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HomeMy WebLinkAboutIR 6939 r-- 6939 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. �,O T(Hf0 May 29, 1984 u f To the Mayor and Members of the City Council Y Subject: VEHICLE EQUIPMENT REPLACEMENT RESERVE FUND 1813 BACKGROUND Prior to 1966 all major Departments of the City of Fort Worth had their own vehicle maintenance garage. In 1966 the consulting firm of Griffenhagen Kroeger of San Francisco, California, was retained to perform a comprehensive study of the City's five existing garages and various maintenance programs to determine the feasibility of consolidating operations. The Study recommended that the City establish a single Division responsible for equipment financing, procurement, maintenance, record keeping, and accumulating replacement reserves. The Equipment Services Division was established as a result of this Study. One of the recommendations suggested that the Equipment Services Division own all equipment and rent it to the user Departments. Departments would be charged a monthly rental fee based on the number of miles or hours they operated the equipment. Rental rates were to be calculated to insure that all operating and replacement costs were recovered. The Study defined replacement costs as depreciation and an appropriate inflation factor. Rental rates were to be reviewed at least on an annual basis to determine their adequacy. FINANCING EQUIPMENT REPLACEMENT The total rental revenue collected should finance the total costs of operating the equipment and the annual depreciation expense. The portion of the rental revenue collected as depreciation expense should be placed in a restricted Equipment Replacement Fund. When equipment is scheduled to be replaced, sufficient funds should be available to transfer from the Replacement Fund to the Capital Replacement Budget of the Equipment Services Division. CURRENT STATUS OF THE REPLACEMENT FUND The value of the City's General Fund vehicular fleet is in excess of twenty million dollars. The Equipment Replacement Fund should be equal to at least the total amount that has been set aside annually as depreciation expense for the life of each existing vehicle in the fleet. As of April 30, 1984 accounting records indicate that the Replacement Fund should have approximately ten million dollars. However, accounting records indicate that for various reasons the Fund's balance is almost depleted. Some of the reasons for this are: 1 . When the Equipment Services Division was established the records are not clear whether cash equal to the accumulated depreciation up to that point was transferred to the new Equipment Replacement Fund. ISSUED BY THE CITY MANAGER -- FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 6939 - P.2 �'p T(A,,, E fORT�p To the Mayor and Members of the City Council May 29, 1984 u � s Subject: VEHICLE EQUIPMENT REPLACEMENT RESERVE FUND X073 2. Rental rates have been calculated to recover only the original net purchase cost of the equipment, instead of the true cost of replacing the equipment. Rental rates do not take into consideration inflation. On numerous occasions replacement equipment has been upgraded in size and complexity over the original piece of equipment. In these cases, rental rates did not cover inflation nor the cost related to the upgrading of the equipment. On other occasions City Council has approved additional equipment out of the Replacement Fund for service expansion and program enhancements. Two examples are: a. In 1981-82 the City purchased 2.1 million dollars of Fire equipment prior to its' normal scheduled replacement time. The new equipment was substantially upgraded in size and complexity. b. The financing of new equipment required to start-up Landfill Operations during fiscal year 1975-76 as required by EPA `J and the State Health Department. 3. The Equipment Services Division had to assume the additional responsibility of maintaining and replacing Park and Recreation (1975-76) and Fire Department (1978-79) equipment that previously had been the responsibility of those Departments. When the equipment was transferred to Equipment Services the appropriate accumulated replacement reserves were not transferred. 4. Over one million dollars was transferred from the Equipment Services Replacement Fund into replacement reserve funds in the Solid Waste and Golf Funds during 1982-83 when they both became self-supporting enterprises. As enterprise funds they are both responsible for financing the replacement of their own equipment, ! and the money transferred represented the portion of the rental rate they had paid in over the past few years for that specific purpose. 5. Equipment has been replaced before being totally depreciated as a result of collision. ISSUED BY THE CITY MANAGER -- FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 6939 - p.3 p T fgfA May 29, 1984 oaf 40R1�p To the Mayor and Members of the City Council �rf X Ahs VEHICLE EQUIPMENT REPLACEMENT RESERVE FUND Subject: Revenue received during the fiscal year from the part of the rental rate that should go to the Replacement Fund has been diverted to actually finance replacement equipment budgeted for that particular fiscal year instead of accumulating for future replacement. In addition to a cash flow problem, this type of financing is causing equipment to be retained beyond normal replacement cycles; thereby, resulting in higher repair costs, excessive downtime, and substantial loss of productivity by the operating Departments. During the preparation of the 84-85 budget the Equipment Services staff met with the operating Departments to discuss what equipment they felt should be replaced. The preliminary list totalled approximately 5 million dollars. Equipment Services reduced the list to 3.2 million dollars without seriously impairing the Departments' ability to provide essential services. To further reduce the replacement list will adversely effect Departmental operations and increase the Equipment Services Division's cost of maintaining the equipment. Equipment Services' revenues for 84-85 are projected to be approximately $687,000 more than what is necessary to finance the operating budget, excluding the purchase of any replacement equipment. CONSIDERATIONS The Staff has evaluated several issues regarding how to finance vehicular equipment replacement during the 1984-85 fiscal year. • Finance 84-85 replacement equipment from funds set aside for depreciation expense. The amount budgeted for 84-85 is 2.6 million dollars. This amount combined with the projected $687,000 surplus rental revenue would be sufficient to fund the 3.2 million dollars of equipment scheduled for replacement. • Artificially increase the rental rate to offset the cost of replacing vehicular equipment. During the 84-85 fiscal year a 27% increase would be necessary to finance the 3.2 million dollars of equipment currently in the proposed equipment Services Division' s budget. • Purchase only $687,000 of replacement equipment during the 1984-85 fiscal year. • Schedule transfers from the General Fund to the Equipment Services Division's Capital Operating Budget annually until adequate replacement reserves can be accumulated in the Equipment Replacement Fund. The required transfer for 1984-85 would be $2,515,000 to finance General Fund replacement equipment. Discontinue the practice of accumulating equipment reserves and allow the General Fund Departments to budget for their own replacement equipment. ISSUED BY THE CITY MANAGER -- FORT WORTH, TEXAS INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 6939 - P.4 MBA T A,. May 29, 1984 aar� To the Mayor and Members of the City Council y O rrExA`' Subject: VEHICLE EQUIPMENT REPLACENENT RESERVE FUND eT� CONCLUSION The Management Study of the Equipment Services Division performed by the consulting firm of Coopers and Lybrand dated November 1982, recommended either scheduling annual transfers from the General Fund; or, increasing rental rates as a means to allow the Equipment Replacement Reserve Fund to become self-sustaining. The City has an established policy of accumulating cash reserves to replace vehicular equipment. Cash reserves are currently being accumulated in the Solid Waste, Golf, and Water/Sewer Funds to replace vehicular equipment. The Staff will develop a Decision Package for City Council consideration during the 1984-85 budget review process. C , `�,obert L. Herchert Gv, City Manager ISSUED BY THE CITY MANAGER — FORT WORTH, TEXAS