Maybe that’s only for registering primary domains and not subdomains?

That is true and would explain my confusion on this matter if they have some list of apex domains they are dynamically creating sub-domains for. Honestly if this is the case I would avoid participating in this. This puts the control of the domain (sub-domain) in their hands for your city. Cities and states can already use sub-domains of their countries .gov domain structure which I realize is full of its own issues but that's another topic all together. Cities can also get citystate.gov in some states but I don't know how that process works.

This project would likely be shut down the first time someone complains to their government about one of the sites.