Oklahoma City funds some its biggest public works without taking on municipal debt. What could other cities learn from its program?
Debt is a very common aspect of life in the U.S. If you own a house, you might be paying off a loan you used to buy it, and it could be years before you’ve finished doing so. Cities do this too for large public projects, except their debt frequently takes shape as municipal bonds.
Not all public debt involves municipal bonds, just like how not all personal debt involves mortgages. But all the same, these bonds are frequently an albatross hanging from a city or government’s neck. The burden of owing too much can stymie progress elsewhere.
When a city builds big stuff but avoids using bonds, that’s clearly a pretty big deal. That’s what Oklahoma City found out in the 1990s. Today on the blog: a 101 on The Big Friendly’s MAPS program.
Funding public projects
When a local government needs money for a big project, they often turn to municipal bonds (“muni bonds”). Investing firms will offer funds upfront to cover project costs. In return, the city will issue these bonds, which are just IOUs.
Bond-funded projects can vary. Some are considered necessary and overdue. (Think of your least-favorite road to travel thanks to potholes.) Others add something new to the community.
For instance, the Salt Lake City Public Library system’s main branch fulfills its namesake but also serves as a prominent community center and hub for local arts and culture. Your local sports stadium might also be an example of a bond-funded space.
Cities can pay off muni bonds with tax money; if it’s a space like a stadium, the city might be using some its revenue. Regardless, it’s still debt and it can still impact what a community does in the future. If a city has trouble paying back its debt (bonds or otherwise), it can impact their credit rating and jeopardize the possibility of investment in the future.
Lower ratings can lead to higher interests for cities to pay on their bonds, leading to a cycle of issuing bonds, refunding (refinancing) them, and embedding debt indefinitely. Debt begets debt.
With that in mind, seeking alternatives to bonds is understandable. Finding them is another story. Take tax increment financing (TIF). A city freezes the property tax revenue takeaway for the taxing bodies. Any additional revenue over the next few years instead goes to a TIF fund, which will be used for urban renewal projects.
Here’s an abbreviated example I’m borrowing from Peoria Magazine. A city designates a neighborhood as a TIF district. All the properties in the area together are worth $1 million and the taxing bodies split $40,000 in revenue. Over time, the property values increase to $1.1 million, meaning revenue would go up to $44,000. However, the $4,000 bump is put toward the TIF fund instead of those taxing bodies.
While TIFs are used across the U.S., they’re pretty polarizing for the general public. Cities have been known to use them in questionable ways and they frequently don’t take public input into account. For instance, “TIF” is kind of a dirty word in Chicago, as it were.
TIFs typically feature little constituent oversight. For muni bonds, it’s pretty common, but there’s still the issue of long-term debt. But there’s at least one way that addresses concerns for both of these.
OKC’s Metropolitan Area Projects (MAPS)
The U.S. went through a recession in the early 1980s, one that hit Oklahoma City pretty hard. To undo years of economic decline and a shrinking population, OKC’s mayor and the local chamber of commerce proposed MAPS. The program has funded to dozens of public works projects over the last two decades.
It’s a pretty simple concept: Instead of issuing bonds, city voters approved a one-cent sales tax increase. The proceeds would go to the MAPS fund for different projects. It’s like keeping a loose change jar with a specific future purchase in mind.
MAPS has covered a lot of different projects in OKC. Here are just a few:
- Renovations to the city’s music hall
- Construction of a trolley-car network
- Construction of a new main library
- Development of its Bricktown Canal and surrounding entertainment district
- Improvements to local schools
- Expansion of the local trail system
MAPS played a big role for sports in the city. The first round of the program is partially credited with convincing Seattle’s NBA team to move here in 2008. The Thunder’s current stadium was a MAPS objective, after all.
Development on the riverfront also led to large outside investment to convert the space into a crew/rowing training area. Oklahoma City is now home to USRowing‘s headquarters because of it.
All told, the city has spent about $1.6 billion in sales tax revenue on all this stuff, and the returns have been extremely profitable. The first phase of MAPS alone, which cost $350 million, has made an estimated $5 billion impact on the local economy.
There is a trade-off in doing things this way, though. In lieu of bonds that would pay for construction and renovations upfront, the city had to wait to break ground until the sales tax accumulated enough money. But residents seem OK with it, voting to extend the tax three times and fund the projects on their terms.
A covenant like this, between a town and its residents, isn’t similar at all to a city’s use of muni bonds or TIF districts. MAPS offered residents a more democratic way to improve their communities that didn’t involve mortgaging their future to make it happen.
Future of MAPS
Last December, voters overwhelmingly approved another round of MAPS with a goal of $978 million. The citizen-volunteer advisory board met last month to begin planning, despite the pandemic.
Public works that eschew muni bonds or other debt-inducing means should be considered a commodity for communities big and small. We don’t know what a MAPS program in a big city like New York, LA, or Chicago would look like to scale. But it’s worth exploring when we remember most of the U.S.’ most populous cities, including OKC, are have more debt than they can afford.
You might recall in January that the non-partisan Truth in Accounting released its annual Financial State of the Cities report (assuming you’re jazzed about public finance and have made it this far into this piece).
The report looked at the budgets of U.S.’ 75 most populous cities for fiscal year 2018 and ranked these cities based on whether they have enough money to pay off all their debts. Of the 75 cities they observed, 63 couldn’t do so. Oklahoma City was ranked #14—fairly good compared to other cities, but it still couldn’t pay off all its debt if need be.
Importantly, this report excludes debt related to capital assets and focuses more on pension obligations than anything else. A program like MAPS wouldn’t be considered here.
But TIA’s report is still significant. Most cities can’t afford paying their large debts. Any measure that can take a chunk out of a city’s debt—or prevent debt in the first place—can be the difference between a city making ends meet or having to make difficult decisions about its services.
Plus, while MAPS debt-saving effects aren’t measured in this report, its other effects arguably are. The revenue it’s elicited, from tourism and conventions to attracting new businesses, likely helped pushed OKC towards the top of TIA’s list and (more importantly) towards greater solvency.
Oklahoma City might be forced to use more conventional funding for future projects, like muni bonds. Or more cities might look to OKC as a blueprint for much-needed economic development. In any case, every city in the U.S. will need to consider changes over the next few years.
It’ll take more than successful programs like MAPS for Oklahoma City and other local governments to move forward when the dust settles. But MAPS would certainly help.