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In response to our discussion at the Council Workshop of 5/17/10, I’ve attached the highlights of

three somewhat similarly situated Western Washington cities that have developed a Reserve
Policy. As you can see there are differences but the underlying themes are fairly consistent and
seem to be more conservative in approach to budgeting than other cities with that had adopted
lesser standards. Unfortunately ICMA does not provide guidance for a national standard short
of maintaining a bare minimum of two months expenses in reserve, but this is really more of a
cash management position.

Already staff and Council have used followed some of these principles but it’s been more ad
hoc. Additionally, without a clear strategy it’s difficult to know what level of investment we can
safely make while meeting or exceeding expectations. By establishing a reserve policy
everyone from staff to the public will know how the city will respond when opportunities present
themselves or rainy days arrive.

My recommendation is as follows:

1. Establish a reserve policy that would provide for Capital and Contingency
reserves. By dividing it into two accounts, we maintain clear distinctions between
rainy day funds and annual set-aside capital projects both of which are critical,
but really separate goals. 10% for each seems to be a gold standard for reserve
2. Set standards that anticipate situations where the funds would be used as well as
how they will be replenished.
3. Consider statutory constraints on these savings. While future Council’s can
always overturn an ordinance, locally adopted rules are looking upon favorably
by ratings agencies.
4. Consider establishment of capital asset depreciation account to set aside funds
annually for major purchases. While expensive to establish, it would flatten our
acquisition costs preventing foreseeable shortfalls.

Mercer Island (City of Mercer Island, 2003)

Capital Reserve

• Maintain a Capital Reserve Fund to accumulate funds to finance eligible capital facilities
projects consistent with the City’s overall Capital Improvement Plan. Such projects would
include construction of new public buildings, major reconstruction of a public building or
park, or acquisition of a new open space or park.

• Investment earnings will continue to be distributed to the Capital Reserve Fund per the
Investment Earnings budget policy.

• The Council will have the opportunity to build the balance in the Capital Reserve Fund
as part of the annual process for determining the disposition of the year-end surplus in
the General Fund and the Capital Improvement Fund.

Contingency Fund
• The City has established a contingency reserve to provide for unanticipated
expenditures of a nonrecurring nature, to meet unanticipated significant revenue
shortfalls, and/or to meet unexpected increases in service delivery costs. In the past, the
Contingency Fund received revenues from two sources:
1. Interest earnings based on the cash balance in the fund; and
2. General Fund surplus from the prior year, which can be used to increase the
Contingency Fund balance to the specified target level.

• As a long term goal, the Contingency Fund is to be funded at a target level of 10% of
General Fund budgeted expenditures. In addition, state law limits the amount of cash
that can be kept in the Contingency Fund to 37½ cents per thousand dollars of assessed
valuation. For 2008, the legal limit for the fund is $3,329,339.

City of Tukwila (City of Tukwila, 2010)

Contingency Reserve Fund

• Established to save for large capital improvements

• Set initially to be a minimum of 4% of General Fund Revenue.

• Target of 8% no later than 2014 with annual increases of 2% of General Fund Revenue.

• Minimum 25% of difference between budgeted and actual annual expenditures

deposited into reserve before re-appropriation.

• Minimum 25% of construction sales tax deposited into reserve.

• Use of reserve may not be recurring expense.

• Planned draw-down of reserve not to exceed 50% of its value or 4% General Fund
• Replenishment schedule – 25-50% draw-down adopted with plan to restore fund 75-
100% within 5-7 years. 10-25% draw-down adopted with plan to restore fund in 3-5
years. 0-10% draw-down adopted with plan to restore fund in 1-3 years.

Risk Management Reserve

• Established to mitigation of risk associated with claims or general liability.

• Target of 8% same schedule increases as Contingency Reserve.

• Same replenishment schedule as Contingency Reserve.

Revenue Stabilization Fund

• Dedicated to mitigating unexpected declines in revenue (i.e. 2008 recession.)

• Annual transfer 1% of General Fund Revenue to the fund.

• May not be utilized unless revenue declines more than 5%.

• No decline of more than 50% of fund unless general fund revenue declines more than

• Same replenishment schedule

• If the reserve exceeds 10% of General Fund Revenue, balance will be transferred to
Contingency Reserve.

City of Federal Way (City of Federal Way, 2009)

• Contingency Reserve targeted at 3% of General Fund Revenue for unexpected costs or

economic downturns.

• Strategic Reserve in Risk Management Fund targeted at not less than 5% of General
Fund Revenue for risks associated with claims or general liability (target is self-

• Create asset reserve funds for replacement cost of assets based on a depreciation

City of Federal Way. (2009). City of Federal Way Budget. Retrieved May 19, 2010, from

City of Mercer Island. (2003). City of Mercer Island Finance. Retrieved May 19, 2010, from City of Mercer

City of Tukwila. (2010). MRSC Policy and Procedures. Retrieved May 19, 2010, from MRSC: