POLICY & PROCEDURE
Subject
FINANCIAL MANAGEMENT POLICIES
Index: Department Finance and Administration
Number: 300-03
Effective Date:
Supersedes:
Staff Contact:
Clerk ID Number:
Approved By and Date:
Peggy Lauerman
Approved by Council 5-7-19
The City of Mill Creek is accountable to its citizens for the use of public dollars. Municipal resources must be used wisely to ensure adequate funding for the services, public facilities, and infrastructure necessary to meet the community’s present and future needs. The City of Mill Creek is committed to the highest standards of responsible financial management. The City, including the City Council, City Manager and staff will work together to ensure that all financial matters of the City are addressed with care, integrity, and in the best interest of the City.
Written, adopted financial policies have many benefits, such as assisting the elected officials and staff in the financial management of the City, saving time and energy when discussing financial matters, engendering public confidence, and providing continuity over time as elected officials and staff members change. While these policies will be amended periodically, they will provide the basic foundation and framework for many of the issues and decisions facing the City. They will promote sound financial management and assist in the City’s stability, efficiency, and effectiveness.
The City of Mill Creek’s financial management policies address the following major areas:
5.0 General Policies
10.0 Debt Policies
6.0 Operating Budget Policies
11.0 Investment Policies
7.0 Revenue Policies
12.0 Special Revenue Fund Policies
8.0 Expenditure Policies
13.0 Reserve Policies
9.0 Capital Management Policies
14.0 Accounting, Auditing, and Financial Reporting Policies
5.1 
The City Council may adopt resolutions and ordinances to set financial policies to assure the financial strength and accountability of the City.
5.2 
The City Manager, or designee, shall develop administrative directives and general procedures for implementing the City Council’s financial policies.
5.3 
All City departments will share in the responsibility of meeting policy goals and ensuring long-term financial health. Future service plans and programs will be developed to reflect current policy directives, projected revenues, and future service requirements.
The goals of the budget process are: Align the budget with citizen priorities, measure progress towards priorities, obtain the best value for each tax dollar, foster continuous learning in the City, and build regional cooperation.
6.1 
The operating budget shall serve as the City’s comprehensive two-year financial plan which provides for the desired level of City services as defined by the City’s priorities. It will serve as the policy document of the City Council for implementing Council goals and objectives.
6.2 
In order to facilitate the biennial budget development process and 6-year Capital Improvement Plan, the City Manager should propose a combined biennial budget and capital development calendar at the first regular Council meeting in March, in even years.
6.3 
The City Council will adopt and maintain a balanced biennial operating budget.
6.4 
The City of Mill Creek defines a balanced budget as current biennium revenues (including fund balances) being equal to or greater than current biennium budgeted expenditures.
6.5 
The City will strive to adopt a budget where current biennial operating revenues will be equal to or greater than current operating expenditures.
6.6 
All general government current operating expenditures should be paid from current revenues and cash carried over from the prior biennium in excess of the adopted reserve level. The City will avoid budgetary and accounting procedures that balance the current budget at the expense of future budgets.
6.7 
Revenue and expenditure forecasts will be prepared to examine the City’s ability to absorb operating costs due to changes in the economy, service demands, contractual obligations, and capital improvements. The forecast will encompass six years and will be updated as needed but no less than biennially.
6.8 
Biennial operating budgets should provide for design, construction, maintenance and replacement of the City’s capital, facilities, and equipment consistent with the Capital Improvement Plan including the related cost for operating and maintenance.
6.9 
The City should maintain all of its assets at a level that protects the City’s capital investment and minimizes future maintenance and replacement costs.
6.10 
One-time revenues should be used for one-time/non-recurring expenditures.
6.11 
One-time construction sales tax from the General Fund should be transferred into the Capital Improvement Project Fund in accordance with the City’s adopted Capital Improvement Plan to help support future capital needs associated with the increased residential and commercial populations.
6.12 
All supplemental budget modifications (appropriations requested after the original budget is adopted) including staff additions should conform to the City’s budget policies and be carefully considered. All budget modifications will conform to these operating budget policies.
Design, maintain, and administer a revenue system that will assure a reliable, equitable, diversified, and sufficient revenue stream to support desired City services.
7.1 
Mill Creek strives to maintain as diversified and stable of a revenue system as permitted by state law to shelter the City from short-run fluctuations in any one revenue source.
7.2 
Major General Fund revenue streams are impacted by fluctuations in the local, regional and national economies, and therefore, Mill Creek’s revenue estimates should be conservative and avoid speculation.
7.3 
The City will estimate its biennial revenues through an objective, analytical process using best known economic data.
7.4 
The City strives to establish user fees and charges at a level related to the cost of providing the service and within policy parameters established by the City Council.
7.5 
In each odd numbered year, the City should review and adjust user fees for the effects of inflation and other costs or legislative factors as appropriate. The City will set fees for user activities in accordance with cost recovery policies adopted by Council.
7.6 
Surface Water Utility-The City will strive to set rates at a level that fully supports the total direct and indirect cost of the activity including the cost of annual depreciation of capital assets. Additionally, for analysis and rate modeling purposes, the proposed rates shall also take into account debt service commitments.
a. 
The analysis associated with “generally accepted” rate-setting techniques includes the following:
•
Revenue Requirement Analysis – Establishes the overall level of financial and rate needs of the City.
•
Cost of Service Analysis – Design rates to collect the appropriate level of revenue and to meet the goals and policies of the City.
b. 
At a minimum, a rate study should be reviewed and updated every 5 years.
7.7 
The City will account for revenues according to City policy, state statute, and as prescribed by the State Auditor’s Office.
Identify priority services, establish appropriate service levels, and administer the expenditure of available resources to assure fiscal stability and the effective and efficient delivery of services.
8.1 
The City budget will provide for a sustainable level of service that strives to achieve City goals.
8.2 
The City’s operating budget will not use one-time revenues to support ongoing expenditures.
8.3 
The City will account for expenditures according to City policy, state statute and as prescribed by the State Auditor’s Office.
8.4 
Written cost allocation plans will be developed and incorporated into the City budget as needed. The cost allocation plan will be the basis for distribution of general government costs to other funds or capital projects (also known as indirect costs).
Review and monitor the state of the City’s capital equipment and infrastructure, setting pri-orities for its replacement and renovation based on needs, funding alternatives, and availability of resources.
9.1 
The City of Mill Creek will develop a Capital Facilities Plan (CFP) as defined and required by RCW 36.70A.070. The plan shall be for a period of six years.
9.2 
The CFP together with the City’s Capital Improvement Plan (CIP) will include all projects to maintain public capital projects required to maintain service levels at standards established by the City Council. It may also include for consideration such other projects as requested by the City Council.
9.3 
The CFP/CIP will provide a full description and details on each capital project including estimating costs and potential funding sources for each capital project proposal before it is submitted to Council for approval. The City will use intergovernmental assistance and other outside resources whenever possible.
9.4 
The City will finance only those capital improvements that are consistent with the adopted CIP and City budget priorities. All capital improvements will include operations and maintenance costs and the plan will be updated every biennium.
9.5 
A capital project is defined as new, replacement of, or improvements to infrastructure, (e.g. buildings, roads, parks) that has a minimum life expectancy of five years and a minimum cost of $25,000.
9.6 
One-time revenues should be transferred into the CIP Fund at the end of a biennium. One-time revenues are those receipts that are easily identifiable due to the magnitude of the revenue and are not expected to reoccur, such as one-time development related revenues (e.g., construction sales tax on large buildings). The City recognizes that during each budget cycle, Mill Creek receives a recurring base amount of development related revenues that should not be transferred out of the City’s General Fund.
9.7 
The City will transfer a portion of the City’s General Fund Reserve above an amount which is needed to respond to economic fluctuations, cash flow needs, and catastrophic events. At the end of each biennium, the City will transfer 33% of all reserve funds above the General Fund Reserve minimum for capital project investment.
9.8 
The CIP includes a CIP Contingency in which a minimum of 10% of projected revenues from Real Estate Excise Tax (REET) should be designated for this fund to be used to support Transportation, Parks and Trails, and City Facilities and Equipment. It is at Council’s discretion that these funds can be appropriated toward currently unidentified projects, toward approved projects that are underfunded or toward unexpected increases in planned projects.
Capital Asset Management
9.9 
The City will maintain its capital assets at a level adequate to protect the City’s capital investment and to minimize future maintenance and replacement costs. The budget will provide for adequate maintenance and orderly replacement of capital assets from current revenues where possible.
9.10 
The capitalization threshold used in determining if a given asset qualifies for capitalization is $5,000 per item with a useful life of over one year. All capital assets shall have a City of Mill Creek property tag affixed to it when placed into service.
9.11 
Minor equipment that falls below the $5,000 threshold but is subject to shrinkage shall have City of Mill Creek property tag affixed to it when placed into City service and will be accounted for on the “Small and Attractive” inventory list.
Maintain the reserves, contingencies, and ending fund balances of the various operating funds at levels sufficient to protect the City’s credit as well as its financial position from emergencies.
12.1 
At the end of each biennium, the remaining dollars left in each fund that are undesignated and unencumbered constitute available reserves of the City.
12.2 
The City will include all fund balances in the biennial budget.
12.3 
General Fund Operating Reserve
This reserve sets aside funds (15 percent of the General Fund’s budgeted revenues for the ensuing biennium) to respond to economic fluctuations, catastrophic events and unanticipated cash flow needs.
a. 
At the end of a budget cycle, a third of any surplus reserve should be transferred to the Capital Improvement Plan (CIP) Fund for future capital investment.
b. 
A surplus is defined as the difference between the actual beginning fund balance and the budgeted beginning fund balance.
c. 
Biennium surpluses in the General Fund Operating Reserve may remain in the General Fund Operating Reserve, appropriated and used to fund one-time operations and capital expenditures if:
•
Surplus balances remain after all current expenditure obligations and reserve requirements are met.
•
The City has made a determination that revenues for the ensuing biennium are sufficient to support budgeted General Fund operations.
d. 
If reserves are used for their intended purpose and spent down below the 15 percent reserve requirement, the City will develop a written fiscal strategy to reinstate the required 15 percent reserve.
12.4 
CIP Contingency Reserve
A minimum of 10% of projected revenues from Real Estate Excise Tax (REET) should be designated as a Capital Improvement Plan (CIP) Contingency Reserve to be used to support transportation, parks and trails, City facilities and new capital equipment projects. REET receipts fluctuate from year to year based on the transfer of property ownership in Mill Creek. Although staff projects this revenue stream conservatively, it is still prudent to maintain an adequate CIP Contingency Reserve and not allocate or appropriate these monies until they are actually received. Only Council can approve spending down funds in the CIP Contingency Reserve.
12.5 
City Hall North
The City will maintain an operating reserve of 5%.
12.6 
Surface Water Utility Fund Reserves
Operating:
The City shall strive to maintain adequate reserves in order to provide sufficient cash flows to meet operating and capital expenses, while also providing the financial ability to address economic downturn and system emergencies.
The City’s goal is to achieve a year-end minimum balance target of 120 days (33%) of total annual operating expenditures excluding transfers. In any year where operating reserves exceed the target, i.e.120 days of operating expenses, it is assumed that the excess cash is swept into the capital account to help pay for capital projects.
Capital Reserves:
This reserve provides a source of emergency funding for unexpected asset failures or other unanticipated capital needs. It can also help the utility address cash flow issues related to capital projects. The City’s goal is to achieve a target balance of $500,000.
Revenue Bond Reserve:
Bond reserves shall be created and maintained by the Surface Water Utility Fund in accordance with any provisions set forth in the bond covenants. These shall be in addition to the reserves described above.
Parity Debt Service Coverage Ratio:
The City shall strive to maintain a minimum target goal for parity debt service coverage ratio, gross revenue of the utility less operating and maintenance expenses, (not including depreciation, taxes and debt payments) of 2.00 times or higher on the combined parity annual debt service payments.
12.9 
Equipment Replacement Fund
The City shall maintain an Equipment Replacement Fund for fleet, capital equipment and general asset replacement. The Equipment Replacement Fund should be maintained at a level sufficient to meet scheduled equipment replacement so as to sustain an acceptable level of municipal services and prevent a physical deterioration of City assets.
Contributions will be made through assessments to the operating departments and maintained on a per asset basis.
12.10 
Unemployment Compensation and Self Insurance Reserve Fund
This fund will be maintained to accumulate reserves for unanticipated claims for unemployment compensation and/or the City’s property damage coverage, liability and automobile insurance deductibles.
12.11 
Additional Reserves
The City Council may create additional reserve accounts to set aside funds for specific purposes or special projects for known significant future expenditures, or as general operational reserves.
13.1 
The City will establish and maintain Special Revenue Funds to account for the proceeds of restricted revenue streams that have legally specified uses in accordance with the Government Finance Officers Association (GFOA) guidelines and best practices.
13.2 
Special Revenue Funds should have biennial operating budgets, be reviewed through the normal budget process, and be included in the City’s budget document.
Comply with prevailing federal, state, and local statutes and regulations. Conform to a comprehensive basis of accounting in compliance with Washington State statutes and with generally accepted accounting principles (GAAP) as promulgated by the Governmental Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA) where applicable.
14.1 
The City will maintain revenue and expenditure categories according to state statute and administrative regulation. The City will use the “Budgeting, Accounting & Reporting System” (BARS) prescribed by the State Auditor for its revenue and expenditure classification.
14.2 
The City of Mill Creek will ensure that City records are audited annually or as directed by the State Auditor’s Office (SAO) and these audits will result in the issuance of a financial opinion. Audit results are available on the SAO website.
14.3 
The City of Mill Creek will establish and maintain a high standard of internal controls and accounting practices overseen by the Finance Director.
14.4 
The City accounts for revenues and expenditures on a cash basis.
14.5 
Reports on revenues and expenditures will be prepared monthly and budget reports showing the current status of revenues and expenditures will be prepared and reviewed quarterly with City Council and made available for public inspection.
14.6 
A fixed asset system will be maintained to identify City assets, their location, and their condition for all general government and internal service funds.
14.7 
The City will strive to establish and maintain an asset listing of existing infrastructure by estimating the existing asset infrastructure, including annual depreciation for the Surface Water Fund.