AGENDA #4d

MEMORANDUM

TO:                  Mayor and Town Council

FROM:            W. Calvin Horton, Town Manager

SUBJECT:      Fiscal Year 2005-06 Vehicle Replacement Plan

DATE:                        February 13, 2006

REISSUED: February 27, 2006

The attached resolution would authorize the Manager to seek proposals for financing of Town vehicles as part of the vehicle replacement plan.  The proposed financing would provide funding for the purchase of the list of vehicles included in Attachment 1.

BACKGROUND

In June 1998, the Town contracted with a consulting firm, David M. Griffith, Inc., now MAXIMUS, to develop a long-range vehicle replacement plan that would allow the Town to replace vehicles and related capital equipment in accord with the normal useful life of each vehicle.  The two main goals of the vehicle replacement study were to develop a vehicle replacement plan that would eliminate the backlog of deferred replacements and to provide a predictable level of annual funding requirements.

David M. Griffith found that historically, the Town was spending approximately $650,000 per year for vehicle replacements.  In order to achieve an optimal replacement schedule they recommended that we should spend about $1,500,000 per year.  David M. Griffith gave the Town several options to achieve the Town’s goals.  Key elements of the option recommended by the Town Manager and selected by the Town Council are as follows:

• Immediately begin spending about $1,500,000 annually on vehicle replacement.

• Fund vehicle replacements with installment financing.

• Gradually increase the annual contributions from the general fund from about $850,000 to $1,600,000 over about 10 years.

• As debt service costs rise, use the increasing fund balance of the vehicle replacement fund to cover debt service costs in those years where contributions from the general fund are less than the total debt service requirement.

In April 2001 we retained the services of MAXIMUS for a follow-up “Vehicle Replacement Program Post-Implementation Review.”  The key recommendations in the report that were approved by the Manager and Town Council are summarized below:

• Extend loan terms to more closely match vehicle life expectancy.

• Conduct a more thorough annual update of the plan.

• Review and adjust replacement parameters annually.

• Ensure that contributions to the fund are adequate.

• Distribute costs for all charges for all vehicles back to user departments.

DISCUSSION

Fiscal Year 2005-06 Vehicle Replacement Plan

Attachment 1 consists of the list of 19 vehicles slated for replacement in the current year, plus three additions to the vehicle fleet that were recommended by the Manager and approved by the Council in the fiscal year 2005-06 budget.  The total estimated cost of these vehicles is $1,795,500. Of that total, $838,000 is included for replacement of a 1992 Ladder Fire Truck. 

At the beginning of the fiscal year 2005-06 budget process, the replacement list included 53 items that had reached their planned service life, with a total estimated cost of $2,614,900.  In accordance with standard procedures of the vehicle replacement program, each vehicle on the list was reviewed considering age, mileage and mechanical condition.  Based on that review, we were able to defer replacement of 31 vehicles to a subsequent year.  Small utility trailers with replacement costs under $5,000 have been removed from the capital budget and are funded from supply accounts.  Vehicle number 22 (an administrative full-size sedan) was deleted from the Police Department fleet as part of an overall fleet reduction review conducted during the budget process.  During that review, we also eliminated 11 other vehicles from subsequent years in the fleet replacement plan.

The fiscal year 2005-06 budget request of $1,795,500 for vehicle replacement is in line with the spending level recommended by MAXIMUS when inflation and program additions are considered.  Aggressive replacement of aging vehicles over the first several years of the plan has dramatically improved the operational effectiveness of our vehicles.  As we move into our ninth year under this Fleet Replacement plan in fiscal year 2006-07, we expect to see our budget request increase again due to the natural progression of a cyclic replacement plan, fleet growth, inflation and to account for the 31 vehicles deferred in previous years.

The proposed plan has been reviewed and approved by the Town’s Green Fleets Committee with two recommendations.  In accordance with the recommendations of the committee, we plan on replacing one ¾-ton pickup truck with a smaller Ford Ranger, four-wheel drive truck.  This will result in a small improvement in fuel economy and an increased capability for operating in winter weather emergencies.  We also plan on acquiring one compact hybrid-electric SUV in place of a full-size SUV.

Vehicle Replacement Funding Plan

 As shown on the attached vehicle replacement list, some of the items listed have loan terms of three years, while most of the vehicles have seven-year terms.  The three-year loan term vehicles are police cruisers.  All other vehicles have an average life of seven years.  Financing would be obtained separately for these two groups in order to align the financing period with the terms of their useful lives.

The proposed budget request of $1,795,500 represents $1,599,500 in seven-year loan term vehicles and $196,000 of three-year loan term vehicles.  The combined principal and interest payments necessary to finance $1,599,500 of seven-year loan term vehicles would be approximately $1,915,000 based on current interest rates.  The total needed to finance $196,000 of three-year loan term vehicles would be about $214,000.

Potential Future Enhancements to the Plan

The Public Works Director and the Finance Director are working together to analyze and develop possible future amendments to the Fleet Replacement Program.  In the fiscal year 2006-07 budget we will consider purchasing police cars and some other vehicles with cash.  This will eliminate three-year installment loans for small vehicles with short service lives and retain seven-year installment loans for larger more expensive vehicles with longer service lives.  This change would allow us to retain the cost-leveling benefits of installment financing for large purchases and reduce the impact of the Fleet Replacement Plan on the Town’s overall debt service load.

CONCLUSION

We recommend that the Council adopt the attached resolution authorizing the Manager to seek proposals for the financing of Town vehicles with a replacement cost totaling $1,795,500.

ATTACHMENT

1. List of Vehicles for FY 2005-06 Fleet Replacement Funding (p. 5).