Do the Math: Fleet Leasing in the Public Sector

When Jeffrey Wade joined the team at the Cuyahoga Metropolitan Housing Authority (CMHA) in 2011, he had 10 years of experience in the private sector under his belt. At the time, officials at the Cleveland, Ohio-based agency were debating whether to lease, rather than purchase, new vehicles for their 240-unit fleet, the majority of which is comprised of passenger cars and light-duty pickups. Given his background, Wade thought the move made perfect sense.

“I was surprised that vehicles were purchased outright,” said Wade, associate general counsel and director of risk and safety management for the housing authority’s Office of Legal Affairs. “Cash flow is always a significant issue. You have to create efficiencies. When you can set up the  lease parameters in a way that’s fiscally prudent, why wouldn’t you do it?”

Wade helped propel the discussion forward, ultimately meeting with experts at Merchants Fleet Management before diving into fleet leasing for the first time in February. 

Two states away, in Crystal Lake, Ill., a northwest suburb of Chicago, the city’s Director of Finance George Koczwara was finalizing a fleet leasing plan that came to fruition this May after three years of internal debate. A staff working group, with help from Enterprise Fleet Management, completed “the mother of all analyses,” determining that the move to leasing would allow the city to continue to acquire the vehicles and heavy equipment it needs, remarket those assets strategically, and reap the financial rewards — a total projected savings of more than $3.5 million over the next 15 years, he said.

“In local government, you don’t necessarily get rewarded for taking risks,” Koczwara said. “But on the flip side, we have little choice. We have to come up with a way to procure and replace the fleet at the appropriate time.” 

Leasing might not be right for every situation, but for fleets that are seeking new ways to stretch limited budgets, it can pay dividends in several key areas, including acquisition, remarketing, maintenance, and fuel spend. 

Expanding Acquisition Options

Crystal Lake’s fleet includes 326 vehicles and pieces of heavy equipment. The leasing plan calls for 116 units on three- to five-year leases. The city is also working on leasing ambulances and fire engines directly from manufacturers, with a goal of putting the entire fleet on leases. After 15 years, the calculated net cost of $19.6 million to purchase vehicles falls to $17.8 million, a projected savings of $1.8 million. The city estimates a combined savings of $3.6 million, including reduced staff and maintenance costs along with fuel savings.

At Cuyahoga Metropolitan Housing Authority, which is responsible for nearly 10,000 low-income residential units in about 60 properties, the agency took a somewhat more measured tack, starting with administrative vehicles. (It was “a very practical approach,” Wade noted, adding that he can see the vehicles from his office window.) The first phase called for the lease of 30 new Nissan Altima sedans in February; a 2017 Ford F-350 pickup was added when the need arose. The Altimas alone would have cost more than $600,000 to buy outright. 

“We would never have six figures to buy 30 units,” Wade explained. “Take that cost and spread it over the lifecycle of the lease and consider the time value of the money. You just can’t recover that.” 

Getting Strategic with Remarketing

CMHA’s new Altimas are leased on four-year terms, and Wade said the performance of the used-car market could compel the agency to remarket them sooner. “If we find the depreciation is a little aggressive and the book value is less than the market value, we might get out before four years,” he said.

Crystal Lake’s agreement with Enterprise has built-in flexibility that will allow the city to defleet some units after as little as 12 months if the market demands it. Koczwara points to the “sweet spot” that represents the ideal replacement period — essentially, where decreasing values meet the inevitable increase in maintenance costs. 

To illustrate the point, Koczwara used the example of a dump truck the city purchased in 1999. The sticker price was $95,000 and it cost $109,000 to maintain. When the frame rails cracked, it went to scrap. “So we paid more in repairs than the initial purchase price, and it had no residual value. There is a cost to driving it until the wheels fall off,” he explained. 

Reducing Maintenance and Fuel Costs

Whether it’s owned or leased, the older a vehicle gets, the costlier it becomes to maintain and gas up. Cycling vehicles out every few years gives fleets the opportunity to trade out less efficient engines and take advantage of new vehicle types, including compact vans, many of which can carry the same payload as a light-duty truck, typically for a slightly lower acquisition cost and greater fuel economy. 

Wade said that, as its lease plan expands, CMHA will target its oldest, highest-mileage units and those that have suffered the most wear and tear. The reason is simple: They have the highest potential for costly failures. “The type of unit we put under lease will always be driven by what is going to yield the lowest total cost at end of lease term,” he said.
Most of the units Crystal Lake leases come with bumper-to-bumper maintenance, which will be performed by at least four local shops. Injecting those dollars into the local economy is a “win-win,” Koczwara said, and outsourcing will reduce the city’s workload. The position of a technician who is nearing retirement will not be filled, which represents a large portion of the fleet’s projected cost reduction. 

Of course, Koczwara added, a projected fuel savings of $270,000 over the first 10 years of the program is no less significant.