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Exhibit 1: Risk Analysis Curve A risk analysis shows how confident this city can be that a given amount of reserves is sufficient to withstand the risks the city faces over a I 0-year period. 50 For this city,a reserve of$33 million 45 provides an 851 chance of reserves being sufficient over a 10-year period. 40 35 I 30 � I 0 0 25 c o I Z 1 20 i 15 i 10 i 5 f I 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 99 Percent must consider their appetite for covering risk by accumulat- they are willing to assume versus how much money they are ing more reserves versus spending on current services or low- comfortable having in reserve. It is notable that this curve, ering taxes.Some officials use this kind of analysis to consider like in all risk analyses that GFOA has developed, begins the value of spending on projects to make their community to turn more sharply upward as we move to the right. This more resilient against extreme events. happens because as we move to right we cover increasingly The results of a Monte Carlo analysis can be shown as a extreme and catastrophic possibilities in order to have confi- curve, much like the one in Exhibit 1. It shows the level of dence that reserves will be sufficient. confidence a hypothetical city can have that its reserves The upward turn of the curve shown in Exhibit 1 implies are sufficient to withstand the risks that a local government needs more to which the city is subject over a and more money to gain more con- 10-year period. For example, $33 mil- To understand risks, fidence as we move right along the lion would give the city 85 percent curve.At some point,then, it becomes confidence.City officials are then able Y°� need to quantify them. cost-ineffective to rely on reserves to to debate and discuss how much risk cover risk.This highlights the fact that June 20191 Government Finance Review 13