In RTW, things were indeed as Sheogorath describes them. A city would grow to the point where it became impossible to maintain order, even with all happiness buildings and a full 20-unit garrison. In those cases, the only option was to let the city revolt and then exterminate. Fortunately, that is not completely the case now.

Squalor in M2TW caps the penalty to public order at 80%; it can go no higher. You can get, let's see, 15% for happiness from walls, 25% for happiness from a pleasure palace, 15% for law from a barracks, 15% for happiness and 15% for public health from a huge cathedral, 20% for law and 25% for public health from a mayor's palace. That adds up to a total of 130% positive public order. You get your garrison percentage, governor influence, and triumph/glory bonus on top of this. Some factions also get other buildings, but not all.

On the negative side, you have a max of 80% due to squalor, figure on 15% unrest (most cities have this) plus whatever the distance-to-capitol penalty is. That's 95% plus distance.

Taxes can add up to 30% for low or subtract up to about 40% or so for very high, and there seems to be a base of 85% to which all these add/subtract.

The end result is that it is quite possible to wind up with a city that can maintain public order even in the case of a permanent population growth. You won't have a lot of margin of comfort in case some bastidge drops a high ranking spy in the city, and the garrison required might well eat between one and two thousand florins per turn all by itself, but you can do it.