Funding

Leasing: Not Just for Private Sector Fleets

Current economic conditions require government fleet managers to seek alternatives to funding their fleet through different finance methodologies. Leasing is a practical solution, which in the past, was primarily utilized only by the private sector.

May 2010, Government Fleet - Feature

by Janis Christensen, CAFM

Click here to view the print version of this article with charts.

For many years, a discussion of vehicle leasing was most often related to the private sector. With the notable exception of the State of Michigan, which has leased vehicles since 1995, government fleets simply did not lease vehicles; they purchased them. This paradigm was predicated on the practice of government vehicles having a longer lifecycle and the "run it into the ground" approach asserted as the most cost-effective method for operating a fleet of vehicles. Today, many government fleet managers see the value of operating a younger fleet, but with limited and scarce availability of budget dollars, they find it difficult to actually change finance practices.

Before we explore the practicality of leasing, let's take a look at current funding choices fleet managers may consider in replacing fleet assets.

Vehicle & Equipment Payment Methods

Essentially, five different finance methods are used to fund vehicle acquisitions:

  1. Annual allocations or appropriations of cash.
  2. Accumulation of cash reserves in a fleet replacement fund, usually through the use of an internal leasing or replacement cost charge-back program.
  3. Borrowing cash from financial institutions.
  4. Borrowing cash from investors through the issuance of commercial paper and bonds.
  5. Leasing from a leasing company, bank, or commercial finance company.

Note the terms "financing" and "funding" differ in meaning, although they are sometimes used interchangeably. The financing of a fleet is the method used to pay (e.g., cash, lease) for the acquisition of vehicles and equipment. Funding is the amount of money needed to acquire the assets under a particular financing method.

When considering how to pay for the acquisition of fleet assets, the fleet manager should look at each of the various methods to finance the amount of required funding. Since year-over-year funding requirements can vary dramatically depending on the age mix of the fleet and historic funding availability, the selection of a capital financing method is very important relative to the current replacement of vehicles and the future overall age of the fleet. The fleet manager should estimate both the total cost and annual budgetary funding requirements associated with each type of capital financing considered.

1. Annual Appropriations of Cash. This type of pay-before-you-go approach to financing historically results in significantly fluctuating annual outlays as adequate funding is unavailable to purchase the desired number of units. Even during good economic times, securing sufficient funds to replace vehicles and equipment in a timely manner is a challenge for many public sector organizations. This reluctance is greatly impacted by the large numbers of vehicles that may need replacement in some years and the inability of certain capital financing approaches to effectively deal with the resulting replacement spending needs, inherently uneven from year to year.

Most organizations, particularly in the public sector, do not have a good mechanism for accommodating year-to-year changes in spending requirements when the source of funds for such expenditures is relatively static. In other words, regardless of current or past economic conditions, the cash finance approach almost always results in underfunding replacement purchases.

With today's budget crisis and tight availability of funds, many government fleets find themselves particularly hard- hit with a growing lack of annual funds to replace vehicles. Finally, the cash finance approach does not promote recognition of vehicle capital costs or management of total cost of vehicle ownership since once vehicles are purchased they are viewed as "free" by organization staff.

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