The cost of construction equipment can strain a budget in the best of times, so how are government fleets coping now, in these not-so-great times?
Many government fleets have seen acquisition budgets cut sharply in this economy, and some even have had equipment procurement spending eliminated entirely, at least for the time being, as local governments struggle to manage with dwindling revenues.
Such is the case for Harford County in Maryland.
"We have actually found ourselves in a position where we're not buying any equipment this year," said Warren Patrick, the County's fleet manager.
Leasing Offers a Short-Term Option
However, obstacles as severe as those Patrick faces needn't halt construction projects. In such situations, leasing could be a pragmatic move, especially for a short period — perhaps for the duration of one or two projects. The overall expense of leasing for a limited time is substantially less than the outright purchase of equipment, of course, and once the work is done and the equipment returned, no continuing cost remains.
Harford entered into an agreement with Hertz Equipment Rental to secure equipment the County lacks for particular projects.
"As of this moment, we have not had an emergency" requiring the County to make use of the lease, Patrick said in December, though his fleet operations has turned to Hertz in the past. Patrick recalled a dozer was needed for the County landfill for a short period of time. The County had sold its own equipment that would have served the purpose because the equipment had been used only sporadically. Hertz stepped in and delivered the needed piece.
"That filled the bill," Patrick said.
Dealers Provide Another Source
Dealers are another potential source of leased construction equipment in this economic downturn. Many dealers are holding repossessed equipment, Patrick pointed out.
Standard Equipment Co., a John Deere dealer with a half-dozen branches in Maryland and Delaware, has repossessed equipment on hand, said David Riley, a territory manager. "The whole industry really does," he said.
John Deere's leasing program for government fleets includes a provision allowing return of leased equipment if the user submits a letter stating funding for a construction project has been stopped, Riley said. John Deere will accept the returned equipment under such circumstances and terminate the lease, Riley explained.
The returned equipment is remarketed, he added, leased to another government fleet as equipment with hours on it at a rate reflecting its used status.
Leasing is an alternative for those times "when you can't just buy the equipment," Riley said. "You're not spending $90,000 right away. You're only spending $3,200 a month. Six months down the line, if you can't use it any more, it comes back, and you only spent $19,000."
Harford's Patrick advised negotiating lease terms with dealers long before equipment may be required. He said he had been approached by equipment dealers seeking to lease used equipment.
"They came to me, and they gave me some pricing and some proposals," Patrick said.
"We have not had a serious demand for those pieces of equipment yet," Patrick said, "but like a good Boy Scout, we've lined up our ducks, should we have a need for them. The time to look for them and to negotiate for them is not when you need them."
Oxnard Uses Lease-Purchase Agreement
The City of Oxnard, Calif., pressed by economic factors, has made adjustments in securing construction equipment. The Oxnard fleet numbers about 950 pieces and includes police sedans, a range of trucks including light-duty pickups and refuse trucks, and construction equipment.
"Typically we don't lease, we purchase," said Dan Berlenbach, fleet services manager for Oxnard. But these are atypical times.
"Essentially, the City is cash-poor," Berlenbach said. "This fiscal year and the last fiscal year, because of the economic situation and the lack of revenue for the City, we're doing lease-purchase," Berlenbach said. The leased equipment, with an option to purchase, includes "some of the more critical vehicles and equipment," he said.
Leasing has pros and cons, Berlenbach noted. "It is less expensive at the outset for sure," he said, "but obviously, long-term, it's not less expensive. Money's not free."
That cost of money — the interest on a lease — is something to avoid long-term. However, short-term, "it is a good way to cut your maintenance costs and renew some of those unreliable [pieces] in your fleet. In our case, we did it mostly for regular fleet vehicles — light and heavy trucks. We had a couple of pieces of [construction] equipment in there," said Berlenbach.
Oxnard was not in dire need of new or replacement construction equipment, Berlenbach said. "We just basically kept what we had and sunk more money into it," he said. By making repairs and replacing parts as needed, the fleet has been able to make do, he said. The fleet continued work on planned projects.
Call it the re-constructive approach.
Repossessions Available for Public Sector Lease
In an interview with Government Fleet, Todd Snell, product market development for John Deere, discussed the volume of repossessed construction equipment in the industry and the state of the leasing/rental market for such equipment.
Government Fleet: What is the volume of repossessed heavy equipment on hand now in the industry?
Snell: We are experiencing an increase in repossessed equipment and track it on a regular basis. The increase is something we expected with this economy.
GF: What happens to repossessed equipment?
Snell: Most repossessed equipment is sold. The captives are selling mainly on a wholesale basis through their dealer network. The general financial services industry is using auction primarily, but also consigning goods at trusted equipment distributors. Much of this equipment ultimately is leased. The lease is developed at the point of retail sale, once the unit has been inspected and reconditioned as needed.
GF: What pros and cons of acquiring/leasing used vehicles are important for government fleet managers in this economy?
Snell: Leasing used equipment is a very economical thing to do, but requires overcoming the uncertainty of increased maintenance expense compared to new. John Deere’s certification program helps eliminate most of this concern because certified units are thoroughly inspected and provide a warranty to cover any major failures that might occur in the first months of use. This warranty can be extended for longer periods.
Leasing used equipment extends the fleet manager’s budget due to no down payment requirement and, generally, lower payments. Terms can be as short as 12 months for short-term needs.
Right now an abundance of high-quality used equipment is available. Much of this equipment has been repossessed, which can cause concern about its care. There are two things to realize about repossessed equipment. One is that most of this equipment came from hard-working people who kept very good care of it, but just could not make it in these tough times. The other is that reputable dealers, like the John Deere dealer network, work through these units to make sure they are in good operating condition before they are made available for sale or lease.
One thing that’s very clear: government budgets have been reduced, in some cases, drastically. They still need the equipment to maintain their roads, sewers, etc. Finance leases are the usual method of acquiring equipment, which gives ownership to the governmental agency in the end. Recently, we’ve noticed an increased interest in operating leases that have a purchase option at the end of the lease and much lower payments. Long-term rentals have also grown in interest. The payments are very similar to an operating lease, but there’s no purchase option at the end. The governmental agency would simply return the machine at the end of the stated term. A long-term rental agreement helps acquire equipment without the need to own it.