AGENDA #1b
TO: W. Calvin Horton, Town Manager
FROM: Bruce Heflin, Public Works Director
SUBJECT: Report on Options Regarding the Fleet Replacement Program
DATE: May 2, 2001
This budget working paper responds to the Council’s request for a status report on the Fleet Replacement Program that was adopted by the Council beginning in fiscal year 1998/1999.
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 startup 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.
FY 2000/2001 Fleet Replacement Program Review
The Town has been operating under the adopted fleet replacement plan for about three years. At the end of this fiscal year, we will have replaced 161 vehicles at a total cost of $4,460,000. This represents about 60.5 % of the Town’s vehicle count and about 41.3% of the total replacement value of the fleet.
As part of the fiscal 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. At the time of the writing of this report, the consultant’s preliminary report of their findings was not available for attachment to this memorandum. Their preliminary report will be provided under separate cover as soon as it becomes available.
One of the expected positive outcomes from an optimized fleet replacement schedule is reduced maintenance cost. Since we are only midway through our third year of the fleet replacement plan, it is difficult to demonstrate empirically that we are realizing such savings. We still have a number of older vehicles in the fleet and we are adding new vehicles every year. Attachment 1 shows that maintenance costs are actually continuing to rise; however, we believe that most of this rise can be attributed to inflation and the increased size of the fleet. Attachment 2 shows the growth in the size of the fleet (excluding fire trucks) in terms of equipment cost over the past ten years. Since 1991, maintenance costs have risen by about 3.6% while the replacement value of the fleet has risen by about 7.6 %. We will be able to measure maintenance savings with more certainty after a few more years under this plan; however, we can already demonstrate that maintenance costs are rising at a slower rate than the size of the fleet. Despite a 7.6% increase in the size of the fleet over the past ten years, we have not needed to add fleet maintenance personnel to the staff. Furthermore, we believe that the fleet replacement plan will allow us to continue this trend through the upcoming annexation of Southern Village.
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 2000 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 in prior years, 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 was very successful this year, completing six cycles town-wide, principally related to the increased reliability and availability afforded by newer equipment and relatively favorable weather. We estimate that we collected about 16% more versus that collected last year.
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.
Options for the Future
If the Council decides to modify the fleet replacement plan as a cost savings measure in any given year, we believe there are at least two options, including modifying the schedule of vehicle purchases in any given fiscal year and/or a fleet-wide revision of the planned service life of all vehicles. Any decision to modify the schedule of vehicle purchases for a fiscal year would need to include giving the Town manager the authority to make exceptions to the policy for critical vehicles that are destroyed in accidents or are otherwise rendered beyond economical repair. While there would be little or no true cost savings with a purchasing “freeze”, up to approximately $170,000 in first year debt service costs could be deferred to a subsequent year. We would expect the replacement cost of these vehicles to rise at about 3% per year and we would expect the salvage value of the vehicles to be reduced. We would also expect some minor increase in maintenance expenses on the deferred replacements and some degradation in the operational efficiency of the affected departments.
A second option available to the Town Council is to extend the planned service life of all Town vehicles. As with an adjustment of the purchasing schedule, we believe that any anticipated sort-term cost savings would be offset by losses in increased replacement cost, increased maintenance cost, reduced salvage value and degraded operational productivity.
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 those operations that are heavily reliant upon vehicles and equipment. As we near the end of our third year under this program, we look forward to seeing the results of the DMG Maximus analysis of our progress to date. We expect that they may have several recommendations on how we can adjust the program to further optimize our fleet replacement schedule and control costs.
ATTACHMENTS
1. Cost of Maintenance and Repair of Vehicles (p. 5).
2.
Replacement Value of the Fleet (p. 6).