Title
Fleet Replacement Assessment Overview Discussion
Staffreport
COUNCIL PRIORITY
• Sustainability & Resiliency
• Fiscal Sustainability and Transparency
SUMMARY
In 2024, San Leandro contracted with Baker Tilly US, LLP to complete an assessment of the City’s Equipment Replacement and Maintenance Fund. This report provides an overview of the assessment.
RECOMMENDATIONS
This report is for information purposes only.
BACKGROUND
San Leandro maintains a vehicle and equipment fleet over around 200 assets. Fleet assets are administered in two departments: 1) the Police Department administers maintenance and replacement of PD vehicles in conjunction with third party vendor, Priority 1; and 2) the Public Works Department administers the maintenance and replacement of all other City vehicles. Finance assists both Departments with financial reporting and manages the City’s Fleet Internal Service Fund which holds funds for all City fleet assets.
In 2024, the City contracted with Baker Tilly US, LLP (Baker Tilly) to complete an assessment of the City’s Equipment Replacement and Maintenance Fund, an Internal Service Fund. The purpose of the fund is to plan for funding the maintenance and replacement of the City’s fleet and other equipment. The Baker Tilly assessment focused on the financial management of the fund including both administration (the ways in which costs are estimated and allocated) and the appropriate level of reserve funding.
Baker Tilly worked with the Finance, Public Works, Recreation, and Police Departments to capture all necessary information to ensure a proper replacement schedule was available and that reasonable replacement cost estimates were being used. Baker Tilly had several suggestions to the City for proper administration of the fund. Internal management suggestions, such as inter-departmental communications suggestions and asset costing, are being reviewed and implemented as required. This report discusses results of the policy and funding suggestions made by Baker Tilly for Council consideration.
Analysis
In addition to accurately tracking and costing assets, the most important part of a proper fleet management system is the funding of reserves. Internal Service funds cover both the operational and capital needs of the programs they were established to serve. In the case of the fleet fund, the fund should cover both the ongoing maintenance of assets still in service as well as the replacement of assets at the end of their useful life. Both operating and capital reserves are suggested. At the end of fiscal year 2023-24, the fund had an unrestricted fund balance of just under $6.1 million.
For operating reserves, best practice is to keep at least two months, or 8-17%, of the fund’s annual budgeted operating expenditures as an operating reserve. Baker Tilly suggests the City maintain an operating reserve equal to 10% of the fund’s annual budgeted operating expenditures to cover maintenance emergencies as well as unexpected economic fluctuations (such as supply chain restrictions during the COVID pandemic). For fiscal year 2024-25, the fund’s annual expenditures were budgeted at $2.33 million, meaning there should be an operating reserve of at least $233,000.
For capital reserves, city policies range from replacing assets on a pay-as-you-go method to saving 100% of estimated replacement cost year over year. Baker Tilly has recommended that the City strive to maintain a capital reserve in the fund of between 75% and 100% of the calculated accumulated replacement for each asset. After their review, Baker Tilly has set target capital reserve amounts as follows:
|
Fund |
75% Reserve |
100% Reserve |
|
General Fund |
$13,971,758 |
$18,629,011 |
|
Environmental Services Fund |
$90,502 |
$120,669 |
|
Stormwater |
$698,669 |
$931,558 |
|
Water Pollution Control and Prevention |
$1,630,283 |
$2,173,710 |
|
Total |
$16,391,212 |
$21,854,948 |
Funding for assets can come from several sources, including, but not limited to:
- General Fund Undesignated fund balance
- Annual transfers as part of the operating budget
- Grants
- Financing
o Leases (operating budget)
o Bonding (voter approval needed; for larger, longer life assets)
To ensure a proper reserve threshold is determined, City policy must be set on how assets should be funded, with the understanding that certain revenue sources are unpredictable, such as grants. Additionally, target reserve levels should take into consideration that not all assets will be replaced at once. For example, the above 100% reserve ($21.9 million) includes funding for assets to be replaced in 10 years. While there is a small chance a natural disaster could happen that would wipe out most of the City’s vehicle and equipment fleet, the City maintains a General Fund fund balance reserve of 20% to also partially account for this type of threat, and insurance would eventually cover most, if not all, of those costs.
The City also has several competing priorities including infrastructure funding, pension and other post-employment benefit funding, and addressing a structural deficit. Staff recommend setting the operating reserve at the proposed 10%, and an initial capital reserve funding goal of 50% over the next 5 years ($9.3 million for the general fund). This goal would be incorporated into City policies that would be reviewed by the Finance Director annually and the City Council at least every 5 years. This balance, $3.2 million higher than the current undesignated reserve, could be accomplished by a combination of one-time appropriations and annual contributions included in the operating budget. Once the 50% is achieved, staff would calculate the replacement value annually and the City would make ongoing, budgeted contributions to maintain that percentage.
Current Agency Policies
While no formal policies currently exist, Finance staff plan on bringing forward several policies for consideration in the coming months.
Financial Impacts
No action is being requested at this time. Future appropriations may be requested based on the policy direction provided to staff.
ATTACHMENT
Attachment A: Baker Tilly Policy Recommendations
Attachment B: Fleet Replacement Presentation
PREPARED BY: Heather Rowden, Interim Finance Director, Finance Department