In the first of a series of three financial meetings, the City Council decided Wednesday to create $3 million in reserve funds.

The money would be split into several different accounts. Of that, $1.5 million would go towards capital reserves, which would be available at all times to help Finance Director Elray Konkel pay bills.

Another $500,000 would go toward a contingency fund for unexpected expenses, which would be accessible only with council permission.

The final $1 million would be for an emergency reserve fund, money that will largely remain untouched.

Those reserves will be collected over a two-year span.

In 2010, the council decided to place $1 million in the capital reserve fund. The following year it will deposit $500,000 into the capital reserve account and $500,000 in the contingency fund. The council agreed that since the emergency fund most likely won’t be used often, it could be funded by one-time revenue, such as the sale of surplus property expected to happen this year.

“The emergency fund is hopefully something you don’t have to touch,” said Mayor Bob Scales. “If you have to use it, you could say OK to use one-time revenue to fund it.”

Councilor Barry Peters questioned the decision to raise half the reserve funds now and half next year. He lobbied to raise one-third of the money this year, and the remainder next year. He said it would be too difficult for the city to make those changes two months into the year.

“I think it would be wiser not to create false expectations in the community on a 50-50 approach,” Peters said. 

But Councilor Bill Knobloch said the council can’t afford to push off what needs to happen now. 

“We are where we are today, and we have to make those hard decisions,” he said. “We’re not here to make things nice. This is not the time to worry how difficult it is.”

Scales said the council is doing what it should have done several years ago. Over the last few years, revenue declined, but the council continued to authorize spending. Now it has gotten to the point where the city can’t deal with an unexpected cost. 

Peters said the council is just as much at fault as anyone for the current situation. He said the revised budget brought forth by staff was actually smaller in real dollars than last year’s original. But the council continually tacked on more projects and other charges.

“I think our council added expenses, and we have to be disciplined,” he said. 

The council still has several questions left to answer. In two more meetings, the council will go through the state and local mandates that it has to fulfill and use those as a way to begin the discussion of what the city’s service priorities are. 

“We need a long-term plan of where we want to be for a year or two from now,” said Councilor Kirsten Hytopoulos. “If we’re limited in what cuts we can make right now, we may not make intelligent cuts.”

Once a hierarchy is decided, interim City Manager Lee Walton will return to the council with possibilities for budget cuts.

The decision to fund reserves means council and staff will need to trim nearly $2 million over the next two years.

“We have to reinvent the city,” Walton said.

Walton said everyone will have to sacrifice to make the cuts work. Cuts will come from all angles, not just city staff. He said the council will have to answer the questions of how much police protection the community needs, or how many community service organizations will lose money.

“The pain must be shared,” Walton said. 

The council began the meeting by stating that any and every program will be up for discussion. Part of that discussion includes the idea of new revenue, but that comes later. Scales said the best approach is to make sure that expenses line up with the city’s baseline, recurring revenue (approximately $18 million, Konkel said). Once the council creates a sustainable budget, then the ideas of new revenue sources and non-essential projects come into play.

Though the need to make cuts to the budget and reorganize the city’s priorities has been at least two years coming, councilors said Konkel’s request to initiate a $600,000 interfund loan from the city’s water utility into its general fund precipitated the series of meetings. Had the council not executed the loan, the city bank account would have overdrawn on a $600,000 insurance payment. 

Scales said the contingency fund would be perfect to deal with that sort of problem. 

Konkel planned to use grant proceeds from the Williams property and sale of the Vincent Road property to pay the bills in January, but those funds haven’t arrived, so Konkel had to ask the council for the loan.