Top 10 Challenges Facing Public Sector Fleets in CY-2011

The forecast is that calendar-year 2011 will be a repeat of 2010 for most public sector fleets. The persistently sluggish economy promises to dominate the majority of fleet decisions in calendar-year 2011, just as it did in 2010. Public sector fleets will continue to be pressured to lower capital expenditures and reduce operating costs to compensate for tax revenue shortfalls.

In 2011, the primary issue affecting public sector fleets will boil down to revenue versus cost. At all public sector fleet operations, the initial economic crisis (and its aftermath) has translated into reduced funding resulting in older fleet assets and reduced staffing. Public entities are funded largely through sales and property taxes — the two areas most devastated by the economic downturn. These two sources of revenue are not likely to recover in the near future.

Fleets have been buffeted by the current economic storm for the past three years. Historically, counties and cities recover from recessions about 18-24 months after a national economic recovery because of the lag in tax revenue collection. The concern, as expressed by the National League of Cities, is the current downturn will last much longer in certain areas as property tax revenues may be reduced for even longer than anticipated due to depressed property values. Also, business tax revenues will continue to be anemic as many small businesses have closed or relocated to other areas and there are fewer new business startups. In fact, in many markets, property tax revenues are not forecast to return to 2007 levels for another five to eight years.

The National League of Cities states these budget shortfalls are expected to be much more severe from 2011-2012. The municipal sector will likely see a fiscal shortfall of $56-$83 billion from 2010-2012 as a result of declining tax revenues and cuts in state funding.

Fleets have made adjustments to deal with these shortfalls in the current budget year and are not expecting any relief in CY-2011. Fleets are taking various steps to address these economic constraints. The silver lining to lean budget years and fiscal problems is that fleets have been able to make operational changes not otherwise feasible in better years. Successful examples are widespread decreases in the number of take-home vehicles, fleet right-sizing and consolidations, along with ­increased insourcing.

1. Zero-Growth Budgets

The No. 1 challenge facing public sector fleets in 2011 is budget constraints due to the decline in tax revenues. Over the past three years, fleet managers have watched capital replacement budgets fall prey to the budget axe. 

This was best enunciated by Walter Burnett, public works director of the City of Macomb, Ill., who said: "Our issues and challenges are budget, budget, and budget."

Everything fleet does revolves around money: facilities, salaries, vehicles/equipment, parts, shop supplies, tools, maintenance, fuel, etc. Financial constraints will continue to affect public sector fleets for years to come. Most tax bases remain stagnant. As a result, there is an ongoing push to minimize fleet capital procurements by keeping vehicles and equipment in service longer. All capital expenditures are being intensely scrutinized. Capital purchases are deferred or eliminated completely and in most cases, total capital expenditures are reduced.

Some fleets report no capital funding approval for FY-2011 resulting in a lack of funding for vehicle replacements for the third year in a row. This has a big impact on fleet maintenance as equipment and vehicles are rapidly aging, requiring more funds to keep them running. It's a true case of "pay me now or pay me later."

Many fleets are internal service funds, meaning all costs are recaptured through user rates charged to customers. As the economic sluggishness continues, user departments have turned in large numbers of assigned vehicles. Although this is beneficial in "right-sizing" the fleet, it is also detrimental because fewer vehicles assigned to customers mean fleet's fixed overhead is spread over fewer units, leading to higher charges to the remaining customers.

The challenge for fleet management is to stretch the capital outlay budget as far as possible. Defrayed vehicle purchases must be considered and weighed against the increased expenses of operating an aging fleet. Other funding sources may need to be considered to offset the lack of capital funds, such as lease agreements. Cooperative purchasing agreements are increasingly considered for vehicles, equipment, and parts purchases. Vehicle cannibalization programs and the purchase of used parts have also been considered.

"We are negotiating with our vendors for price concessions and will look at price reductions available for a one-time large purchase of quantities, such as  six months to a year's supply for items such as filters, wiper blades, brake parts, etc.," said Doug Weichman, CAFM, director, fleet management division for Palm Beach County, Fla.

The budgetary shortfalls have caused grant requests to increase. Grants and so-called "free" money are helpful if they allow fleets to acquire needed vehicles. Misapplication, shorter lifecycles, and under-utilization are some of the concerns fleet managers have about grants that hamstring them into acquiring less-than-optimal vehicles for their fleet applications. While the federal stimulus monies plugged budgetary gaps, all fleets realize this was a temporary fix and are being warned that FY-2012 will see a ­further drop in funding.

However, some fleets have been extremely successful in obtaining grants. One such fleet is Snohomish County, Wash. It received American Recovery and Reinvestment Act (ARRA) grant projects, although implementation and reporting data to the grantors is challenging for a five-member administrative staff, which also manages the operation of a 1,300-vehicle/equipment fleet. Snohomish County is also constructing an electric vehicle (EV) charging infrastructure and is procuring EVs. "In addition, we have funding from the DOE Clean Cities for construction of two additional solar-powered EV charging facilities and three biofuel stations," said Allen Mitchell, CPFP, fleet manager for Snohomish County Department of Public Works Fleet Management Division.

2. Pressure to Extend Replacement Vehicle Cycling

One consequence to the reduced capital vehicle purchase budget is that fleets have extended vehicle lifecycles. Fleets have been extending lifecycles for all vehicle classes and eliminating underutilized vehicles from inventory (those accumulating fewer than 5,000 miles and/or 500 engine hours per year).

The consequence to extended cycling is an increase in maintenance requirements, which impacts service levels. One example is an increase in unscheduled repairs. This, in turn, adversely affects constituents. When service levels are diminished, ­citizen complaints invariably increase.

"In 2010, Macomb public works deferred all vehicle and equipment purchases for one year to help the City budget," said Burnett. "As a consequence, maintenance and repair costs have risen significantly. As we look forward to 2011, we expect to replace some vehicles and equipment, rehabilitate some, and defer others. The choices are going to be tough for the foreseeable future."

Longer lifecycles result in an overall maintenance cost rise when equipment life extends beyond its optimal replacement cycle. Many units have been parked or auctioned due to the unit not being worth the cost of the repair.

Fleet operations are struggling to keep rates low to allow customers to weather budget constraints. Although in the long-run, extending vehicle lifecycles is not a good solution, in the short-term, fleets have been enabled to do so by an abundance of available units for reassignment due to turn-ins. This is only a short-term budget bandage designed to buy customers time to develop alternate strategies to address severely decreased funding levels.

For fleets that operate as an internal service fund, the hourly billable rate is designed to cover all operating expenses.  With older, worn-out equipment, fleets must invest more labor, which increases  the cost to customers. What is saved in capital purchases often goes directly into maintenance to keep older assets in ­service.

Utilization is an increased focus by all fleet managers. Numerous fleets have performed fleet utilization studies during the 2010 fiscal year and removed vehicles not fully utilized. 

Fleet size reduction and proper ­vehicle application is also on the mind of every political subdivision's senior leaders and elected officials. Reducing fleet size is the quickest means to lower expenses. Fleet right-sizing or downsizing has been occurring for the past several years, with fleets "cherry-picking" the best-condition vehicles.

"During the past two years, we have reduced the size of the County fleet by approximately 75 vehicles to improve the cost-effectiveness of the fleet. This avoided fleet rental costs on the order of $500,000 annually for our customers," said Mitchell of Snohomish County. "But the downside is it also reduced our revenue by the same $500,000 annually. Of course, the support costs for the eliminated vehicles will be eliminated, too."

3. Anemic New-Vehicle Orders

An almost universal response to the dramatic decline in tax revenues has been to defer new-vehicle and equipment acquisitions.

New-vehicle orders decreased sharply in 2009-2010 as customer organizations internally re-evaluated their operations and identified no-longer-needed equipment for turn-in. Due to budget constraints, every department is scaling back operations, resulting in staff reductions and sharply decreased vehicle and transportation needs. It is anticipated that more layoffs will occur in calendar-year 2011. Reductions in overall fleet size correspond to reductions in workforce. For the last full calendar-year of reporting, government fleet sales decreased 18.6 percent in calendar-year 2009.

Fleet operations received voluntarily turned-in vehicles in record numbers in 2009 and 2010. Due to the numerous turn-in vehicles, fleets were able to reallocate existing equipment, which further reduced new-vehicle purchases. Also, fleets have re-deployed low-utilization vehicles to higher-use applications, which decreased the need for new purchases in these areas.

Most fleets are attempting to adhere to their vehicle replacement schedules. A growing number of fleets will increase purchases in 2011 only because they ­deferred replacements for the past several years. These fleets postponed purchases in 2009 and 2010, which prompted them to accelerate replacements in 2011.

"We are purchasing quite a few vehicles this year as we have not had any 'new blood' in the fleet for quite a few years now," said Dave Cole, mechanical maintenance and warehouse administrator for the City of Glendale, Calif.

However, many fleets did not budget capital funds for vehicle replacements in the 2011 fiscal-year.

"2011 is going to be a very lean year," said Charlotte Ashcraft, director, Franklin County Commissioners Dept. of Fleet Management in Columbus, Ohio. "If it is not absolutely necessary to purchase, we will not be purchasing it. With the uncertainty of funding in the upcoming year, it is equally uncertain what we will have to fund purchases."

As a funding alternative, some fleets are investigating vehicle leasing programs. One benefit to a vehicle leasing program is to allow retirement of the oldest light-duty work vehicles (vans, pickups, etc.) and to take pressure off overloaded maintenance resources.

One of the biggest vehicle acquisition decisions will be selecting a replacement for the Crown Victoria Police Interceptor, which will be discontinued in 2011.

4. Difficulty in Maintaining Aging Assets

To reduce costs, some fleets have also stretched PMs to 5,000 miles or six-month intervals on light-duty vehicles. They have implemented extended, modified, or enhanced PM services and schedules.

With tight budgets, fleets are watching all purchases and re-evaluating stocking levels. Fleets must keep older vehicles on the road longer, which typically means more maintenance and parts.

"With the lack of new cars, the need to keep the ones we have running is even higher. Parts purchases will increase, but the budget will not," said Ashcraft of Franklin County. "This will require some stock adjustments and even more comparison shopping. One shining light in the parts arena is that many of the ­suppliers are feeling the effects of the slow economy, so they are cutting their costs significantly."

Keeping older, higher-mileage vehicles on the road is a challenge. These vehicles require additional repairs, which slow the return-to-service time. As a result, customer service suffers. Mechanics take pride in their work, and when a repair takes longer than usual, the drivers blame the mechanics, even when it has nothing to do with their abilities.

"The fact a car now has 200,000 miles on it and the driver hasn't been careful to make sure they got it in on time is not relevant," said Ashcraft. "The story will get out that the car broke down and that is a reflection on our mechanics' abilities. We need to be watchful and diligent in our inspections and if it takes an extra half-hour to get a service done, then so be it."

In the next several years, the cost of motor oils is also forecast to increase. For example, General Motors is introducing Dexos synthetic blend oil, which will be required on its 2011 model-year vehicles. One benefit to Dexos is that it will help improve fuel economy, reduce oil deposits, extend oil life, and reduce emissions. However, the synthetic motor oil is more expensive than the conventional motor oils it replaces.

5. Impact of New Diesel Emissions Standards on Truck Operations

The new diesel emissions standards are costing fleets more money due to higher acquisition prices and increased maintenance.

The introduction of the 2010 emissions standards negatively impacted fleet purchasing abilities. Diesel emissions regulations for 2010 increased unit prices by $12,000-$24,000 each.

Also, new SCR (selective catalytic reduction) devices require dealer-only service, which increases maintenance expenses. In addition, it required changing specifications and operations. For instance, the SCR-equipped trucks sometimes required increased wheelbase dimensions to accommodate diesel particulate filter (DPF) systems. Although emissions are cleaner, fuel economy decreased with the 2010-compliant diesel engines.

Some fleets are still determining whether they will dispense urea as part of their fueling operation or as a maintenance item. Diesel exhaust fluid (DEF), if dispensed on-site, requires bulk storage.

6. Increased Concern about Staff 'Burn-out'

For the first time since the early 1980s, many political subdivisions have laid off employees to help close budget gaps. Many of these layoffs are multi-phased, with subsequent phased layoffs to kick in during the 2011 calendar-year.

Employee management is becoming a major issue. Public sector employees are used to economic downturns impacting businesses, not the local government. Fleet managers are entrusted with managing an operation, but more importantly, managing people.

"It is harder to keep morale up with employees fearful for their jobs, no raises, and increase contributions for employees for medical insurance and related services. Stress levels are up with effect productivity and time-off from work in times you need to get more out of your employees," said Weichman of Palm Beach County.

Many fleets have not filled vacancies since 2008 and expect this trend to continue. Fleets are also consolidating and reorganizing to strengthen core operations. At many fleet operations, the night shift and pickup/delivery of customer vehicles are things of the past.

Fleet departments have hiring freezes for technician vacancies. Often, when a position becomes vacant, no replacement is permitted. Also, if personnel quits or retires, those positions are often frozen. Remaining staff members are forced to work harder to maintain "normal" operations. More and more fleet managers cite staff "burn-out" as a growing concern.

Fleets were operating very lean even before these vacancies occurred, so it has put an extra strain on productivity. It affects repair turn-around time. In addition, many fleets have eliminated overtime work, ­except in emergency cases.

Public sector fleets no longer have problems finding or retaining qualified staff - that's one of the bright spots on the horizon. Of course, this only applies to fleets with the funding to hire technicians; not all have this funding. In addition, this pool of technicians is likely to shrink as experienced technicians from closed dealerships are absorbed elsewhere within the economy. 

7. Unpredictability of Future Fuel Prices on Budgeting

Gasoline and diesel prices stabilized in 2010. This is in sharp contrast to the volatile retail pricing that occurred in the past several years. If the economy does not improve, fuel prices will stay low and manageable. On the other hand, as the economy ­improves, fuel costs will rise.

Fuel costs and alternative fuels continue to be a crucial issue for fleets. Fleet's challenge is to budget appropriately for fuel in 2011. Fleets would rather err on the side of caution and budget high, if possible.

"Our 2011 budget for fuel is equal to the 2010 approved levels, but we have been asked to reduce all budget lines by at least 5 percent, but would like 10 percent," said Ashcraft of Franklin County. "If fuel cost remains steady, as it is this year, then we can make it, but if fuel cost resumes the upward climb, we will have to institute more aggressive cost-saving measures. We need to reduce usage. I am proposing to each of our fleet partners that they reduce fuel ­usage by 10 percent."

Fuel volatility makes forecasting a fuel budget extremely difficult. One reason the fuel market has been volatile and unpredictable is because it is no longer based solely on the cost of production or supply and demand. It is now also based on commodities speculation, weather-related supply disruptions, and geopolitical events. These unpredictable variables make forecasting the future of fuel costs an unknown. Will the price stability enjoyed in 2010 continue in 2011? Your guess is as good as any.

In 2010, the price of fuel came down and stayed under the predicted consensus (what most fleets budgeted for the previous year, based on trends at that time).  Next year, who knows? Fleets are budgeting tightly with the hope fuel prices will stay at their current level or slightly higher. 

8. Political Pressure to Expand Green Fleet Initiatives

Despite budget constraints, "green initiatives" continue to gain priority at most political subdivisions. Political support for carbon friendly, low-emission vehicle technologies, along with funding through the federal stimulus package has provided fleets the opportunity to acquire additional green vehicles.

Political support to "green" fleets is expected to continue despite pressure to reduce costs. Many political subdivisions have made the commitment to reduce greenhouse gas emissions and acquire carbon-friendly vehicles. Also, political subdivisions are mandated under EPACT to have 75-percent of their acquisitions be alt-fuel vehicles. Unfortunately, there are complexities (and increased costs) to migrating to a greener fleet. For instance, tighter emissions regulations for on-road and off-road heavy equipment and trucks add complexity and increased cost to operating these vehicles. In the light-duty segment, the desire to "go green" and purchase the lowest emissions vehicles is often costlier (at least from the perspective of initial acquisition price) than conventionally fueled vehicles. 

Alternative-fuel vehicles powered by CNG/LNG, propane, hydrogen, or all-electric vehicles are promising for centrally fueled and maintained government applications. However, the limited retail infrastructure makes their use very difficult for non-centrally fueled fleets.

In addition to reducing emissions, there is pressure, applied to the types of vehicles purchased to reduce fuel consumption, which often means downsizing to a smaller displacement engine. 

"However, trying to establish our carbon footprint and track it is not possible due to staff and funding cuts, but we get pressure to do these types of activities," said Weichman of Palm Beach County.

Fleets are compelled to continue exploring the various alternative-fuel options and improved mileage. They are continuing to take advantage of biofuels, hybrids, and incentives for these vehicles. Fleets are also looking at new OEM-manufactured electric vehicles and electric vehicle conversions.

The "green" movement has also taken hold beyond vehicles and started to impact fleet services operations. There is continued pressure to reduce driving to meetings, training, or other duties and instead use teleconferencing, etc. 

"With the current economic doldrums, there is immense pressure to abandon best management practices and just survive," said Mitchell of Snohomish County. "We have chosen not to let the tight budgets deter our progress toward having our fleet run 100-percent on biofuels and electricity by 2015. We will also seek additional grant opportunities to better leverage funding."

9. Relentless Mandates for Cost-Cutting Initiatives

The level of scrutiny of the internal cost of providing service to the citizens is increasing. Fleets are receiving a level of attention at the highest tiers of governments as never experienced before, especially fleets with a reputation for providing good service. The level of service provided needs to be at the lowest cost with the data to prove competitiveness - not just with sister cities, but also with private sector service providers. Every fleet manager needs to know the exact cost of the fleet and be able to present it to the management at any time. Now is a great time to be "part of the solution" and not "part of the problem."

One cost-cutting initiative is the outsourcing of parts operations. In addition, there has been a reduction or elimination of personal use and/or take-home vehicles for fire and police.

Some fleets sell some of their used vehicles to smaller municipalities, which do not have the budget to purchase new units.

Another area where fleets are attempting to generate revenue is with insourcing. Larger fleet operations are being courted by other local government agencies to take over their fleet operations. If analysis reveals that taxpayer savings can be achieved, then financial and political decisions are made at the top executive levels.

"Our strategy has been to seek contracts with cities and tribes located within Snohomish County to provide them with a cost-competitive, one-stop shopping experience," said Mitchell. "Thankfully, we have been able to attract additional business to more than compensate for the losses. We expect to finalize agreements with the Washington State Motor Pool and Washington State Patrol for regional support of their fleet before the end of 2010."

10. Outsourcing and Privatization

With revenues down, budgets must still be balanced, which means certain services must be reduced. In the minds of some elected officials, it's easy to cut support services, such as those provided by fleet operations. As a result, outsourcing will continue to be a hot topic for public ­sector fleets.

The tax revenue crunch is forcing governments to do a bottom-up evaluation of all services. The consensus is that there will be more outsourcing of work due to budget cutbacks. As city, county, and state governments continue to develop financing strategies and look more closely at "what things cost," fleet managers will see a bigger push to outsource historically ­insourced services.

Other cost reductions have been to close maintenance shops, eliminate second shifts, not fill vacant positions, institute furlough days, and extend service lives of vehicles and equipment. One silver lining is that the hard economic times are wringing out what little waste still exists in fleet.

Elected officials are similarly being squeezed by the lower-than-expected sales/property tax revenue. They are looking at every opportunity to continue to provide the services and service levels constituents have become accustomed to receiving. Some elected officials have decided on short-term sacrifices of internal services (fleet is an easy target) in order to support short-term constituent services by choosing to outsource more of vehicle maintenance and repairs to "lower-priced" private sector vendors. Part of these evaluations includes consideration to opening up more government business to managed competition.

Holding Our Breath

Public sector fleets are impacted by many different variables. "When federal dollars get cut, we feel it; when state funding gets cut, we feel that too; when foreclosures happen, we feel that too," said Ashcraft of Franklin County. "We avoided some of the drastic cuts this year, but in 2011 the full force of the economic ­downturn is going to hit us."

This sentiment is echoed by Cole of the City of Glendale. "We are holding our breath as to what this next year might bring us. Against the backdrop of a slowing economy, we have to become more efficient."