Lesson Two: The Nuts and Bolts of a City Budget

Editor’s Note: The operation of city government can be a complex process that relies on, in some cases, sophisticated calculations. The intent of Municiapl Budget 101 is to provide a high-level overview of this process as it applies to La Porte City, with the belief that a better understanding of the process will allow public discourse to assist local decision-makers as they work to develop a capital improvement plan for our city. For additional and more specific information related to City Finance, logon to the Iowa Department of Management website, www.dom.state.ia.us/.

The dawn of a new year brings with it two important, if not appreciated, words: tax time. While individual taxpayers wipe the dust off their calculators and start plugging numbers into their 1040, cities throughout the state of Iowa have their own special accounting paperwork to complete, a form called the Adoption of Budget and Certification of City Taxes. It’s a process that, by law, must be completed and placed on file with the state’s Department of Management by March 15.

The Adoption of Budget and Certification of City Taxes form provides a detailed accounting of where the city expects to get its revenue. It also reports the city’s plan for how those dollars will be spent. Using this form as a guide, Lesson Two of Municipal Budget 101 will review the revenue sources cities in Iowa can tap into to help pay their bills. It will also review what the state refers to as the “Government Activities” in which cities engage. In other words, the services cities provide their citizens.

Many of the laws that dictate the budget process for cities in Iowa can be found in Chapter 384 of the Iowa Code, City Finance. This is the chapter that defines and sets limits on the taxes that can be collected to support a city’s General Fund. It spells out the various funds a municipality may establish and defines the purpose and limitations of each of these funds.

Where does the city of La Porte City get its money? Revenue for the cities in Iowa come from a variety of sources. As illustrated in Figure 1, there are nine general categories of revenue.

LPCrevenues

Property Taxes and TIF Revenues

Property taxes are generated through the use of a sophisticated formula, one that differs for each of five classes of property: residential, agricultural, commercial, industrial and utilities/railroad. The largest portion of property tax revenue comes from the Regular General Levy, which cities may tax at a rate of no more than $8.10 per thousand of assessed value. Beyond the Regular General Levy, there are several other permissable levies that cities may consider. Of the twenty, nearly half may be initiated without the approval of the electorate (FIGURE 3).

FIGURE 3: Other Tax Levies, State of Iowa

  • Permissible Levies (Non-Voted)
  • Contract for use of Bridge
  • Operation and Maintenance of Publicly Owned Transit
  • Rent, Insurance & Maintenance of Civic Center
  • Operation and Maintenance of City owned Civic Center
  • Planning a Sanitary Disposal Project
  • Aviation Authority (under section 330A.15)
  • Levee Improvement Fund in Special Charter City
  • Liability, Property & Self Insurance Costs
  • Support of a Local Emergency Management Commission

Permissible Levies (Vote Required)

  • Instrumental/Vocal Music Groups
  • Memorial Building
  • Symphony Orchestra
  • Cultural and Scientific Facilities
  • County Bridge
  • Mississippi or Missouri River Bridge Construction
  • Aid to a Transit Company
  • Maintain Institution Received by Gift/Devise
  • City Emergency Medical District
  • Support Public Library
  • Unified Law Enforcement

In addition to the regular levies, cities may also consider Special Revenue Levies. The city of La Porte City, like most cities in the state, levies property taxes to pay for employee benefits, employer taxes and worker’s compensation insurance for city employees.

Another separate levy the state allows is used for debt service. This is where cities determine the amount of property taxes that will be required to repay debt they have incurred, most commonly for bonds that have been issued for special projects. In La Porte City’s case, the Debt Service Levy is used to repay bonds issued for the construction of the Family Aquatic Center and several other street projects.

TIF revenue, or Tax Increment Financing, is a public financing method that is used as a subsidy for redevelopment, infrastructure, and other community-improvement projects. For the current fiscal year, the city of La Porte City anticipates receiving nearly $150,000 in TIF revenue, to make the bond payments associated with the Family Aquatic Center.

Other Sources of City Revenue

Beyond property taxes, there are other sources of funding cities in Iowa can tap into. This year, for example, La Porte City will receive nearly $300,000 classified as Other City Taxes. This category refers to La Porte City’s share of the money generated by the one cent local sales option tax.

As displayed in Figure 1, Licenses & Permits (cigarette and liquor permits and franchise fees),  and Use of Money & Property, the amount of interest city accounts accrue, are expected to generate around $30,000 each in the current fiscal year.

Intergovernmental revenue is collected by cities in the form of road use tax dollars and support from other governmental agencies, including grants.

In La Porte City, the largest portion of revenue in the category of Charges for Fees/Services is received from payments for sewer and garbage collection. Other fees collected by the City include admission charges for the pool and museum, the summer recreation program (baseball/softball), and charges for the ambulance service.

The two remaining revenue categories, Miscellaneous and Other Financing Sources are ones that can vary widely from year to year. Cities typically use the Other Funding Sources category to receive large sums of money reserved for major projects. Of the nearly $3 million reported in La Porte City’s Certified Budget for FY2014, approximately $1 million has been reserved for a mandated sewer upgrade, another $800,000 for street projects and more than $200,000 for a new ambulance that has been ordered. To illustrate the impact special projects can have on a small city, those three special projects account for nearly 40% of the revenue La Porte City anticipated receiving this year. It should be noted that the sewer upgrades planned by the City cannot be started until the plan submitted in 2011 has been reviewed and approved by the state.

LPCexpenditures

Next Week in Municipal Budget 101:

In Lesson 3, City Services, The Progress Review takes a closer look at La Porte City’s Certified Budget, reviewing the city’s expenditures (Figure 2) and comparing them with area cities of compareable size. What are the services La Porte City residents value most? How much are they willing to pay for them?