CITY OF BOISE FLEET MANAGEMENT PROGRAM STRATEGIC PLAN

Transcription

1 CITY OF BOISE FLEET MANAGEMENT PROGRAM STRATEGIC PLAN INTRODUCTION This document presents the results of a strategic planning process that was undertaken to identify opportunities to optimize the City of Boise s fleet management operations and activities. For purposes of this project optimize means achieving a balance between the best services to fleet users at the lowest possible overall cost. As a support service, fleet management activities should be designed to meet customer needs by enhancing their ability to deliver efficient and cost effective services to the residents of Boise. At the same time, since the City has a fiduciary responsibility to use tax payers funds wisely, policies should be enacted to regulate how departments use vehicles and to insure that the fleet management program is structured to provide overall value to the City. The process used in developing this strategic plan included collecting and analyzing data regarding current fleet costs and performance, comparing performance against industry benchmarks, and conducting an analysis of current activities and processes to determine the fits and gaps with recognized industry best management practices. The best practices assessment is included in the Appendix to this strategic plan. The plan that resulted from the strategic planning process was the product of the collaborative work of a team of City staff and consultants from Mercury Associates, Inc. Members of the team included Jef Faw of the Finance Department, Scott Canning of the Public Works Department, Dennis Falconer of the City Shop, Eden Belanger of Parks Department. Jack Taddicken of Police Department, Jeff Ramey of the Fire Department, and Jim Schmer of the Department of Development Services. This strategic plan consists of initiatives in several functional areas of fleet management and operation, to be pursued over next few years, aimed at addressing both tactical and strategic improvement opportunities. In each of these areas, the fleet management function is identified, current issues and opportunities associated with existing fleet practices are outlined, an improvement strategy is articulated, and an action plan associated with pursuing the strategy is outlined. 1

2 STRATEGIC FOCUS AREA #1: ORGANIZATION, ROLES, AND RESPONSIBILITES Background and Industry Best Practices A clear best practice for fleet management programs, and a dominant trend over the past 20 years or so, is the consolidation of fleet management functions into one centralized service organization. Traditionally, it was believed that the effectiveness or responsiveness of a fleet management organization was correlated to its physical and organizational proximity to the vehicle users it serves. The result of this belief was the creation of numerous independent fleet management programs within a county or other jurisdiction, each of which was intended to serve the purportedly unique needs of its own group of customers relying on its presumably specialized skills and knowledge. Increasingly, however, it has come to be recognized that many, if not most, fleet user needs can be met more cost effectively through a consolidated approach to fleet management. The trend in the fleet industry clearly is toward more rather than less consolidation of fleet management functions. And most organizations that we have worked with of Boise s size have developed a centralized fleet management program. The move toward consolidation can be traced to the increasing complexity and cost of fleet management endeavors over the last 20 years or so and to a simultaneous increase in emphasis on governmental efficiency particularly in the face of competition from contract providers of fleet management services. During this period, developments in such areas as information technology, human resources management and professional development, risk management, regulation of environmental protection and occupational safety and health, and automotive technology have essentially changed the definition of "effective" fleet management, making it prohibitively expensive for many small, independent fleet management organizations to keep up. In short, the complexity of fleet management today produces significant economies of scale which often can be captured only through collective effort. There are two issues to centralizing a fleet; 1) centralizing all maintenance and repair; and 2) centralizing ownership and management of the fleet. In centralized maintenance and repair, the responsibility for all maintenance activities lies with one department. Several economies of scale are obtained when all maintenance and repair activities are under a single jurisdiction. Centralized fleet ownership and management, on the other hand, provides consistent management of all fleet assets and provides greater opportunities to pool and share vehicles. This is especially true of general purpose administrative sedans and construction type equipment which is very costly but may not necessarily be used daily by a single operating department. 2

3 The benefits associated with centralized ownership of vehicles/equipment are often not as easy to recognize for most fleet users. Department managers do not like to give up ownership of their fleet of vehicles and equipment for fear of decreased flexibility and increased bureaucracy. This, however, is not the case. We know from observations made at several hundred municipalities - our clients across the nation. Public property assigned to a manager is not the private domain of that manager. Responsibility for arranging for preventive maintenance inspections, performing repairs, planning replacement, maintaining a right-sized fleet, monitoring utilization, and standardizing the fleet are all management issues that can best be attended to when the fleet is centrally managed. The specific advantages to the centralized fleet management approach include: Economy of mass purchases; Consolidation of shop equipment; Reduction in aggregate shop space requirement; Better overall evaluation of the organization s total fleet costs; Identification of obsolete units; Improved utilization and distribution of equipment; Centralized and consistent records; Better labor distribution; More flexibility of skilled mechanics; Single agency management control; Consistency in the procurement of fleet assets; Fewer parts needed in inventory; Improved scheduling of maintenance and repairs; Improved security; Decreased vehicle downtime; and Pooled resources. Current Issues and Opportunities Fleet activities in Boise currently are substantially decentralized. Each department is responsible for developing its own asset management strategy including deciding when to replace vehicles and mobile equipment items. In fact, there is no City policy that sets standards and criteria for replacing vehicles. In the asset management area there is also no standard process in place to guide departments in determining the correct size and composition of their fleets. As a result, it appears that overall fleet utilization is low. 3

4 Fleet maintenance and repair is also fairly decentralized with four departments now directly involved in this activity (Aviation, Public Works, Fire, and Parks). Each department uses different repair procedures, systems, and approaches to fleet maintenance and communication between them is suboptimal. Fleet management is not the primary mission of any organization within the City with the exception of the Equipment Services Division (hereafter ESD) of the Aviation Department (often referred to as the City Shop). Many of these other organizations find it difficult to invest in the development of sound maintenance management systems and controls. It is also impractical to assign a professional, full-time fleet manager to a small fleet. Therefore, management of these small fleets tends to fall on an employee as a cursory duty. These employees typically do not have the technical training or experience to actively manage a fleet of vehicles. They also do not have the tools required to effectively manage fleet assets especially in terms of the required information systems that can provide the quantitative data required to measure fleet program effectiveness. This was evident during this study when some departments had difficulty in providing very basic information data about their fleets (particularly cost data). In contrast, ESD already has a staff of experienced fleet professionals, has spent years refining its service programs, and has made a substantial investment in required systems and facilities. While fleet management is not rocket science, it is a specialized field of endeavor that demands specialized expertise to be done well. ESD has the requisite expertise and most other agencies do not. Consequently, it is likely that the City has suffered increased costs and decreased efficiencies as a result of its decentralized fleet program, mainly because part-time fleet managers tend to seek retail solutions to fleet issues because they only have expertise at this level (a result of experience with their personal fleet at home) and thus tend to overpay for fleet related goods and services. With maintenance staff resources spread among four departments, the City is not able to apply economies of scale and, therefore, experiences labor supply shortages in some areas and surpluses in others. This situation is particularly acute for ESD where staffing levels are inadequate to meet reasonable repair turnaround times. ESD is a division within the Aviation and Public Transportation Department, an unusual alignment of the fleet function in city organizations. We also find that the department in which a fleet operation is housed is often perceived as receiving higher priority or preferential treatment by the fleet operations. As such, many municipalities have shifted fleet operations to a neutral 4

5 department, comprised of other internal service activities such as Finance, Risk Management, Information Technology, and Purchasing. Another issue associated with the inclusion of ESD as part of Aviation is a mismatch between customer bases. Aviation s focus is to serve the traveling public while ESD s mission is to serve internal customers. The scope of ESD s operations is currently limited to maintenance and repair activities and the organization has little input into fleet budgeting or establishing rates - functions for which a fleet manager s insights are typically required for a cost-effective and self-sustaining fleet operation. Because vehicles are owned by departments rather than by the City, the City does not have control over vehicle allocation or redistribution to meet changing needs. Transferring ownership from the departments to the fleet Internal Service Fund would enable the City to improve overall management of fleet resources and will promote greater involvement in the oversight of daily fleet operations. Under this approach ESD, in effect, would lease vehicles to the departments, charging them fees comparable to what they are currently setting aside for replacement funding, plus management fees to cover overhead for program administration. Development of a centralized support fleet management program would enable the City to leverage core competencies, capture economies of scale, reduce duplication of effort, and link related functions (such as fleet replacement planning to fleet maintenance). Centralization of all feet activities within the City will enable a holistic approach to this business, provide for the development of consistent policies and practices, and foster improvements through a more systematic approach to management of the City s fleet assets. It is important to note that the primary role of a centralized fleet organization is to provide efficient and effective services to fleet users not to regulate their behavior. Since user departments understand the requirements of their business much better than a central car czar ever could, they should drive decisions regarding the number and type of vehicles that they need to complete their mission activities. The fleet organization should provide its customers with consultative advice regarding fleet size and composition, influence their behavior through use of a service based (direct) cost chargeback system, and provide feedback on user decisions through management and exception reporting. Regulation, where it occurs, should come in the form of policy guidance and through the budget process where departments are required to justify their resource and spending requests. User departments, while generally supportive of a centralized fleet program, are concerned that such a program will be overly bureaucratic, command rather than support oriented, and not adequately responsive to their fleet 5

6 related needs. These concerns can be addressed by involving users in management of the fleet program, instituting appropriate customer service protocols, using a detailed Service Level Agreements delineating each party s responsibilities (example provided in the Appendix) and developing effective performance measurement and reporting procedures. Improvement Strategy 1 Centralize fleet management and service activities under one organization, preferably situated in a department such as Finance that has an internal service orientation. Action Plan 1.1 Identify parent organization for the fleet function a) Discuss pros and cons of placing fleet in a line versus staff organization. b) Consider managerial capacity of potential parent organizations to execute the strategies and initiatives contained in this strategic plan. c) Select a name for the new organization we recommend the Fleet Management Division. d) Submit recommendations to the Mayor and Council for approval. Fleet Steering Committee Implementation start: Sept 1, 2007 Target completion date: Sept 30, Develop budget for centralized organization a) Identify staff positions to be transferred to the Fleet Management Division. We recommend the following organization: 6

7 Fleet Manager Administrative Assistant Shop Supervisor Working Foreman, old City Shop (transferred from Parks) Parts Supervisor Mechanic (10 four transferred from Parks, 1 from 20 Mile Farm) Fire Mechanic (2 one existing and one position transferred from Fire Department) Field Mechanic Note that the mechanic at 20 Mile Farm should remain in his current location but receive technical and administrative supervision through the fleet organization rather than Public Works. The mechanic at the golf course should also remain in his current location but report to fleet rather than the Parks Department. We recommend that the Police Specialist position remain at the Police Department and function as a fleet coordinator. All time spent by the Police Specialist transporting vehicles and on minor repair activities should be documented in the fleet management information system. b) Identify budget. c) Finalize budget and submit to Mayor and Council for adoption. Finance Department Implementation start: September 1, 2007 Target completion date: September 30, Recruit and hire a Fleet Manager a) Develop job description (example provided in the Appendix). b) Establish salary range. c) Conduct a national recruitment. d) Screen applications and select 3 to 5 candidates for interviews. e) Develop interview questions. 7

8 f) Convene an interview panel with representation of 3 customer departments, Finance, and a fleet management expert (such as the State of Idaho Fleet Manager). g) Make selection. Steering Committee Implementation start: October 1, 2007 Target completion date: December 31, Create a Fleet Advisory Board a) Establish membership of the board with representation of 4 customer departments and Finance. b) Develop a charter for the board including boundaries of decision making authority. This should include a procedure for the board to participate in the Fleet Manager s annual performance review. c) Develop a meeting schedule. We recommend monthly during the first year of transitioning to a centralized fleet organization and quarterly thereafter. Fleet Management Division Implementation start: January 1, 2008 Target completion date: On-going 1.5 Develop a performance measurement system and an annual report a) Define key measures of fleet performance by reviewing the list provided in the Appendix and by contacting peer cities. b) Identify data sources and reporting formats. c) Develop reporting schedule for internal staff, customers, and City management. d) Develop annual report format. e) Draft and distribute report. 8

9 Fleet Management Division Implementation start: December 1, 2007 Target completion date: December 31, 2007 STRATEGIC PLANNING FOCUS AREA #2: FLEET POLICIES AND PROCEDURES Background and Industry Best Practices A formal fleet policies and procedures manual provides an organization with a single point of reference for all fleet related issues. The purpose of a formal policy is to establish procedures for the use, maintenance, acquisition, billing, replacement, and disposal of vehicles and equipment owned by the City. The documents ensure consistencies among all of the various departments within the organization in the proper use and care of City owned assets and when operating their personal vehicles in the conduct of official City business. Current Issues and Opportunities The City s existing fleet of policies are found in the City s Employee Handbook in the following sections: Vehicle Usage Policy effective Vehicle Regulations Policy a effective These policies provide a good description of employee responsibilities and restrictions on vehicle use. However, there is a general absence of specific policy and procedures statements describing the vehicle management process. For example, there are no policies describing the requirements for replacing vehicles; vehicle assignment justification; guidance for departments regarding minimum vehicle utilization (mileage) standards; vehicle acquisition and funding processes; use of vehicle chargeback or rates processes; vehicle acquisition and contract requirements; fuel and parts acquisition processes; vehicle misuse, neglect, and fraud policies; vehicle upfitting and disposal processes; vehicle mileage data capture and reporting; and fleet user customer agreements, processes, feedback and user committees. New centralized shop operating procedures also need to be developed to avoid confusion and inconsistencies. For instance, Parks currently provides all tools to its mechanics while ESD expects staff to provide their own basic set of tools. In our experience, mechanics generally have excellent tools and 9

10 it is in a City s best interest to have mechanics use these tools to repair City vehicles. Mechanics need to have their investment protected by the City insuring tools against theft and by providing a reasonable tool allowance to replace damaged or worn tools. We suggest an allowance of $750 per year. Note that the City still needs to provide large and specialized tools. These details need to be spelled out in the shop procedures manual. Improvement Strategy 2.1 Develop Fleet Policy Manual 1) Draft Manual Action Plan a) Develop policy topic outline from example manual in the Appendix and a survey of peer cities. b) Circulate outline to stakeholders for review and comment. c) Draft policies based on finalized outline. d) Circulate draft policies to stakeholders for review and comment. e) Finalize policy document and submit to mayor and council for approval. Fleet Management Division Implementation start: March 1, 2008 Target completion Date: May 31,

11 STRATEGIC FOCUS AREA #3: FLEET REPLACEMENT PLANNING Background and Industry Best Practices Timely replacement of fleet assets is important for controlling vehicle availability, safety, reliability, and efficiency. The economic theory of vehicle replacement holds that vehicles should be replaced when the sum of ownership and operating costs is at its lowest historical point. The chart at right, which shows three cost curves, illustrates this concept. The capital cost curve shows the decreasing cost over time of a fleet asset as it ages and depreciates. The operating cost curve illustrates the increasing maintenance, repair, and fuel costs for the same asset over its life cycle. The total cost curve combines the two. The optimal point at which to replace this asset from an economic perspective is when the total cost curve is at its lowest. That is, when the combined cost of owning and operating the unit is at a minimum, just before it begins to increase. As illustrated, the bottom of the total cost curve is relatively flat. This means in practical terms that there is not a single best time to replace a unit. Rather, a period of time exists during which the combination of capital and operating costs are at their lowest and delaying the replacement of the unit will not have a material impact on the total annual costs for that unit. For example, for the typical light-duty vehicle, this flat section usually represents from five to seven years or from 80,000 to 100,000 miles. Many of the vehicles in the City s fleet already exceed this range. The total cost curve is different for every unit. This variability is caused by differences in the design and engineering of different types of units, the effects of differences in operating environments, the quality of care the unit receives, and other factors. As a result, it becomes impractical to apply this model without utilizing class average replacement criteria or estimates, which will accurately reflect the best replacement time for most of the units in that particular class of vehicle or equipment. Establishment of a more formal fleet replacement program for the City needs to start with development of class-based replacement criteria. Even the best replacement planning efforts will not succeed if the appropriate funding to renew the fleet is not available. It is important for decision makers in the City to recognize that a dollar of fleet replacement funding deferred is not a dollar saved. Fleet assets do wear out. Over time they not only become more unreliable, but more costly and unsafe to operate. Decisions to defer 11

12 replacement for a particular unit or type of unit beyond its planned service life will impact the average maintenance and repair costs for those units. It will also affect the manner in which the unit is utilized due to its actual or perceived drop in reliability. Significant deferment, in our experience, also leads to an overall increase in the size of the fleet due to the need, real or not, to have spare vehicles available. The ultimate need to replace the unit in question is not eliminated; it is only pushed to another year. There are three basic financing alternatives available to the City for funding replacement of fleet assets: cash, savings, and debt (including leasing). The graph at right illustrates a 20-year replacement plan for a county government fleet of about 3,000 vehicles and pieces of equipment and the funding requirements associated with financing all of the purchases in the plan with ad hoc appropriations of cash. As can be seen, a major drawback of cash financing is that it makes fleet replacement funding requirements volatile and unpredictable because the long-term replacement spending requirements of most fleets are inherently and unavoidably lumpy. This is due to the simple fact that different types of vehicles and equipment have different life expectancies and come due for replacement in such a way that spending needs fluctuate from year to year. As can be seen in the above graph, there are some pronounced peaks and valleys in future spending needs that any organization would have difficulty accommodating. For example, projected replacement costs are about 45 percent higher in 2009 than in 2005 and nearly double between 2011 and Most organizations have difficulty dealing with fluctuations in fleet replacement spending needs because the amount of funds they can devote to the purchase of vehicles each year generally does not fluctuate. In fact, while the number of fleet assets that need to be replaced may zig upward (say, by 45 percent) in a given year, government revenue in that year may not only not increase by a corresponding percentage, but may actually zag downward. When this happens, some fleet replacement purchases must be deferred and a backlog of replacement spending needs begins to accumulate. 12

13 Fleet replacement financing approaches such as a reserve fund and lease purchasing allow an organization to spread the capital cost of each vehicle over its useful life. This makes fleet replacement funding requirements smooth and predictable and reduces the likelihood that critical replacement purchases will be deferred and that a backlog of replacement spending needs will develop. The graph at right shows the long-term funding requirements associated with financing the replacement costs of the 3,000-vehicle fleet above with a sinking fund and charge-back system. Although replacement spending requirements are identical to those shown in the earlier graph, funding requirements (represented by the charge-back revenue line) are not at all volatile. One of the challenges of managing a reserve fund properly is calculating chargeback rates so that the reserve fund balance does not get too big or too small. Many government jurisdictions with which we have worked in this area have built up unnecessarily large fund balances due to improper rate setting and/or an incomplete understanding of how a reserve fund should operate. In many such cases the reserve fund gets depleted by political decision makers who are looking for sources of extra cash during tight budget times. Like a reserve fund, lease purchasing makes replacement funding requirements smooth and predictable by spreading the capital cost of each vehicle in the fleet over its useful life. This approach also is attractive to many cities, counties, and states that use it because it eliminates the need to manage a replacement fund balance (which can be susceptible to raiding in an economic downturn), and because making the switch from cash financing or a sinking fund to debt financing can produce very large budget savings in the near term. 13

14 The graph at right shows the funding requirements associated with financing the replacement of our sample 3,000-unit fleet using lease-purchase financing. Under this approach, the purchase of every vehicle and piece of equipment in the fleet would be financed over a period of seven years, slightly less than the weighted average life expectancy (i.e., replacement cycle goal) of the various types of assets in this particular fleet. As in the two previous exhibits, the bars represent projected annual replacement spending requirements. The line in this graph illustrates projected lease payments and, consequently, the fleet s replacement funding requirements. Although the volatility of future spending needs has not changed, funding requirements are now smooth and predictable. Equally, if not more, important, however, are the significant budget savings associated with changing replacement financing approaches. The area of the graph that is circled shows how a switch from cash financing to leasing can significantly reduce fleet replacement funding requirements in the short term, creating very sizable, albeit temporary, budgetary windfalls. These budget savings result from the fact that cash financing requires paying for vehicles upfront before they are used, whereas lease purchasing permits an organization to pay for its vehicles and equipment incrementally over the course of assets useful lives. The last step in an effective fleet replacement program is a short-term replacement decision making process that identifies and prioritizes when to replace individual vehicles and pieces of equipment. Although replacement guidelines usually trigger an assessment of the need to replace a particular vehicle, some assets will need to replaced earlier than expected (for instance, due to unusual wear and tear or recurring mechanical problems) and some units will be cost effective to operate well beyond the age or usage threshold suggested by replacement guidelines. Consequently, fleet management organizations need to include a number of factors beyond age and accumulated usage in the process of identifying the specific units most deserving of replacement in any given year. These factors include historical repair costs, type of use (such as severe duty, mission critical or back-up), reliability, and an 14

15 assessment of a candidate unit s current condition. Many organizations have developed a point system that mixes the factors listed above into a quantitative process of assigning replacement priorities. This has the advantage of taking most of the politics out of the replacement decisionmaking process because all stakeholders (including budget staff and fleet users) understand the factors being considered and have bought into the process. We have included a sample point system in the Appendix to this strategic plan. Current Issues and Opportunities The average age of the vehicles in the City s fleet is 9 years (107 months). This is considerably older than standard for a municipal fleet where the average age should range from 3.5 to 5 years depending on the mix of cars, trucks, and heavy equipment in the fleet. The average fleet turnover rate is double the average age between 7 and 10 years with standard industry practice. Note that the implied fleet turnover rate for Boise is 18 years. The replacement value of the City s fleet is approximately $39 million. This means that the City should spend between $3.9 million (10 year turnover rate) and $5.6 million (7 year turnover rate) to replace vehicles. Precise records on how much the City has spent each year to replace vehicles are not available because capital asset purchase records co-mingle asset types together (i.e. expenditure figures include plant equipment, computers, vehicles, etc). Based on the acquisition cost for vehicles in each model year, actual spending has average $2.2 million per year well short of standard industry practice. We estimate that 472 vehicles in the City s fleet currently exceed industry standard replacement points. Replacing these units would cost the City $18 million. There currently is no official replacement policy with established cycles for replacing various types of vehicles in the fleet. Rather, each department makes its own decisions o replacing vehicles based primarily on available funding levels. The City is suffering from the absence of a coordinated, comprehensive, and planned approach to replacing its fleet assets. The proof that the current decentralized and ad hoc approach is not working is in the advanced age of the fleet and the wide variances in fleet age among departments. The old fleet puts increased pressure on ESD and other maintenance operations because old vehicles require more frequent and extensive repairs than do new ones. 15

16 The lack of consistent replacement policies and centralized program oversight has led to fleet creep as departments keep vehicles in service rather than disposing of them after a replacement vehicle has been received. The age of the fleet has contributed to this fleet creep as departments have accumulated spares and backups to compensate for unreliable front-line units. Consequently, there appear to be opportunities to decrease the size of the City s fleet particularly if this is done in concert with fleet renewal. Rightsizing the City s fleet has the potential to produce millions of dollars in savings and cost avoidance over the next five years as fleet renewal is implemented. Given the growth that the City is experiencing, and the associated demands for new capital funding, it is unlikely that sufficient cash will be available over the next five to ten years to replace fleet vehicles according to industry standard cycles. Consequently, we believe that the City should consider the advantages of meeting vehicle replacement funding requirements with a reserve fund or lease-purchasing approach rather than continuing to rely on ad-hoc appropriations of cash. This strategy makes new vehicles much more affordable by spreading out funding requirements over the life of an asset rather than paying the full ownership cost upfront. Improvement Strategy 3 Develop a long-range fleet replacement and financing plan to insure that City vehicles are replaced at the most economical point in their life-cycles. Action Plan 3.1 Develop official fleet replacement criteria a) Survey regional fleets for cycles used to trigger replacement of vehicles and equipment. b) Identify a key vehicle classes for development of life-cycle costs analyses (LCA) based on the City s cost of ownership. c) Conduct LCA analyses. d) Circulate list of recommended replacement cycles to fleet users for review and comment. e) Finalize replacement cycles and include in replacement policy document (see next action plan below). 16

17 Fleet Management Division Implementation start: September 1, 2007 Target completion Date: September 30, Develop a fleet replacement policy a) Draft a fleet replacement policy that provides a uniform and consistent process for determining when vehicles should be replaced (see example provided in the Appendix to this Strategic Plan). b) Circulate draft for review and comment by fleet users. c) Finalize policy and submit to City Council for adoption. Fleet Management Division Implementation start: October 1, 2007 Target completion Date: November 30, Conduct a fleet right-sizing analysis a) Analyze historical vehicle usage to identify potentially under-utilized units. b) Survey departments on their business needs for low use vehicles and explore options such as pooling, rentals, and reimbursing employees for use of their personal vehicles. c) Consider opportunities to eliminate backup and spare vehicles with targeted replacement of older front-line units. d) Develop list of vehicles targeted for elimination from the fleet and a timeline for disposing of the units. (Sample strategy: identify equipment used only 25-50% of the total average monthly utilization by vehicle class/type. Example: If average monthly miles for pickup trucks equals 1,000 then vehicles with less than 250 miles equal the low-hanging fruit to be considered first for elimination.) e) Document savings and cost avoidance. 17

18 Fleet/Finance Department Implementation start: October 1, 2007 Target completion Date: December 31, Develop a long-range fleet replacement plan a) Project future replacement dates for all vehicles in the fleet by applying adopted replacement cycles to existing vehicle ages and meter readings. b) Project salvage values based on historical City data and peer fleet averages. c) Project future year replacement funding requirements. d) Develop ten year forecast of vehicles to be replaced and resulting funding requirements by fund and by department. Finance Department Implementation start: January 1, 2008 Target completion Date: January 31, Analyze alternative financing approaches a) Model fiscal impacts over a ten-year period from financing vehicles with cash, a reserve fund, and leasing. b) Develop a replacement financing strategy based on the results of the analysis. c) Submit the financing strategy and replacement plan to City Council for approval. Finance Department Implementation start: February 1, 2008 Target completion Date: March 30,

19 STRATEGIC FOCUS AREA #4: COST CONTROL, COST ALLOCATION, AND CHARGE BACK RATES Background and Industry Best Practices Optimizing cost management and control depend upon an organization s ability to accurately accumulate, track, and report cost information. Accounting structures and practices that understate costs do not promote good management because decisions are often based on incomplete or inaccurate cost information. There are basically two ways that operating funds can be provided to a fleet management organization to support the management, maintenance, and fueling of a fleet: through direct appropriations to the organization or through the use of a charge-back system which recovers the organization s costs through charges to other organizations for the goods and services it provides them. Similarly, there are two ways that capital funds can be provided to support the acquisition of new and replacement vehicles: lump-sum amounts can be appropriated to the fleet management organization or to the departments it serves on an annual basis, or capital costs can be amortized over the lives of the vehicles in the fleet through the use of a reserve fund and charge-back system or a debt financing arrangement such as a lease-purchase program. There are three reasons why the use of a cost charge-back system is preferable to the direct appropriation of funds to a fleet management organization, a fleet user department, or some combination of the two. One is that properly designed charge-back systems improve the consumption and provision of fleet resources by 1) illustrating linkages between the behavior of vehicle users and the costs of the vehicles and related services they consume; and 2) encouraging fleet users to hold fleet management organizations accountable for the quality and costs of the goods and services the latter provide. The second reason for implementing a charge-back system is to promote equitable treatment of fleet users. Since users pay only for the resources they consume, there is no cross-subsidization of fleet costs under a properly designed and implemented charge-back system. One of the implications of this benefit is that fee-supported departments and programs pay the full cost of the fleet resources they consume and do not receive any subsidies from the general fund, which often occurs when a fleet management organization is part of the General Fund. The third reason for implementing a charge-back system is to ensure the timely replacement of capital assets. Using a charge-back system to accumulate replacement funds allows for vehicle capital costs to be amortized over several years thereby making it easier to accommodate peaks in annual fleet replacement spending requirements which usually cannot be accommodated by 19

20 (generally static) operating revenue sources. In a properly designed charge-back system rates should differentiate among the goods and services provided insofar as the costs of their provision are significantly different. The rates should be developed empirically based on the fleet organization s actual costs of providing the various services such as maintenance and repair, fuel, parts, and sublet services. Since using a charge-back system to finance a fleet operation means selling vehicles and related services rather than giving them away, fleet users behave much more cost effectively than they do when such resources are given to them. For the same reason, users also put much more pressure on fleet management organizations to charge competitive (with comparable organizations and the private sector) prices for goods and services than they do when they receive these resources free of charge. Internal Service Funds are used by state and local governments and other jurisdictions to account for the financing of goods and services provided by one department or agency to other departments or agencies, and to other government jurisdictions, on a cost-reimbursement basis. The use of Internal Service Funds has the following advantages: The ability to identify and accumulate the total cost of a support activity, including the depreciation of capital assets; Facilitates costing and pricing of support services; Allows for the accumulation of funds for equipment replacement; and Allows the allocation of general overhead costs to the Internal Service Fund for redistribution to benefiting programs. The design and management of ISFs and charge-back systems should comply with the guidelines of the Federal Office of Management and Budget (OMB) Circular A-87. OMB A-87 establishes principles and standards for determining costs for federal awards carried out through grants, cost reimbursement contracts, and other agreements with state and local governments. The purpose of OMB A-87 is to provide a uniform approach for determining allowable costs incurred by local governments. To the extent that the City of Boise receives any federal funding, either directly or on a pass-through basis, the guidelines of OMB A-87 must be followed at least for calculating the fleet service costs that are charged to federally subsidized programs. Even where no federal funding is involved, many cities have adopted OMB A-87 guidelines as the de facto standard for the design of charge-back systems and the management of internal; service funds. Basic principles articulated in this circular require that charge-back-funded organizations (they need not be classified as internal service funds) operate on a 20

21 break-even basis; recover only allowable costs from federally funded customer organizations; make adjustments for under and over recovery of costs (preferably through adjustments to future billing rates); bill all users at the same rate for similar services; utilize billing units which represent services provided or benefits received;, and not improperly utilize revenues generated by one type of service to finance the delivery of another type of service (e.g. capital charge-back rate revenue does not subsidize operating costs, or visa-versa). ISFs are permitted to have fund balances (reserves) that are being accrued for the purpose of asset replacement as well as to finance near-term working capital requirements. Any reserves being accumulated for financing operations are limited to the equivalent of one billing cycle or 60 days worth of operating expenditures, whichever is less, by OMB A-87 guidelines. Current Issues and Opportunities A consolidated program budget for the fleet function does not exist and constructing a comprehensive picture of current fleet costs proved to be impossible using available financial data. Fleet cost data for ESD was accurate because this organization operates as an Internal Service Fund. A projection of Boise fleet costs, based on ESD s cost and industry averages, is shown in the following table: 21

22 Estimated Annual City Fleet Costs Cost Estimated Annual Amount Funding to replace vehicles1 $2,200,000 Depreciation2 $3,375,000 Labor3 $1,100,000 Parts4 $910,000 Sublet services5 $217,000 Fuel6 $887,000 Indirect and overhead7 $982,000 Total $9,671,000 The ESD charges costs back to customers using a transaction based system Labor is priced between $64 and $70 per hour for internal and external repairs respectively. Parts are marked up 33.1% and sublet services are marked up 15%. A detailed model showing how these rates were developed is not available. Moreover, ESD does not charge back the actual cost of labor. Rather, it uses a time estimating program (Mitchell Manager) to charge standard labor times for standard jobs. No other department charges fleet operating costs back to fleet users, thus users perceive vehicle services as being free. Capital costs (i.e. the cost of vehicles themselves) are not charged back to any department. The lack of a chargeback methodology that recovers ownership costs fails to provide adequate incentives for user department to make informed decisions regarding the need for vehicles. Absent a charge back methodology, a using department can allow vehicles to sit idle with no consequences. An effective chargeback system provides user departments 1 Based on the average cost of model year vehicles in the City s fleet for model years. 2 Based on an assumed 8 year life, $30m acquisition cost, and 10% salvage value. 3 Used actual budget for ESD and extended costs to other departments. 4 Based on ESD costs plus projected costs for other departments. 5 Based on ESD costs plus projected costs for other departments. 6 Gallons of fuel purchased by the City times $2 per gallon. 7 Cost per Vehicle Equivalent Unit plus 10% for ESD and plus 30% for other departments. 22

23 with a budgetary incentive to either reduce their fleet size to the minimum necessary to support mission critical activities. Structuring a new centralized fleet program s finances to operate on a cost reimbursement basis will provide a number of positive benefits for the City including: Improved recognition of cost by shop staff as services are sold rather than given away (or sold for less than their fully burdened cost); Improved recognition of costs by fleet users as price signals are consistently provided through the cost charge-back process; Better activity based costing of City functions as the fully burdened cost of support fleet services are added to organizational costs; Better shop management decisions as service offerings are based on an analysis of competitiveness with alternative service providers; and Better fleet management decisions based on market economic principals and life-cycle cost analysis. Improvement Strategy 4 Develop a fleet budget covering all assets and costs in the City and develop an accurate cost charge-back system to distribute both operating and capital costs back to the appropriate funds, departments, programs, and activities. Action Plan 4.1 Develop a centralized fleet budget including capital costs (i.e. depreciation, reserve fund charges, and/or lease payments) maintenance and repair costs, fuel costs, and an appropriate allocation of indirect and overhead costs. a) Identify current direct budget and expenditure amounts (e.g. funding for purchasing replacement vehicles, personnel, repair parts, commercial service costs, etc.) related to fleet operations and transfer funding from various departments to the fleet Internal Service Fund. b) Identify appropriate indirect and overhead costs to include in the fleet fund such as facility and shop equipment depreciation, Finance Department support and overhead, and general City support and overhead. c) Finalize budget and submit to City Council for approval. 23

24 Finance Department Implementation start: March 1, 2008 Target completion Date: March 31, Develop capital cost charge-back rates a) Identify costs to be recovered through capital charge-back rates. b) Calculate monthly rates for each vehicle class based on adopted replacement financing method. c) Determine budget requirements for each fleet user. Finance Department Implementation start: March 1, 2008 Target completion Date: March 31, Develop operating cost charge-back rates a) Identify costs to be recovered through operating cost charge-back rates. b) Define the services that rates will be charged for (we recommend fleet administration, labor, parts, sublet, pool vehicles). c) Allocate costs to cost pools associated with each service. d) Define rate structure (we recommend a service based or direct charge system). e) Project billable units of service3 (e.g. number of labor hours to be billed). f) Calculate rates Finance Department Implementation start: March 1, 2008 Target completion Date: March 31,

25 STRATEGIC FOCUS AREA #5: FLEET MANAGEMENT INFORMATION SYSTEM (FMIS) Background and Industry Best Practices In all fleet operations, a tremendous amount of information is recorded and compiled in the normal course of procuring, operating, and maintaining the vehicles and equipment used in that operation. In the past, this information was kept primarily in a hard-copy format, on documents that were manually recorded, compiled, and filed. Extracting key data elements by equipment type, user department, or functional area was cumbersome, time consuming, and labor intensive. Similarly, performance evaluation or cost analysis involved extensive manual effort to extract the necessary data and manually transcribe information. Computations were done manually and were prone to errors, requiring even more time to verify and cross-check tabulations. Because of the time and effort required, only the most critical cost and performance indicators were tracked, leaving large quantities of useful data unused and buried in a wide array of records and manual reports. With advances in information technology over the last years, however, analytical procedures that would have required weeks or months of effort can now be performed in a matter of hours or minutes. Key data elements can be instantly compiled, sorted, and summarized to produce information on activities and performance that simply was not available in the past. Real-time access to vehicle repair histories, work standards, parts catalogs, and perpetual inventory records enables fleet management organizations to plan, direct, and control service delivery activities with a degree of precision and efficiency never before possible. At the same time, increased levels of accountability, pressures from private-sector providers, and benchmarking against other organizations have all increased pressure on fleet management organizations to develop and use management information to facilitate improvements and demonstrate proficiency in all areas of performance. Management information systems, in short, have become one of the most important tools for delivering fleet management and maintenance services cost effectively. A comprehensive FMIS must include the following functionality: 25

26 Data Capture abilities; Record Keeping; Information Technology Interface capability and Administration; Ad Hoc Management Analysis; Performance Measurement and Reporting; and Program Management Auditing and Consulting. Current Issues and Opportunities Several City departments have purchased commercial-off-the-shelf fleet management information systems. This would seem to suggest that the City of Boise has an abundance of detailed, objective information on its fleet operations. Nothing could be further from the truth. In fact, we question whether the City could assemble an accurate and up-to-date statistical profile of its enterprise-wide fleet operation without many days and perhaps even weeks of effort. This is because departments have purchased and deployed several different systems that do not communicate with each other, and some of the fleet operations in the City do not use a computerized fleet management system at all. The absence of a central repository of data on the City s fleet despite the collective expenditure of many thousands of dollars on the purchase of existing fleet management software -- makes effective fleet management difficult at best. In view of the importance the City attaches to having a viable fleet operation, it is noteworthy that the City would find it very difficult to measure some of the most basic attributes of enterprise-wide fleet condition and performance in order to gauge its progress toward the attainment of its fleet management goals to say nothing of more prosaic objectives such as maximizing fleet safety, reliability, and efficiency. City s lack of accurate fleet data and data integrity is most telling when evaluating the management of the fleet. Specifically, many departments lack usable, reliable fleet data. Without data, evaluation and analysis of fleet activity and cost are impossible, so informed and knowledge-based fleet management cannot and does not occur. Access to timely, detailed, accurate, and complete data on vehicle costs, utilization, and other aspects of the condition, operation, and performance of a fleet is vital to the effective management of that fleet. Implementation of an off-the-shelf FMIS can facilitate the interface of fuel transactions, financial information, and external repair data from commercial repair vendors. Additionally a bar-coding process for the shop needs can 26