measure 5. However, the level at which the legislature funds local schools is inadequate. Because of this, voters recently approved a temporary income tax increase in order to help provide additional financial support for local schools and county jails.
Some citizens think that all tax dollars and city revenues go into one large pot and can be spent in any way the Council wishes. We hope that this explanation of city finances has made it clear that it is not so simple. As you can see, there are different “colors of money” that have specific restrictions over the manner in which they can be spent.
If you are interested in learning more about the City’s budget and the way it is constructed, please visit our Community Budget
web site. There you will be able to ask questions, make comments and even provide testimony during the budget season.