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HomeMy WebLinkAbout08.d. Adopt approach with respect to vehicle replacement funding8.d. kka iimmom Central Contra Costa Sanitary District February 2, 2017 TO: HONORABLE BOARD OF DIRECTORS VIA: ROGER S. BAILEY, GENERAL MANAGER FROM: PHILIP R. LEIBER, DIRECTOR OF FINANCE & ADMINISTRATION SUBJECT: VEHICLE REPLACEMENT FUNDING APPROACH The information in this memorandum was provided in the agenda packet for the January 26, 2017 Board Workshop. Due to time constraints, discussion of this matter was postponed to this meeting. Introduction This memorandum addresses whether a vehicle replacement reserve should be established at Central San as a change from the current practice of budgeting for fluctuating vehicle replacement needs in the annual budgeting process. This issue was raised at the November 10 Board workshop and is explored in detail here, along with a recommendation to adopt a levelized funding approach in the annual budget. Background and Consideration of Practices at Other Agencies Provisions to address vehicle replacement funding in a manner other than budgeting and collecting fluctuating vehicle expenditures as part of the annual budget process can be a component of effective public sector fleet management policies. Municipalities that offer centralized vehicle management (as an internal service fund) and charge out costs to user departments are the type of agencies that most often provide for more advanced funding mechanisms for vehicle replacement. An objective is ensuring the availability of funds to replace the vehicles in the pool while avoiding significant changes in rates that may be difficult for the using departments to absorb at the time of such replacements. Such policies do not appear to be as common in the utility industry, but in a brief review of practices at several local and prominent agencies, staff found that some have adopted such policies for vehicles or equipment (see Attachment 1). Decision Criteria Vehicle replacement reserves would appear to be of highest value in the following situations: Vehicle Replacement Funding Approach February 2, 2017 Page 2 • Vehicle replacements have not been funded adequately due to being crowded out by other investment needs, or overall funding shortages due to volatile available revenues. • Vehicle replacements are a sizable portion of the overall capital budget. • Overall vehicle replacement funding needs are particularly volatile from year to year given infrequent but very high cost replacements of specialized equipment. • Capital costs are entirely funded on a pay as you go basis, and any funds needed in a given year would need to be collected from rates in that year, leading to potentially more volatile rates if vehicle replacement costs drove spikes in the overall capital budget. • The establishment of additional reserves would enhance an entity's assigned credit rating or provide funding in the event of unforeseen expenses or volatile revenues. • There would be an opportunity to earn a reasonable return on available reserve funds. Such policies would appear less advantageous if: • There are no further rating advantages or financial stability benefits to having additional reserves. ■ Other mechanisms are available to reduce rate volatility from fluctuating budget funding needs (such as the use of debt). • Fund set asides reduce flexibility to redirect funds to higher priority needs. Assessment at Central San Central San's vehicle fleet consists of approximately 120 Tight and heavy duty vehicles. Central San's fleet management plan calls for generally replacing light duty vehicles at 10 years/100,000 miles, and heavy duty vehicles at 15 years/150,000 miles. (Although this is a flexible guideline; vehicles that exceed these thresholds may still be retained if deemed worthwhile based on a review of service records, overall condition and consideration of other factors). Central San's Equipment Budget component of the annual capital improvement budget contains Central San's planned spending on vehicles in a given year, for vehicles to be replaced based on the above guidelines. Based on the planned replacement cycle, a recent 10 -year projection of vehicle replacement costs totals about $5.4 million in spending over a 10 -year period, or an average of $540,000 per year. With a $40 million annual capital budget, vehicle replacement costs average about 1.25% of the capital budget, but in a year where a particularly high cost vehicle is to be replaced (such as a Vactor truck), costs could reach nearly 5% of the capital budget. This does not constitute a material portion of the capital budget. As Central San is also moving towards the use of bond funding to address other aspects of a changing capital program (generally increasing overall spending, and increasing volatility), other tools will be available to address the years in which spending on specialized vehicles will be higher than average. Vehicle Replacement Funding Approach January 26, 2017 Page 3 Recommendation Adopting a revised vehicle funding practice similar to that used by Contra Costa Water District would appear to be of value in consideration of the above factors. This would involve: 1. For financial planning and budgeting purposes, generally collect annual vehicle replacement funding as a level amount based on the average annual spending for vehicles over a 10 -year projected period. The projection is based on the forecast end of lives based on the fleet management plan. 2. If actual spending is below the budgeted and collected amount, roll the surplus forward to the next year's budget. Based on the pattern of anticipated vehicle spending in the 10 -year Central San projection, with lower spending in the early years and higher spending in the middle and late middle period of the 10 -year plan, it is anticipated that adequate funds would be available from this carry- forward approach without exceeding budget and carry -forward budget authority. 3. If early year funding needs are higher and the levelized approach (and available carry forward funds) would result in a shortfall, budget a higher amount to meet the shortfall in the upcoming year. This approach would have the following advantages: • Fits well within existing practice of rolling forward unused capital funds for ongoing projects. • Does not require significant changes to accounting practices or work processes. • Can be reported on through existing reports (capital budget reports and specifically, in the annual equipment budget). • Does not require significant additional staff time or resources. Staff recommends the above practice with respect to vehicle replacement funding and is seeking Board approval to implement this approach going forward. Attached Supporting Document: 1. Agencies Vehicle Reserve Policies Agency Vehicle Reserve Policy? San Diego County Water No Authority East Bay Municipal Utility District San Francisco Public Utilities Commission Sacramento Regional Sanitation District No 1 Y Yes; for heavy equipment Contra Costa Water District Yes Santa Clara Valley Water District Orange County Sanitation District Attachment 1 Agencies Vehicle Reserve Policies Comments Equipment replacement budget fluctuates annually to fund needed purchases for software, computers, servers, vehicles and other equipment. Does have an IT Replacement Reserve. Budgeted funds for vehicles varies over the five-year period presented in the financial forecast. Operating Fund has several reserves including general, rate stabilization, facilities closure, equipment replacement ("For replacement of existing heavy equipment": $1,050,625). Capital: Expansion, Replacement (Portion of future rehabilitation and replacement of existing facilities), bufferland improvements, debt service stabilization. Vehicle Replacement Fund: "This fund was established in FY89 to fund planned replacement of vehicles and heavy equipment that have reached the end of their useful lives. This fund is utilized to cover equipment replacement while smoothing cash flows in the ten-year financial plan and annual rate model to minimize annual pressure on rates. This fund will be drawn down annually as replacement vehicles are purchased consistent with the annual budget. At the beginning of each fiscal year, funds will be deposited in this sinking fund as provided for in the adopted fiscal year budget. Budget levels will be based generally on annualized deposit requirements as determined by the District's 10 -Year Financial Plan. Annual deposits shall be reported to the Board of Directors as part of each Fiscal Year -End Financial Report. In addition, interest earnings on fund balances will be deposited into the fund as will the net proceeds of the sale of replaced vehicles and equipment. These additional deposits are to provide for inflationary increases to replacement vehicle and equipment costs. This fund shall be maintained at a minimum balance of the funds required for the following year's budgeted fleet replacements. The balance shall not exceed total expenditures planned in the Capital Improvement Program and Ten -Year Financial Plan. No Budget provides for specific vehicle replacement costs on an annual basis. $688,831 and $3,951,848 in FY16-17. Agency Delta Diablo Vehicle Reserve Policy? Yes; more broadly for capital asset replacement Union Sanitary District ? Yes Attachment 1 Agencies Vehicle Reserve Policies Comments Capital Asset Fund. The Capital Asset Fund is used to establish a cash reserve and allow the orderly tracking of funds for the purchase of new assets and/or improvements to existing assets. The major revenue sources for this Fund are interest and Sewer Service Charges. Capital Asset Replacement Facilities. Capital Asset Replacement Facilities meet the ongoing need for renewal and replacement of specific pieces of equipment and facilities with less than a 20 -year useful life. They also provide for major cyclic maintenance on Targe pieces of equipment, such as the cogeneration facilities and replacement caused by catastrophic failure of equipment. Examples of these types of projects are roof replacements. pumps. and vehicles. Examples of specific Capital Asset Replacement projects include equipment overhauls and vehicle replacements. Capital Asset Replacement Fund. The Capital Asset Replacement (CAR) Fund provides for the orderly renewal and replacement of existing District assets. The purpose of the CAR fund is to establish a cash reserve and allow for gradual rate increases to accommodate future expenses. It assures funds will be available when needed and that these funds have been collected from the appropriate ratepayers who have used the system and benefited from it. The major revenue sources for the CAR Fund are interest, sewer service charges, Ad Valorem property taxes, and annexation fees. Each year. unspent funds from the Wastewater Program General Fund mill be transferred into this Fund. Have renewal & replacement funds for Vehicles & Equipment and for IT. • Renewal & Replacement — Vehicle and Equipment FY 2017 Expense: $662,220 Vehicles and equipment that are scheduled to be replaced due to age or obsolescence are purchased through this fund. The provision is based on a 10 -year replacement schedule and expense projection. Major expenses include a hydro jetter, a truck -mounted jetter, diesel pumps, three electric carts, and other equipment. The provision is $300,000 for FY 2017.