AGENDA #2e
BUDGET WORKING PAPER
TO: W. Calvin Horton, Town Manager
FROM: Bill Terry, Interim Public Works Director
SUBJECT: Fiscal Year 2004-05 Fleet Replacement Program Revised Budget
DATE: May 19, 2004
This budget working paper provides information on the recommended revisions to the fiscal year 2004/2005 Fleet Replacement Program Budget.
BACKGROUND
During the fiscal year 1998/1999 budget preparation process, the Town contracted for a “Fleet Replacement Study” with DMG Maximus of Rockville, Maryland. Prior to fiscal year 1998/1999 the Town paid for all fleet purchases with cash from current income or with bonds. Under this method of replacement funding it was very common for the replacement of large items in the fleet to be deferred for several years because of budget constraints. For example, in order for the Public Works Department to replace a $150,000 excavator in a given year, it would be necessary to freeze a significant portion of other fleet replacements and cut other operational programs to remain within the Department’s overall budget authority. As a result, such purchases were commonly deferred well beyond the useful life of the equipment. When several large purchases were made over a few years, the replacement of a dozen or more small vehicles would be deferred. Over time, this resulted in an aging fleet with a large backlog of deferred replacements.
The two main goals of the fleet replacement study were to develop a fleet replacement plan that would eliminate the backlog of deferred replacements and to provide a predictable level of annual funding requirements.
DMG Maximus found that historically, the Town was spending on the order of $650,000 per year for fleet replacements. In order to achieve an optimal replacement schedule, they recommended that we should be spending about $1,500,000 per year. DMG Maximus gave the Town several options to achieve our goal. 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 fleet replacement.
The original recommendations of DMG Maximus included one option that was based on purchasing all vehicles with cash accumulated in a sinking fund in advance of the purchase. The large fund balance associated with this plan made it very expensive in terms of the required annual appropriations during the first few years of the plan. Another option presented by the consultant was an installment financing option where all purchases would be funded with installment financing and the annual appropriation would be limited to the amount needed for Debt Service. The plan that was eventually adopted was a hybrid of these two options. The “hybrid plan” takes advantage of the low start-up costs of the installment financing plan and uses the cash accumulation features of the sinking fund plan to remove some of the variability from the annual funding requirements. Under the hybrid plan, the annual funding requirement increases gradually over time in a steady and predictable manner.
Fiscal Year 2000/2001 Fleet Replacement Program Review
As part of the fiscal year 2001/2002 budget preparation process, we asked DMG Maximus to help us again by examining our progress under the first three years of the fleet replacement plan, providing the Council with an update of the plan as well as answering any questions the Council may have about the concept and the plan. The consultant’s report found that the Fleet Replacement Program was generally accomplishing our primary goals of reducing the backlog of deferred replacements and providing a predictable level of annual funding requirements. The key recommendations in the fiscal year 2001/2002 report were:
· Extend loan terms to more closely match vehicle life expectancy.
· Conduct a more thorough annual update of the plan.
· Review and adjust (as needed) replacement parameters annually.
· Seek a multi-year loan agreement with lending institutions.
· Abandon the modified sinking fund in favor of a traditional debt financing plan.
· Depreciate assets over their life expectancy rather than loan terms.
We concurred in all of the recommendations of the consultant except for their recommendation to totally abandon the modified sinking fund. One of the primary benefits of the modified sinking fund is that it removes some of the year-to-year volatility in the amount of the contribution required from the General Fund. We recommended, and the Council approved, that we continue to maintain this fund to offset the highs and lows in the funding requirement for the Fleet Replacement Fund.
DISCUSSION
One of the expected positive outcomes from an optimized fleet replacement schedule is reduced maintenance cost; however, it is difficult to demonstrate empirically that we are realizing such savings. We believe that we are realizing such savings; however, over the past six years our annual costs for fleet maintenance have continued to rise at about the same rate as that for inflation. We believe that most of this rise can be attributed to inflation and the increased size of the fleet. Since 1991 the replacement value of the fleet has risen from $5,912,000 to about $12,200,000. The increase can be attributed to inflation, the merger with the Fire Department fleet in fiscal year 1995/1996 and the addition of about 21 new vehicles. Despite the increasing scope of work for the fleet maintenance operation, we were able to reduce the maintenance staff from 6 mechanics to 5 mechanics in fiscal year 2002/2003. We believe that the success of the Fleet Replacement Program is the primary reason that we were able to reduce our maintenance staff despite the fact that our fleet has grown substantially over the past 10 years.
Another expected positive outcome from an optimized fleet replacement plan is increased operational productivity of the work groups that rely upon the vehicle fleet. While we do not keep records that would demonstrate such increased productivity, we have several anecdotal reports that field forces are experiencing significantly less vehicle-related down time. We believe that the Fleet Replacement Program is responsible for increased productivity in leaf collection, street repairs, solid waste collection and law enforcement, to name a few.
The high reliability and availability of our dump truck fleet during the snow removal operations of January 2004 was one key to our success. During this operation we seldom had more than one truck at a time down for maintenance problems. Before the initiation of the Fleet Replacement Program, we had deferred the replacement of our dump truck fleet for several years. During a snow removal or storm damage cleanup operation prior to 2000, such as Hurricane Fran, it was not unusual to have two or three trucks out of service for maintenance at any given time. While good maintenance service will always be critical to such emergency operations, our experience supports the belief that a good fleet replacement program significantly reduces the number of operational mission failures that occur during emergency storm damage recovery operations.
Another example of our increased productivity is the loose-leaf collection program. This program has been very successful in recent years, completing six cycles Town-wide, principally related to the increased reliability and availability afforded by newer equipment and relatively favorable weather. We estimate that leaf collection productivity has increased by about 15% since the inception of the Fleet Replacement Program in 1999.
Other Positive Impacts
An unexpected but logical outcome of the Fleet Replacement Program has been improved employee morale. Some user departments have reported that the improved reliability and appearance of the fleet has had a positive affect on employee morale, which has led in turn to improved employee attention to the care of their vehicles.
The original fleet replacement plan calls for the expenditure of about $1,500,000 per year for the first five years of the plan. The level of spending was scheduled to drop to $1,200,000 in the sixth year (fiscal year 2003/2004) and $970,000 in the seventh year (fiscal year 2004/2005) as we completed the process of purging the fleet of old vehicles whose replacement had been deferred beyond their planned service life. As we reviewed the proposed list of replacements for fiscal year 2002/2003, it became apparent that we needed to change the planned service life of black and white police patrol cars from 3 years to 4 years. These cars have not been accumulating the high mileages that were anticipated in the initial plan. Over the last six years we have made similar adjustments on several individual vehicles each year during the annual review of proposed replacement. The cumulative effect has been that we have reached the point where spending falls below $1,500,000 per year earlier than expected. The recommended replacement list was reduced to $883,500 in fiscal 2004/2005. As those vehicles that were replaced in the early years of the plan begin to reach the end of their service life, in fiscal 2005/2006, we expect annual expenditures to rise above $1,000,000 again for about three years. In order for the Fleet Replacement Fund to have the desired effect of keeping annual costs relatively constant, it would be necessary for the annual appropriations to the fleet replacement fund to remain at the planned levels in those years where replacement costs are lower.
In response to the request for budget cuts we have closely reviewed the fiscal year 2004/2005 plan looking for opportunities to defer some vehicle replacements. We were able to identify 10 items of equipment where replacement could be deferred for one year with only minimal impact on operational capabilities. Elimination of these vehicles from the fiscal year 2004/2005 fleet replacement plan will reduce the total cost of replacements by about $192,000 from $882,000 to $690,000. This will result in a $40,000 reduction in new Debt Service payment obligations. In addition to the reductions cited above, we are recommending elimination of the $61,000 contribution to the Fleet Replacement Fund Reserve and the use of $50,000 of the existing reserve to reduce the transfer from the General Fund by approximately $151,000.
The operational impact of these changes will be minimal in fiscal year 2004/2005; however, if it should become necessary to make similar cuts in subsequent years, we will gradually lose the benefits of the Fleet Replacement Program over time. At some point, it will become necessary to reinstate the automotive mechanic position eliminated in fiscal year 2002/2003. We will gradually begin to experience an increase in operational mission failures and loss of productivity in various programs. The improvements in operational efficiency associated with the Fleet Replacement Program were gained gradually over the past six years and we expect that the loss of these efficiencies would also be realized gradually over time. If we are unable to resume nearly full funding of the plan in fiscal year 2005/2006, we believe that it will be essential to add at least one mechanic position in that year.
We believe that the Fleet Replacement Program is generally accomplishing our primary goals. Under this program, the annual outlay for fleet replacement is gradually rising in a consistent and predictable manner. This is much less disruptive to the annual budget preparation process than in previous years when the outlay for fleet replacements would rise and fall dramatically from year to year. The Fleet Replacement Program has also allowed us to dramatically reduce the average age of our fleet, thereby reducing maintenance down time and increasing the productivity of those operations that are heavily reliant upon vehicles and equipment
RECOMMENDATION
We recommend that the Town Council reduce the capital equipment expenditures budgeted for the Fleet Replacement Program in fiscal year 2004/2005 from $885,000 to $690,000 and eliminate entirely the $61,017 contribution to the reserve from the Fleet Replacement Program budget for fiscal year 2004/2005.