At a July 29 study session, Mill Creek council members and staff conducted a second review of revised financial management policies, centering debate on definitional clarity for reserve and surplus, whether minimum reserves should be tied to revenues or expenditures, and how much of any biennial surplus should be shifted to the capital improvement program.

Finance staff opened the session by explaining the timeline for the policy work: the draft incorporated council feedback from an April review and other legal and management comments. Staff said a primary objective was to ensure the document provided consistent definitions and operational rules for the city's biennial budget process and for each fund type.

A central point of contention was the definition and measurement point for reserve balances. Council members argued definitions such as "minimum reserve level," "surplus," "unassigned and unencumbered" and the reference date for measuring fund balances should be stated up front in the policy rather than scattered across sections. Finance staff agreed and said they would move and clarify definitions to the front of the document.

Council members debated whether the general fund's minimum operating reserve should be a percentage of projected revenues (current policy) or a percentage of projected expenditures. Finance staff argued for pegging the minimum reserve to projected expenditures as more conservative and better aligned with cash-flow needs; other council members preferred the revenue measure or a hybrid approach. The draft under discussion included a 15% minimum operating reserve; council members asked that the number and method be returned to the parking lot for further discussion and for sensitivity analysis.

Another contested item was treatment of a biennial surplus (fund balance above the minimum reserve). Staff proposed a policy framework that would make a portion of any surplus available for capital investment but left the precise fraction for council direction. Council members proposed various approaches during the session: a fixed minimum transfer (for example, 15% of surplus) combined with an aspirational target (for example, up to one-third of surplus) or discretionary rules allowing reduced transfers under "exigent financial circumstances." Several council members emphasized that transfers to capital should be careful because once money moves from the general fund to capital it is harder to redeploy for operations in future downturns.

Council members also reviewed fund-specific language presented by staff. The draft increased the proposed capital reserve for the surface-water utility from $500,000 to $2.5 million after staff said engineering assessments showed higher probable capital needs. Staff described a replenishment schedule that would restore a fund to its minimum reserve over a short multi-year window if the reserve fell below the minimum; councilors requested additional clarity and stair-stepping options that would allow phased increases to a higher target.

Other procedural items covered: staff suggested maintaining a two-year review cadence for the financial policies and recommended moving definitions and reserve calculation points to the front of the document. Council members and staff agreed to take the unresolved issues back to finance staff for additional numerical analysis and to return with a revised draft for final approval at a later date.

No ordinance vote was taken; the session was a council study and direction-setting conversation.

What council asked staff to do next: provide a clean, consolidated draft with definitions up front; provide comparative calculations showing reserve measurements tied to revenues and to expenditures; show scenarios for surplus transfers to the capital program (including minimum and aspirational percentages); and outline replenishment schedules for any fund whose proposed minimum would increase.