Whether a fleet is in financial distress or not largely depends on the tax base in their areas. Some fleet managers report their fleets are doing just fine, while others still face unfunded budgets. The nation slid into an economic recession in 2008, but there are signs it’s getting better. What does that mean for fleets?
Local Revenues are Up, but Not Back to Normal
With municipal fleets, budgets are largely dictated by the local economy and city or county tax revenues. The National League of Cities’ 2013 survey of city finance officers revealed that economic conditions are gradually improving, and in many cities, this was occurring after several years of shortfalls and service cuts. In fact, 72% of city finance officers surveyed by the organization reported that their cities are better able to meet fiscal needs than in 2012. However, respondents, surveyed in early to mid-2013, only projected a small year-over-year increase in general fund revenues in 2013.
Some of the factors that affect city finances are sales and local income tax revenues, which experienced increases in 2012, and property tax revenues, which declined in 2012. Survey respondents expected these increases and decreases to continue into 2013.
Jim Phillips, media relations manager for the National Association of Counties, said while it is hard to generalize about the overall county budget situation, U.S. Census Bureau data shows positive year-over-year growth in state and local tax revenue for the past 15 consecutive quarters ending in the second quarter of 2013. However, “many counties are still a long way from where they need to be to continue to provide essential services and meet financial obligations,” he said
He continued, “After several years of budget cuts, including layoffs, purchasing delays, and delays in moving forward with infrastructure maintenance and capital improvement projects, many counties are still struggling with their budgets to meet both short-term and long-term goals and existing obligations.”
How the Economy is Affecting Fleets
Despite the revenue increases public agencies have achieved, this doesn’t necessarily trickle down to fleet operations. With a backlog of other services and projects for public agencies to consider, the fleet budget, including replacement funding, isn’t often the top priority.
Government Fleet sent out a survey in November 2013 to see how fleet budgets are faring for 2014, using the fleets’ most currently available financial data. The conclusion? Nearly 60% of respondents said their budgets are back up to or exceed their budgets from five years prior. A large number of fleet managers said they are finally able to purchase vehicles after pushing back replacements, and some are increasing their fleet budget and size due to added services or increased population. However, while not all fleets are in a dire financial situation, the ones who are feel frustrated.
● Personnel Budgets Just Cover Salary Increases
More personnel budgets have increased than decreased (42% increase, 18% decrease), but 40% said their personnel budgets have stayed the same. (See Chart 1.)
The main reasons for personnel budget increases were employee raises and increased cost of benefits. While oftentimes, raises are contractually obligated or negotiated by unions, one respondent said the elected board agreed to salary increases when members recognized the need to keep the staff from leaving due to low pay. Those with internal service funds said they would recover the cost increase by raising their labor rates. While many said their personnel budgets only increased enough to cover employee salaries and benefits, others said they would be able to focus on training with increased budgets.
A more experienced workforce may be exceptionally knowledgeable about the fleet, but they are often higher-paid workers. A commonly stated reason for reduced personnel costs was retirements of these higher-paid workers and the hiring of new employees at lower salaries or reduced benefits.
Other effects of reduced or unchanged budgets are that fleets aren’t filling vacant positions or in rare cases, furloughing staff.
Keith Leech, fleet manager for the City of Sacramento, Calif., reported a slight increase in personnel budgets due to elimination of furlough, but he plans to not fill some open positions. “We plan to increase employees’ level of productivity through various human capital improvement programs and business model changes,” he said.
● Cost of Doing Business Increased, Increasing Operating Budgets
Overall, more fleets said their operating budgets increased (42%) than decreased (20%). (See Chart 2.)
Respondents said the main cause of operating cost increases was the general increased cost of doing business — this includes inflation, price increases for parts, tires, tools, and other materials, as well as services. While not as common, other reasons cited for the increase in operating budget are increased maintenance costs due to aging fleets from extended lifecycles, and investment in new projects and expenses such as fleet greening projects, additional materials and tools for insourcing and reorganization, and investing in software. Those with internal service funds with increased budgets said they increased their labor rates.
The City of Eugene, Ore., fleet saw a 3% increase in operational costs, which Tony Jobanek, fleet and radio communications manager, attributes to parts and vendor inflationary costs as well as fuel fluctuation. “We’re being asked to find operational efficiencies to reduce inflationary increases,” he said.
Lower fuel cost and improved efficiencies in preventive maintenance are two reasons why fleet operating budgets had reduced, respondents said.
Others cited lack of funding to fleet departments from agencies. Some ways fleets are dealing with reduced operational budgets are to reduce outside maintenance activities, try to reduce miles driven by employees, and reduce parts and supply inventory.
Those who saw no change in their operating budgets also had to make changes in their operations. This included not making some repairs, renting specialized equipment, and increasing efforts to advocate for shared equipment.
One fleet manager in Oklahoma who wished to remain anonymous said the reduction in fuel costs “offset any other increases we have encountered,” resulting in the same budget as the prior year.
● Capital Budget Changes Volatile
Survey results show 38% of respondents said their capital budgets increased, and 20% said it decreased. (See Chart 3.) Unlike with personnel and operating budgets, change in replacement dollars from the prior year were more volatile, with increases as high as 141% and decreases as low as zero replacement funding.
More than one-third of respondents who had increased replacement budgets said they were getting replacement funding after deferring the purchase of new vehicles. At Montgomery County in Maryland, the fleet budget increased 100% for the fiscal year beginning July 2013. “The county placed a moratorium on collections [for the replacement fund] six years ago,” said Bill Griffiths, fleet division chief. “Entering this year, we had a six-year, 1,024-vehicle backlog. Maintenance costs increased by more than 50% in the last three years.” Staff is using a points-based system to identify and replace units with the highest maintenance costs.
A small number of fleet managers said they were increasing their fleet size due to increased services.
It’s important to note that capital budget changes from one year to another may not mark inadequate or surplus funds. Oftentimes, change in capital budget is just part of the replacement cycle, with more or more expensive vehicles falling into the most recent budget cycle for those with higher budgets and the reverse for those with lowered budgets.
However, about half of respondents with decreased capital budgets did attribute it to inadequate funds.
One Florida fleet manager who wished to remain anonymous explained, “We’re not replacing anything. Replacement funds were used to balance the budget.”
A few fleets said the prior year’s replacement budget had been robust, allowing for a large number of replacement purchases the prior year and decreasing the need to replace vehicles the current year.
Fleets with unchanged replacement budgets were varied in their responses as they included fleets with intact replacement funds that continued to be funded and those that continued to have little or reduced funds. For those in the latter category, some of the ways they compensated were to refurbish vehicles, continue to defer replacement, and do more major vehicle repairs.
Michael Webster, CAFM, fleet manager for the Forest Preserve District of DuPage County, Ill., manages one of these fleets. “Even though the budget stayed the same, it is lower than needed, especially in the rust belt,” he said. “We are refurbishing trailers and trucks to keep them on the road longer, repairing/repainting rust areas quickly before more damage occurs, re-educating operators to do a better job of pre-trip inspections, and washing vehicles more frequently.”
Dan Berlenbach, acting deputy director for the City of Phoenix, Ariz., Public Works, said his fleet’s general fund replacement funding has been frozen at 5% of requirements, leading the fleet to refurbish refuse trucks and ambulances and continue to extend lifecycles.
“It is close to impossible to satisfy your customer with an old, breakdown-prone, hard-to-obtain-parts-for fleet. The continued operation and maintenance spending to support a fleet past its economic lifecycle cost is not sustainable, yet we have no choice,” Berlenbach said. “The ‘improving economy’ is not showing up in our operational or capital budgets, and I don’t see it coming for at least two to three years.”
Optimism for an Improving Economy
One way to determine whether budgets are back to “normal” might be to ask if fleet budgets are back to or exceed pre-recession levels. Fifty-nine percent of respondents said “yes” in comparison to their budgets from five years ago. Some of those who said “no” did see an upward trend toward pre-recession levels, while others didn’t think it would ever get there. (See Chart 4.)
The survey also asked respondents how they felt about the future of fleet finances, and 80% said they felt optimistic. (See Chart 5.) Not surprisingly, respondents who said their fleet budgets were back to or exceeded the budget from five years ago tend to be more optimistic about the future (98%). In comparison, of those who had a lower fleet budget in comparison to five years ago, 53% were optimistic.
In Florida, where the bust of the construction industry was a large factor affecting the state economy, Mario Guzman, CAFM, fleet administrator for the City of Boynton Beach, is optimistic. “The City of Boynton Beach has been redeveloping for the past couple of years. The economic downturn has slowed us down, but we are progressively getting on track. New businesses are being created, new homes and developments are being constructed, and there is an overall positive vibe that can be felt throughout the city,” Guzman said. “This growth will lead to the expansion of services to our residents, which will result in the need for vehicles/equipment.”
Twenty percent of respondents said they were pessimistic about future fleet finances. We’re “pessimistic to concerned,” said one California fleet manager who wished to remain anonymous. “Due to tough times, leadership wants to deplete our reserve, leaving us less prepared for the future.”
Mel Galbraith, PCFM, is more cautious. “We are realistic. The economy appears to be on the mend, but the market is wild. For example, there is no reasoning in fuel price drops. To expect today’s low prices to continue is unrealistic,” said Galbraith, who is fleet director for the City of Scottsdale, Ariz. While the city’s fleet budgets have increased across all three categories from the prior year, Galbraith is preparing for tough times ahead. “We have to make the best possible decisions in preparation for a waning economy by replacing old equipment while it is waxing,” he said.
Government Fleet sent out a survey to its readership in November 2013, receiving 96 qualified responses. Fleets were asked to provide data for the most current fiscal year available. Depending on where they were in their budget cycle, some provided data from their current fiscal year and others from the next fiscal year.
Lean Times Spur Innovation
While public fleets don’t seek profits, there are various ways they can reduce the cost of capital purchases, reduce fleet operational or overhead costs, or reduce costs for their customers. During lean times, fleet professionals have come up with creative ideas to obtain funding, offset fleet costs, and keep their employees employed. These include:
● Partnering with other agencies to cooperatively purchase similar equipment to gain volume discounts
● Obtaining grant funding for alternative-fuel vehicles and infrastructure
● Offering to test new technologies for cost discounts
● Sharing equipment between public agencies rather than buying new
● Leasing vehicles or specialized equipment
● Using revenues from a publicly available CNG fueling station
● Advertising on vehicles
● Seeking insourcing agreements
● Reviewing and renegotiating contracts for parts and services
● Making sure vehicle resale money goes back into the capital budget.