Mill Creek council debates clearer definitions and limits in financial policies amid projected deficit

City of Mill Creek officials and councilmembers spent an extended study session on Feb. 11 reviewing parts of the city—s financial management policy, centering on reserves, one-time revenues, capital transfers and the definition of a structurally balanced budget.

The discussion, led by City Manager Yamamoto and the finance director, parsed differences between the statutory definition of a balanced budget and a more aspirational practice recommended by the Government Finance Officers Association (GFOA). Finance staff emphasized the city—s dependence on sales tax and property tax and noted a modeled general fund balance of roughly $13.9 million as of Dec. 31, 2024, with a minimum reserve target set at 15 percent (about $3.9 million).

The session moved beyond definitions into operational implications: whether the city should use prior biennium surplus for one-time investments, transfer a portion of surplus to the capital improvement program (CIP), or rely on additional taxes to close a projected structural gap. Staff presented sample scenarios showing a structural shortfall of about $458,000 under current service levels unless the council adopts additional revenue (property tax levy options discussed included a statutory 1 percent and a larger proposed levy increase). Staff also outlined three choices that would change the city—s breakeven horizon: the statutory 1 percent property tax option, a 12 percent levy scenario that would push the breakeven later, and using the full bank capacity (about $2.5 million) to avoid depletion within the six-year projection horizon.

Councilmembers repeatedly asked staff to clarify terminology and slides. Several members said they had long viewed the entire unspent fund balance as a single "reserve," while staff explained the accounting distinction between a restricted minimum reserve (15 percent) and surplus (unassigned/available fund balance). Staff recommended clearer policy language to avoid that mismatch, suggesting separate wording for (a) fund-balance accounting and (b) the aspirational goal that recurring revenues match recurring expenditures (the GFOA—s "structurally balanced" definition).

Specific policy points the group discussed included: - Operating budget wording: whether the policy should be titled "budget policy" rather than "operating budget policy" because it now includes capital and multi-year CIP items. - Use of one-time revenues: staff and council agreed on a GFOA best practice principle that one-time revenues should fund one-time expenditures and should be transferred to CIP where appropriate (construction-related sales tax from large developments was cited as an example). Staff noted past practice of not transferring certain one-time development revenues during COVID. - Frequency of fee and rate studies: surface water rates were last updated in 2018 in connection with bond issuance; the policy currently calls for a five-year rate study and an odd-year review of user fees. Councilmembers asked staff to assess whether the five-year interval remains appropriate given current inflation and operating pressures. - Capital transfer rule: a draft policy item that would automatically transfer one-third of surplus above the minimum reserve to CIP prompted debate; several councilmembers asked to remove or re-locate that automatic-transfer language and to add caveats allowing council discretion depending on year-specific revenue volatility and projected needs. - Reserves wording and structure: council asked staff to rework the reserves section so it distinguishes fund-specific unassigned balances (surplus) from the general fund operating reserve and to consider labeling the 15 percent as a restricted minimum reserve.

Councilmembers expressed a shared aim: to move toward the GFOA—s long-term structurally balanced budget standard while keeping flexibility for strategic investments. Several members pressed staff for clearer slide presentations that separate operating revenues and expenses from capital flows and show cumulative impacts of mid-biennium decisions on the next biennium.

Staff told the council they will bring revised policy language and modeling back for further review, incorporating clearer definitions of "reserve" versus "surplus," options for transfers to CIP, and more transparent running tallies of the multi-biennium impact of staffing and program decisions.

The study session closed with agreement to rewrite confusing sections and return with sample charts showing both the statutory and aspirational budget presentations so the council could better see the near-term and structural impacts of policy choices.