Agenda Item Wording:
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Authorize the transfer of $4,500,000 from the General Fund to the Vehicle Replacement Fund, $475,000 from the Police Measure T fund to the Police Measure T Vehicle Replacement Fund, and $1,480,000 from the Fire Measure T Fund to the Fire Measure T Vehicle Replacement Fund to replace future vehicles.
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Deadline for Action: 11/6/2023
Submitting Department: Finance and Technology Services
Contact Name and Phone Number:
Renee Nagel, 559-713-4375, renee.nagel@visalia.city <mailto:renee.nagel@visalia.city>
Department Recommendation:
That Council authorize the transfer of $4,500,000 from the General Fund to the Vehicle Replacement Fund, $475,000 from the Police Measure T fund to the Police Measure T Vehicle Replacement Fund, and $1,480,000 from the Fire Measure T Fund to the Fire Measure T Vehicle Replacement Fund to replace future vehicles. Staff is requesting that this approval be retroactive to June 30,2023 to be included in FY 22/23.
Background Discussion:
The City of Visalia owns and maintains 648 vehicles and pieces of equipment (hereafter referred to as the “Fleet”) that are utilized throughout the City. This fleet is owned by a variety of City funds and was purchased from various funding sources. All vehicles and equipment are tracked and replaced by the fund that originally purchased them. Enterprise Funds typically have their rates and fees set to cover operating and capital costs which also includes fleet replacements. The General Fund, which is a Governmental Fund, is required to have revenue cover expenses annually. Any left-over remaining funds are then designated to specific projects or purposes such as the Emergency Reserve and the Civic Center Reserve. To ensure that the General Fund has money to replace the fleet, City Council approved a Replacement Fund many years ago. This fund has allowed the General Fund divisions to be able to replace the fleet as needed and not defer replacement based on funds available. Many agencies do not do this and fleet replacement must compete with all departmental operational needs. This can cause a problem when a high dollar vehicle needs to be replaced such as a fire truck that costs over a million dollars. The General Fund method is also used for Sales Tax Measure Funds such as T & N. This is to ensure that money is set-aside and available to replace the fleet when needed.
The replacement funds receive their money using a method that was established when the original replacement fund was created for the General Fund. This method is designed to transfer cash from the respective funding sources equal to the amount of depreciation calculated for the vehicles and equipment each year. Depreciation is based on the purchase price plus the life of the vehicle. The life of the vehicle is established by the Vehicle Replacement Policy and is approved by the City Council. The cash held in the replacement fund is invested to offset the increase in the cost of the vehicle being replaced.
This method ensures that funds are available and allows the City to replace vehicles annually with the adopted budget. The City has four vehicle replacement funds that consist of 386 vehicles and equipment as shown in Table 1: Summary of Vehicles & Equipment in Vehicle Replacement Funds. These four funds represent 60% of the City Fleet.
The remaining 262 vehicles and equipment are owned by Enterprise and Internal Service funds. This portion of the fleet is also depreciated annually based upon the useful life. These funds use their respective revenues (rates and fees charged for services) and any available grant funding to cover the replacement of the vehicles and equipment they own. Depending upon the availability of resources, these funds may build up a reserve in their fund balance which can be used for the replacement of vehicles and equipment. These funds represent 40% of the City’s Fleet as shown in Table 2: Summary of Vehicles in Other Funds.
Vehicle Replacement Fund Operations:
Over the years, vehicle and equipment prices have risen steadily leaving the replacement funds without enough cash to replace the fleet at their designated years. There are several contributing factors:
• Historically Low Interest Earnings: The investment rates earned by the vehicle replacement funds have been consistently low for more than a decade, preventing interest earnings from keeping up with cost increases. Over the last 12 years, the City’s portfolio annual average was 1.18%.
• Current Rates of Inflation: The rate at which costs are increasing due to inflation far exceeds the funds that were set aside and planned for vehicle replacement. Over the last 12 years the average California Consumer Price Index was 2.9%.
• Vehicle Shortages: Supply is not meeting the demand for many types of vehicles.
o This is especially true for police patrol cars which represent 20% of the fleet. Car manufacturers are focusing on development of electric vehicles (EV’s) and terminating production of gas models which is forcing the City to replace Dodge Charger Police models which are being discontinued, with more expensive Police interceptor patrol vehicles.
o Apart from the EV conversion, supply chain issues continue to be a problem which limits the number and variety of vehicles available to purchase, driving up prices.
To manage the health of the replacement funds over the years, City staff has worked to right-size the vehicles and extend the life of the City fleet in various ways. In addition, staff periodically reviews the City Vehicle Policy to ensure the rules and procedures it contains continue to provide adequate internal controls and remain responsive to the environment within which they are applied. The main goal for the City Fleet is to provide City staff with the necessary tools to perform their assigned duties while being safe and efficient. It is also important to maximize the lives of vehicles and equipment in the fleet to prevent the waste of this costly resource. The following controls are enforced for the purchase of vehicles and equipment.
• Requests to purchase new or replace existing vehicles are made through the Capital Budget process providing an additional layer of review by the Finance department. Vehicle requests that occur between budgets must have the approval of the City Manager.
• New vehicle assignments require the need for frequent use and/or the need to transport special tools or equipment, and an estimated average use of 650+ miles per month. Assignments that do not meet the criteria may request a Ghost vehicle.
• Existing vehicles are only eligible for replacement once they have reached both the years and miles projected for their use.
• Before replacement, all vehicles, including those that have reached the years and miles planned for their replacement, are required to undergo an evaluation of the vehicle condition by Fleet before final authorization for replacement. This approval process requires the authorization of the appropriate department head, the Fleet Supervisor, the Public Works Director, and the Finance Director. Replacements are delayed when feasible.
• Vehicles in heavy-duty assignments that have reached the end of their useful lives are evaluated for their ability to be placed in lower demand assignments rather than automatically being sold at auction. This practice allows vehicles to have a second life and save money by not having to purchase new vehicles. An example of this is patrol vehicles. Their life as a pursuit vehicle ends at 100,000 miles and 9 years and then these vehicles are repurposed for janitorial, code enforcement, etc.
For informational purposes, a more detailed summary of the City of Visalia Fleet as of September 8, 2023, has been provided as Attachment A: City Fleet Summary.
Subsidy Needed
It has been more than 20 years since a cash infusion has been required by the Vehicle Replacement fund, back in the 1990’s, when the Measure T and Measure N Vehicle Replacement funds didn’t even exist. Unfortunately, the resources of the replacement funds have been stretched as far as they can go. With the additional challenges of higher-than-normal inflation experienced over the last two years, and the continued supply chain issues, three of the four fleet replacement funds are projected to be in a deficit starting in 2024/25. The projections prepared for the vehicle replacement funds discussed below are conservative and intended to ensure necessary funding through FY 31/32. Given the proper economic conditions, the cash infusion could last longer than the projected time frame.
General Fund Vehicle Replacement fund (502): This fund is responsible for the replacement of General Fund vehicles and equipment. There are currently 329 vehicles and equipment in this fund with the majority of these belonging to Public Safety. To fully replenish this fund and provide for the scheduled vehicle replacements projected in the next 8 years, a subsidy of $4,500,000 is requested to be transferred from the General Fund to the Vehicle Replacement Fund as shown in the table below.
Measure T Police Vehicle Replacement Fund (503): This fund was established with the Measure T Plan to ensure money would be set aside and available to replace Police Measure T vehicles. This fund currently has 23 police patrol vehicles. To fully fund the replacement of the current vehicles, a cash infusion of $475,000 is requested to be transferred from the Police Measure T fund to the Police Measure T Vehicle Replacement Fund. The 8-year projected cash flow is shown below.
Measure T Fire Vehicle Replacement Fund (504): This fund was established with the Measure T Plan to ensure money would be set aside and available to replace Fire Measure T vehicles. This fund currently has 2 fire trucks. This may seem like a small number, however, the cost per fully equipped Fire Truck is currently estimated to be $1.1 million ($951k for the truck, $142k for the equipment). To fully fund the replacement of the current vehicles, a cash infusion of $1,480,000 is requested to be transferred from the Fire Measure T fund to the Fire Measure T Vehicle Replacement Fund. The 8-year projected cash flow is shown below.
Measure N Vehicle Replacement Fund (505): This fund was established with the Measure N Plan to ensure money would be set aside and available to replace Measure N funded vehicles. This fund currently has 32 vehicles which are utilized by Police, Fire, and Parks Maintenance. With no vehicles older than 2018, this fund has the advantage of having paid higher prices for the existing vehicles, which increases the annual depreciation amounts, providing additional resources. Current projections do not require a cash infusion however, this fund will be evaluated periodically to ensure it continues to be healthy. The 8-year projected cash flow is shown below.
Ongoing Funding of Vehicle Replacement Funds: As discussed above, numerous factors has caused a funding shortfall. To keep up with vehicle costs in the future, staff is recommending changing the methodology to be depreciation, interest earnings, plus a 3-5% mark-up. The mark-up will depend on interest earnings plus the CPI. Having the mark-up be a range keeps the fund from having a shortfall or a large surplus that could be used on other projects. Interest earnings is currently averaging 3%.
Fiscal Impact:
As discussed above, staff is requesting to transfer cash into the three Vehicle Replacement Funds. Approval of this request would result in a transfer of $4.5 million in cash from the General Fund to the Vehicle Replacement Fund, a transfer of $475k in cash from the Police Measure T fund to the Police Measure T Vehicle Replacement Fund, and a transfer of $1.48 million in cash from the Fire Measure T Fund to the Fire Measure T Vehicle Replacement Fund as shown in Table 3: Summary of Requested Cash Transfers below.
In addition, staff is requesting the transfer to be effective June 30, 2023, and come from last fiscal years (FY 22/23) surplus for each fund. This recommendation is based on two factors. The first one being that staff is projecting current and future surpluses to be much smaller due to a decline in sales tax, the slowing economy, continued rising operational costs, and additional cost increases due to recently approved legislation. Second, the General Fund and Measure T Funds have experienced three years of a larger than normal surplus, ending with FY 22/23.
The General Fund surplus for FY 22/23 is currently projected to be $14.4 million after funding the emergency reserves at the 25% operating level. These numbers will be presented once the City’s financials are completed in January. The General Fund transfer request is conservative at $4.5 million due to the need to fund the Civic Center phase 2 (Public Safety Building, Council Chambers and Evidence Building).
Prior Council Action: None
Other: N/A
Alternatives:Transfer funds in each year that is a deficit.
Recommended Motion (and Alternative Motions if expected):
recommendation
That Council authorize the retro-active transfer to FY 22/23 of $4.5 million from the General Fund to the Vehicle Replacement Fund, $475 thousand from the Police Measure T fund to the Police Measure T Vehicle Replacement Fund, and $1.48 million from the Fire Measure T Fund to the Fire Measure T Vehicle Replacement Fund for the replacement of future vehicles and change the methodology as outline in the report.
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Environmental Assessment Status: N/A
CEQA Review: N/A
Attachments:
Attachment A: City Fleet Summary
Attachment B: Vehicle Policy