Final Report on Selected Fleet Management Practices. Town of Groton

Transcription

1 Final Report on Selected Fleet Management Practices For the Town of Groton May 2005 Submitted by: MERCURY ASSOCIATES, INC.

2 Final Report on Selected Fleet Management Practices For the Town of Groton May 2005 Submitted by: MERCURY ASSOCIATES, INC Comprint Circle Gaithersburg, MD

3 TABLE OF CONTENTS Introduction... 1 Study Objectives and Approach... 1 Study Methodology... 2 Overview of the Town s Fleet... 2 Operating Charge-back Rates... 4 Rate Development Objectives... 6 Approach and Methodology... 8 Identify Costs to be Recovered... 8 Define the Services Provided by the Fleet Organization... 9 Define Rate Structure Allocate Costs Determine Billable Units of Service Calculate Rates Analysis of results Vehicle Utilization Analysis Approach Utilization Recommendations Fleet Replacement Cost and Financing Analysis Principles of Effective Vehicle and Fleet Replacement Development of the Replacement Plan Fleet Replacement Financing Strategies Responsibility and Authority Consolidation Opportunities Current Organizational Structure Consolidation Recommendations Appendix Mercury Associates, Inc. i

4 Introduction The Town of Groton, CT retained Mercury Associates, Inc. to assess several specific practices associated with the management of the Town s fleet. The specific areas of endeavor and issues we addressed in this study were the financial management of the fleet, vehicle utilization, and fleet management program consolidation opportunities. This report presents the results of that study. Mercury is a fleet management consulting firm that works primarily with federal, state, and local government jurisdictions and specializes in identifying opportunities to improve fleet management effectiveness and fleet performance and to reduce fleet management, ownership, and operating costs. Mercury has conducted studies for more than 200 government jurisdictions with fleets ranging in size from fewer than 100 to more than 30,000 vehicles and pieces of equipment. Study Objectives and Approach There were four primary objectives of this project. The first was develop service-based cost charge-back rates that can be used to charge fleet users for the goods and services that they obtain from the Fleet Division of the Department of Public Works. The second was to evaluate the utilization of a subset of light-duty vehicles in the fleet and identity any opportunities to eliminate under-utilized vehicles or share fleet resources more efficiently. The third was to determine how much the Town should budget annually for fleet replacement if it is to replace its fleet assets in accordance with reasonable service life cycles. The fourth was to evaluate the benefits of consolidating the vehicle and equipment maintenance and repair functions of the Fleet Division and the Parks and Recreation Division. In order to achieve these objectives we conducted the following project tasks: 1. Developed an inventory of, and obtained age, utilization, and other pertinent information on each asset in the Town s fleet; 2. Developed service-based charge-back rates for recovering the costs of various fleet management and maintenance services; 3. Conducted a vehicle utilization analysis on 55 light-duty vehicles; 4. Developed replacement cycles considering both age and use for all of the different classifications of vehicles and equipment in the fleet; 5. Developed a 20-year replacement plan that quantifies future vehicle replacement dates and costs based on life cycle guidelines and other planning parameters for each type of vehicle in the fleet; 6. Quantified the funding requirements associated with financing projected replacement costs under three alternative financing approaches: ad hoc Mercury Associates, Inc. 1

5 appropriations of cash; a replacement reserve or revolving fund and cost chargeback system; and debt financing; and 7. Evaluated the maintenance and repair operations of the Fleet and Parks and Recreation Divisions as they pertain to possible consolidation of services. Study Methodology The methodology that we employed in this project included the following elements: Analysis of Quantitative Data. An information request was forwarded to the Town requesting documents and data pertaining to all of the functional areas of fleet management examined in this report. Quantitative data on various aspects of the fleet operation were obtained. Analyses of this information provided the basis for many key findings, conclusions, and recommendations. Review of Documentary Materials. We reviewed numerous documentary materials related to the conduct of the fleet management functions discussed herein, including policy and procedure statements, financial statements, invoices, and management reports. Interviews. We conducted interviews and meetings with Public Works staff to obtain an understanding of the current fleet operations. Utilization Survey. We conducted a web-based survey of vehicles that were identified as potentially underutilized. The information that we received through this survey, and subsequent interviews, formed the basis of our recommendations for reductions in the size of the Town s fleet. Overview of the Town s Fleet The Town of Groton owns a diverse fleet of 218 vehicles and pieces of equipment with an estimated replacement cost of $10.4 million (in current dollars). The fleet includes a wide variety of units, ranging from light-duty vehicles such as passenger sedans, sport utility vehicles, and pickup trucks to specialized equipment such as backhoes and wheel loaders. The charts below illustrate the distribution of vehicles in the fleet by major vehicle and equipment classification and by department. The average age of the vehicles and equipment in the Town s fleet at the time this study was conducted was 75 months (6.25 years). The average age of some of the major classes of vehicles and equipment are provided in the table below. Mercury Associates, Inc. 2

6 Town of Groton Vehicle & Equipment Age by Class Vehicle/Equipment Classification Average Years in Service Police Patrol Sedans 3.0 Sedans 6.6 Pickup Trucks 6.3 SUV 4.9 Construction Equipment 7.6 Tractors 11.4 An average fleet age of 6.25 years equates to an imputed average replacement cycle of 12.5 years. Our work with numerous clients has shown that the average recommended replacement cycle for diverse municipal fleets (light duty and heavy duty vehicles and equipment) generally falls between 7 and 9 years, depending on the mix of vehicles in the fleet. Thus, the Town s fleet is relatively old which is one of the reasons why a more effective fleet replacement program where the fleet organization has the authority to replace vehicles and equipment is needed, as is discussed in detail later. The graph at the top of the following page depicts the distribution of the assets in the fleet by model year. Mercury Associates, Inc. 3

7 Town of Groton Distribution of Fleet by Model Year & Before Model Year Number of Units Operating Charge-back Rates This section of the report discusses the development of new operating cost charge-back rates for the Fleet Division, including the methodology used to develop these rates. The Town s current rate structure was implemented with the inception of the fleet program approximately 10 years ago. Town vehicle and equipment users are billed for maintenance and repair at a straight wage rate (actual hourly cost (salary only) for mechanics). The cost of parts, sublet repairs, and fuel are passed through to the customer with no additional markups. Outside agencies that are supported by the Town (i.e., Fire Departments and COG Police) are billed at the mechanic s actual hourly rate of pay plus a 20 percent markup on parts and no markup for sublet services. Outside agencies that are not supported by the Town of Groton (i.e., SCRRRA and Stonington landfill) are billed at the mechanic s actual hourly rate of pay plus 30 percent markup on parts and no markup on sublet services. There are four basic types of cost charge-back systems used by fleet service organizations, as described below: Mercury Associates, Inc. 4

8 Proportional Cost Allocation Systems these systems distribute fleet services costs to fleet user agencies by allocating the fleet service organization s costs to customer organizations using an allocation statistic such as the percentage of vehicles in the fleet that is assigned to each customer agency. These systems have the advantage of being simple to calculate; easy to administer; and also provide budget certainty for customer organizations. The principal disadvantage of these systems is that they do not promote cost recognition (capital and operating costs are mingled together, and it is nearly impossible for customers to understand and measure their costs against market comparables). They also are not equitable because all user agencies are charged the same unit cost per vehicle regardless of the types of vehicles and equipment in their fleets, how much they utilize these assets, and how well (or poorly) they operate and care for them. Time-Based Systems these systems charge the cost of fleet services activities to customers on some increment of time, the most common of which is by the month. Costs are normally grouped into vehicle classes and charges to customers are based on the average unit cost in each class. The advantages of these types of systems are that they work well for fixed fleet costs such as vehicle depreciation (which are time based) and they also provide budget certainty for customer organizations. The principal disadvantages of these systems are that they are difficult to calculate and administer; they result in cross subsidization between customers and funds (because low-cost units subsidize high-cost ones); they do not facilitate cost recognition (capital and operating costs are mingled together, and it is nearly impossible for customers to understand and measure their costs against market comparables); and they are not equitable (because everyone is charged the same regardless of their driving behavior and actual costs). Usage-Based Systems these systems allocate fleet costs to users based on the number of miles (or engine hours) that are driven in a defined period of time (normally monthly). As with time based systems, vehicle class average charge-back rates are calculated. The advantages of these types of systems are that they work well for variable (but not fixed) fleet costs and they also provide budget certainty for customer organizations. The principal disadvantages of these systems are that they are difficult to calculate and administer; like time-based systems they result in cross subsidization among customer agencies and funds; they do not promote cost recognition; and they are not equitable (because everyone is charged the same regardless of their driving behavior and actual costs). Another disadvantage of usage-based systems is that fleet management organizations are forced into the position of being the usage reporting police and are required to hound customers each month to complete mileage reporting forms. Mercury Associates, Inc. 5

9 Service-Based Systems These charge-back systems operate much like those used by commercial repair shops and car leasing/rental companies. Fully allocated charge-back rates are calculated for each line of business in which the fleet management organization engages (such as vehicle maintenance and repair labor, vehicle acquisition and disposal, parts, fuel services, etc.). Customers are then charged for the actual services that they consume, such as hours of labor (at a fully burdened rate per hour). The advantages of these systems are that they are intuitively understandable; they are equitable in that customers pay only for the specific goods and services that they consume; and there is limited cross subsidization between customers and funds. The principal disadvantages of these systems are that they are somewhat complex to design and maintain; they are very dependent on the quality of data captured on the shop floor and at the parts counter; they can cause customers to experience fluctuations in fleetrelated expenditures from month to month and year to year (and so accurate budgeting can be difficult); they may encourage customers who run out of funds at the end of a fiscal year to defer vehicle maintenance in order to stay within budget; and they encourage customers to scrutinize and question the rates used and prices charged by the fleet management organization (which we consider to be an advantage of these systems). Notwithstanding these disadvantages, this is the type of charge-back system that we recommend the Fleet Division use because we believe that it will provide the greatest benefit to the Town in promoting the cost-effective provision and consumption of fleet resources and services. Therefore, the rates that we have developed for the Fleet Division are service based charge-back rates. The new service based charge-back rates have been computed based on information provided by Fleet Division and Public Works staff. The model created is a Microsoft Excel workbook, consisting of linked worksheets, which computes rates based on budget, expenditure, full-time equivalent employees (FTE), performance statistics (i.e., direct billable mechanic hours), vehicle count, and other data input to it. Rate Development Objectives In developing new service based charge-back rates, we were guided by several important objectives, each of which is discussed briefly below: Recover all Fleet Service Division Costs. A fundamental objective of all cost charge-back systems is to recover the full cost of the goods and services provided to customers by an internal service fund organization. This requires that three aspects of the charge-back process be handled properly. First, the projected costs included in the rate base (the total amount to be recovered through user charges) should reflect the costs that will be incurred in the year for which rates are developed as accurately as possible. Second, projected sales of the goods and services for which rates are developed Mercury Associates, Inc. 6

10 should reflect actual consumption as accurately as possible. Third, the billing process should capture data on all such sales transactions accurately and completely. Promote User Understanding of Fleet Costs The principal reason government jurisdictions use internal service funds and charge-back systems is to promote the cost-effective management of resources. A properly designed charge-back process does this by enabling customers to understand what they are paying for and how much they are paying for it. In principle, if fleet users understand how their fleet-related decisions and behaviors influence the charges they incur for fleet resources and services, and if these users are motivated to manage the costs of the resources (of any type or provenance) they consume in order to fulfill their missions, they will make better decisions about their consumption of such resources which will result, over time, in lower fleet costs. Demonstrate Fleet Services Cost Competitiveness A good charge-back system promotes the cost-effective management of resources not only by enabling and encouraging customers to pay attention to the cost of their consumption of resources, but by encouraging them to hold service providers accountable for the competitiveness with which they deliver such resources. Fleet management activities are particularly well suited to the use of a charge-back system because most individuals have at least some frame of reference for judging the reasonableness of rates and charges due to their experience in purchasing and maintaining their personal cars. The same cannot be said of some other governmental support functions such as building maintenance and information technology services. Steps taken in this study to modify the rate structure to better reflect the costs of the services provided by the Fleet Division also will highlight any areas in which the organization needs to improve its competitiveness. For example, calculating separate markups for commercial repair services (i.e., specialty repairs that the Fleet Division farms out to local vendors) and parts prevents cross-subsidization from masking potential inefficiencies in one area or the other. It is important to keep in mind, however, that some of the costs included in these rates are neither avoidable to the Town nor controllable by the Fleet Division. Consequently, care must be taken in comparing these rates with commercial service provider rates to compare apples with apples, not oranges. Treat Fleet Users Equitably An important goal of all charge-back systems is to treat customers equitably. This is accomplished by ensuring that each customer pays the full cost of the goods and services it consumes. When fleet users find it difficult to determine how charge-back rates or charges are computed, they often are suspicious of the Mercury Associates, Inc. 7

11 legitimacy of the charge-back system, and more affluent customer agencies may be tempted to conclude that they bear a disproportionate share of costs. In some cases, this may indeed be the case. Implementing service-based rates represents an important step to promote fleet user equity. By their very nature, vehicle usage-based rates result in cross subsidization of costs because they are based on the average cost of a vehicle or piece of equipment, and this cost is derived from actual costs that can vary substantially from user agency to user agency. Avoid Unnecessary Complexity and Administrative Effort A final goal of all well-designed charge-back systems is to avoid unnecessary complexity and administrative effort in the development and use of charge-back rates. The ultimate litmus test for including a rate in a charge-back system is whether or not it will have any impact on fleet user or fleet management organization behavior. If it will not, the costs associated with such a rate should be recovered through another rate. Thus, for example, it rarely makes sense to calculate a separate charge-back rate for shop materials and supplies. The inclusion of charges for such costs would have little or no effect on the behavior of either the Fleet Division employees or customers. (Commercial shops often utilize separate shop or environmental rates in order to keep their hourly mechanic billing rates down.) Approach and Methodology Our approach in developing service based charge-back rates for the Town involved several steps, with analyses of total costs joining information gathered on operations to create a rate structure that provides insight on the total costs of the Division s specific activities. The following steps were used in conducting this analysis: Identify the costs to be recovered; Define the services provided by the Fleet Division; Allocate costs to cost pools that correspond to the services provided; Define the rate structure; Determine billable units of service; and Calculate rates. Identify Costs to be Recovered Our analysis of the Division s cost of providing services began with the budget for the current fiscal year. However, we believe that an analysis based on actual expenditures is more accurate than one based on budget. Consequently, we built the rate model using the current year budget amounts but compared them to the previous year s actual Mercury Associates, Inc. 8

12 expenditures in order to look for any significant changes in line-item costs. Since the Division s budget was in line with actual historical spending, we used the current budget as the rate base. It should be noted that there are some costs that are not included in the Division s current budget and, therefore, are not included in the cost basis for this analysis. These costs include facility depreciation, managerial and administrative support costs from the Department of Public Works, and Town overhead costs. In most organizations with which work that utilize internal service funds and charge-back systems, these cost are included in the fleet cost charge-back rate base. Define the Services Provided by the Fleet Organization Before a fleet management organization s cost of providing services can be quantified in a charge-back system, the services that the organization provides must be clearly identified. The identification of all fleet functions provides the structure for the full allocation of costs to the appropriate service activity so that cross subsidization of rates can be avoided. As with any business function, there are costs associated with the provision of each service (e.g. salaries, overhead, supplies, etc.). Through the use of cost allocation principles the total costs identified for recovery are allocated to each function or cost pool. We identified the following major service activities for the Fleet Division: Fleet Management - The activities associated with the acquisition, specification, inventory and disposal of fleet vehicles. The total costs allocated to this cost pool include: direct and indirect salaries and fringe benefit costs of all personnel involved in the fleet management function and associated operating expenses. Vehicle Maintenance and Repair - The provision of maintenance and repair activities by the Division for vehicles in the Town s fleet and those owned by outside customers. The total costs allocated to this cost pool include all direct and indirect salary and fringe benefit costs of trades workers and appropriate maintenance, management and administration personnel; direct and indirect operating expenses; and other, indirect costs. Parts Procurement and Supply - The procurement and supply of ad-hoc and contract parts purchases for Town vehicles. The total costs allocated to this cost pool include all costs associated with the contracting with parts vendors, procuring parts, managing the parts room, maintaining parts inventories, paying vendors, charges associated with the storage space for inventory, and all other direct and indirect costs of parts procurement and supply. Commercial Repair Management - The administration of commercial repairs of fleet vehicles. The total costs allocated to this cost pool include: the full costs of contracting Mercury Associates, Inc. 9

13 with vendors, administering repairs, transporting vehicles, processing vendor invoices, billing users, and managing accounts receivable. Fuel Procurement and Supply - The procurement, supply, and dispensing of fuel from the Town s fueling facilities. The total costs allocated to this cost pool include the direct and indirect costs of dispensing fuel on-site, operating and maintaining fueling facilities, and all other direct and indirect costs associated with fuel purchasing and supply. Define Rate Structure Charge-back rates are developed by converting the total costs attributable to each service delivery activity into a billing rate. This rate will recover the full cost of the activity when multiplied by the number of units of service projected to be provided in a year. In order to analyze the Division s costs of providing services, rates were calculated for each specific service that the organization provides. For the labor associated with the maintenance and repair of a vehicle, a burdened labor rate based on the number of projected hours billed to a work order was developed. For parts procurement and supply and commercial repair activities, a mark-up rate applied to the cost of goods sold was developed to recover the costs of procurement or supply. Fuel procurement and supply costs were allocated to calculate a mark-up applied to the per gallon cost of fuel. Finally, the costs associated with fleet management administration and other nonmaintenance related activities are expressed in terms of a fixed monthly fleet management fee for each of the Town s vehicles and major pieces of motorized equipment. Allocate Costs Cost allocation is the process of assigning the costs in the rate base to cost pools or lines of business (i.e. maintenance and repair or parts procurement) that correspond to each of the charge-back rates used by the Fleet Division. The specific sources of allocation statistics used in our analysis included: 1) an analysis of Division staff time; 2) the total expenditures by functional area, used for indirect cost allocations; and 3) direct allocations based on function. An analysis of staff time allocations was performed based on interviews with management staff. This analysis allocated each specific employee s time to one or more of customer service functions performed by the Division or to general and administrative activities. The results of this analysis are shown in the rate model that has been provided to the Fleet Division in electronic format. Once the correct proportion of time spent on each activity was determined, the total salaries for each employee could then be allocated to the various services provided by the Division. For example, since the Fleet Division mechanics are required to source and obtain their own parts (the Division Mercury Associates, Inc. 10

14 does not employ a Parts Clerk to manage the parts function for the shop), a portion of their time was allocated to the parts procurement and supply function. The staff time analysis provides more than just a mechanism to allocate salaries and fringe benefits. It also was used to develop statistics for allocating general and administrative costs (such as the costs of office supplies) to specific activities. For example, if 70 percent of the Division s salary costs are attributable to vehicle maintenance and repair, then 70 percent of general and overhead costs were allocated to the vehicle maintenance and repair function. To properly allocate the $1.1 million in projected operating expenditures to each of the Division s services, the allocation statistics and the projected expenditures for FY were entered into a rate calculation spreadsheet created in Microsoft Excel. Individual line-item amounts were transferred to one of the cost pools if the charge was directly related to proving the service, or a number of the cost pools if the charge were a general cost as described above. Determine Billable Units of Service As noted above, charge-back rates are developed by dividing the total costs of specific services accumulated in cost pools, by the annual number of billable units of service projected to be provided. The billable units of service for each cost pool are outlined in the table below: Service Activity Maintenance and Repair Labor Parts Procurement and Supply Commercial Repair Management Fuel Procurement and Supply Fleet Management Billable Units of Service Labor Hours Charged to Work Orders Cost of Parts Sold Cost of Repair Services Purchased Number of Gallons Sold Number of Vehicles Managed The number of billable units of service projected is clearly an important aspect of the rate development process. For instance, an hourly labor rate is based upon projected number of hours charged to work orders by mechanics. If the number of billable hours were reduced by 25 percent, the Division would under collect revenues which would result in a shortfall in the fund. Consequently, it is important to monitor actual billable units of services (as well as costs) over the next year and make appropriate adjustments to rates for the Division s direct-charge activities. Calculate Rates The results of our rate calculations are shown in the following table. Mercury Associates, Inc. 11

15 Labor Costs $ 528,749 Projected Annual Labor Hours 8,400 Hourly Labor Rate $ Parts Procurement Costs $ 63,874 Projected Parts Sales $ 170,640 Parts Markup 37.4% Commercial Repair Procurement Costs $ 12,169 Projected Commercial Sales $ 37,900 Commercial Repair Markup 32.1% Fuel Procurement and Disbursement Costs $ 14,346 Projected Fuel Gallons Pumped 204,670.6 Fuel Markup (per gallon) $ 0.07 Fleet Management Costs $ 45,237 Number of Vehicles 312 Fleet Management Rate $ Analysis of results It is important to note that the rate base (current budget for the Fleet Division) does not include any indirect costs from the Public Works Department or the Town. Indirect costs, or overhead, for services rendered by Town employees outside of the fleet organization are typically allocated to an Internal Service Fund operation and then appropriately passed on to the end user. The maintenance and repair hourly labor rate of approximately $62.95 per hour appears to be competitive with both commercial shops in the area and with other municipal fleet operations that we have worked with. Dealerships in the area have a labor rate between $70 and $75 per hour, as experienced by the Fleet Division. However, since the rate base does not include Town or Department overhead costs or facility depreciation the rate is understated. It should be noted that in the absence of a dedicated parts clerk, mechanics are required to source, order, and pick their parts themselves. The industry standard staffing ratio for a municipal shop operation is one parts clerk for every 8-10 mechanics. Although the shop has only 6 mechanics (including the floor leader), the addition of a parts clerk would increase the capacity of the shop, would help reduce the chance of parts not being charged accurately to work orders, reduce the potential of inventory shrinkage from unrestricted access to the parts room, help ensure that the parts Mercury Associates, Inc. 12

16 stocking levels are appropriate, and help decrease the amount of obsolete parts in the parts room, etc. The position could be called upon to perform other duties as well as time allows. We have calculated a parts mark-up of 37.4 percent to fully recover the cost of parts procurement and supply. This mark-up is somewhat higher than the industry standard. The primary reason for the higher cost is that mechanics who are paid a higher wage than a parts clerk are performing the majority of the tasks normally associated with sourcing, procuring, and obtaining repair parts and supplies. The percentage is also impacted as the result of the small costs that we are dealing with in this situation which more dramatically affects the resulting percentage. The commercial repair mark-up rate is calculated at 32.1 percent. This also is higher than industry standards which range from 10 to 15 percent for the same reasons enumerated above. The fuel services rate was calculated at $.07 per gallon, which is near the middle of the industry standard for fuel mark-ups, which ranges from $.04 to $.09 per gallon. We have calculated a Fleet Management Administrative (FMA) charge of $12.08 per month per vehicle. This rate falls within the industry benchmark of $5 to $15 per month per vehicle. These service based charge-back rates, as well as any type of charge-back rate, should be re-calculated annually and any shortfall or excess must be accounted for in the revised rate calculation. The electronic Microsoft Excel-based rate model has been provided to the Public Works Department. Vehicle Utilization Analysis The purpose of this task was to evaluate the utilization of a pre-determined subsection of the light-duty fleet and identity any opportunities to eliminate underutilized vehicles or share fleet resources more efficiently. The Town identified 55 light-duty units, out of nearly 120 total light-duty vehicles, to be evaluated. Approach The approach used in this review was more interactive than a mandated, fixed percentage reduction that has previously been the norm in the public sector. The first step was to obtain data for determining the average monthly utilization in miles of all Groton light-duty vehicles, excluding police patrol sedans. While mileage is not the sole determinate of the need for a Town vehicle, it does provide a starting point from which further investigation can take place. Vehicles which have high average mileage are typically well utilized and further examination of the need to keep them in the fleet is normally not necessary. However, low mileage does not in and of its self indicate low need or lack of importance in carrying out a department s mission. In performing Mercury Associates, Inc. 13

17 numerous functions expected of various Town departments, it is not uncommon for a vehicle to be driven almost daily but not accumulate significant mileage. The next step was to determine the mean mileage (based on the most recent utilization records 2004) for each class of vehicle. Any vehicle not meeting 50 percent of the mean mileage was identified for additional scrutiny. For the baseline group of all lightduty vehicles, the annual average mileage was found to be 6,163 per year 514 miles per month. Therefore, all vehicles with less than 3,082 annual miles were selected for further review. All of the operators of these vehicles were surveyed to obtain specific information pertaining to their use of these vehicles. This survey employed a Web-based survey form designed by Mercury Associates to gather information for each vehicle such as frequency of use; purpose of vehicle; hours of availability; number of people using vehicle; number of similar vehicles at the location at which the vehicle is domiciled; assigned driver; location of vehicle; if vehicle serves as an emergency response vehicle; and availability of other transportation options. Town departments that had vehicles surveyed were given approximately two weeks to post their responses to the Mercury Associates URL that was established for the purposes of this survey. This on-line survey was pre-populated with certain information on each vehicle (Groton identification number, agency name, vehicle year, make, and model, etc.) to expedite completion of the questionnaire. This also minimized data entry errors. At the completion of the survey, we compiled and analyzed the questionnaire response data, looking for opportunities to maximize the use of these vehicles and/or reduce the number of vehicles in the fleet. This process included conducting interviews with Public Works staff involved in the overall management of the fleet. The success of this review is dependant upon truthful cooperation of agency staff completing these survey questionnaires. Of the original list of 55 vehicles, 12 (22 percent) were identified for additional investigation. Of these 12 units, 7 are located at the Town Hall Annex (134 Groton Long Point Road), 3 are at Town Hall (45 Fort Hill Road), and 1 at the Spicer House (27 Spicer Avenue). Utilization Recommendations It is our recommendation that the Town of Groton reduce the number of vehicles located at the Town Hall Annex from 16 to 11; the number at Spicer Avenue from 4 to 3; and the number at the Town Hall from 5 to 3. The vehicles we recommend eliminating are included in the table below. Mercury Associates, Inc. 14

18 Vehicle # Department Location Year Make Model 105GRO Public Works Town Hall Annex 1999 Ford Taurus 132GRO Public Works Town Hall Annex 1999 GMC Jimmy 173GRO OPDS Town Hall Annex 1997 Chevy Blazer 183GRO OPDS Town Hall Annex 1997 Chevy Lumina 202GRO Public Works Town Hall Annex 2000 Chevy Cavalier 101GRO Executive Management Town Hall 1997 Mercury Sable 144GRO Information Technology Town Hall 1995 Mercury Sable 119GRO Parks & Recreation Spicer House 1994 Chevy S-10 Although actual vehicles were identified, the Town should be given the freedom to substitute similar vehicles for the vehicle listed if it makes economical sense to do so due to mechanical condition or other factors. None of the vehicles recommended for elimination are emergency response vehicles. Rather, they are more administrative in use and alternative forms of transportation are readily available. The primary alternatives include other Town-owned vehicles at the same location and personal mileage reimbursement. By reducing the number of vehicles as indicated above and assuming the mileage continues to be the same as FY04, the average mileage by location will increase from 4,898 miles per year to 6,530 for the Town Hall Annex; from 3,273 to 5,455 at the Town Hall; and 4,483 to 6,644 at the Spicer Avenue location. These new averages by location will be more in line with the norm (6,163 miles per year). The sale of these 8 vehicles would result in one-time salvage revenue in the range of $17,000 to $25,000. In addition, the Town would avoid future replacement costs of approximately $195,000 (or almost $20,000 per year) by not replacing these units. The Town would also realize annual operating savings from the avoidance of future maintenance and repair expenses for the eliminated vehicles in the range of $4,000 to $8,000 per year. To accommodate this reduction, we recommend that the existing vehicles at Town Hall and the Town Hall Annex be added to the pool of vehicles for use by staff from all departments located at these sites. Reducing the number of vehicles at these sites should not present a hardship on staff needing to travel in a Town vehicle the majority of the time. Meeting transportation needs with permanently assigned vehicles can be quite costly. Pooling vehicles may require the Town to identify a person or two to schedule vehicles and hand out keys. We estimate the total time required to perform these tasks for this number of vehicles should be no more than 30 to 60 minutes per Mercury Associates, Inc. 15

19 day on a day when all vehicles are dispatched and returned at the Town Hall Annex and an insignificant amount of time at Town Hall. A simple system could be set up to accommodate this process. A Microsoft Outlook calendar could be used to track the scheduling of vehicles. Vehicles could be fueled on site upon return by the driver if needed (less than ¾ full tank) and all drivers would be encouraged to inspect the vehicle before leaving the site for damage. These are similar processes that one would encounter in renting a commercial vehicle. Fleet Replacement Cost and Financing Analysis One of the catalysts for this study was the Town s concern that the Department of Public Works does not have an effective, systematic program for determining when vehicles should be replaced and for devoting sufficient funds to the replacement of these vehicles. These concerns are by no means unique to the Town of Groton. In an economic downturn, one of the first areas that is scrutinized for budget cuts is fleet replacement. Consequently, government jurisdictions all over the country are now beginning to explore the damage done to their fleet replacement programs by the recession of 2001 and its aftermath. In order to understand the requirements of an effective fleet replacement program, it is useful to begin by reviewing the economic principles of effective vehicle and fleet replacement. Principles of Effective Vehicle and Fleet Replacement Vehicles and equipment should be replaced at various points in their service lives depending on the type of vehicle, the nature and intensity of its use, and various other factors. Timely replacement is important for controlling vehicle availability, safety, reliability, and efficiency. The well-known 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 below, 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 point on the Time/Usage axis. That is, when the combined cost of owning and operating the unit is at a minimum, just before it begins to increase. Mercury Associates, Inc. 16

20 As can be seen in this illustration, the bottom of a vehicle s total life cycle cost curve is relatively flat. This means, in practical terms, that there is not a single point in time at which a vehicle should be replaced. Rather, there is a period of time during which the combination of capital and operating costs are at or near their lowest point. Depending on how old a vehicle or a fleet is, delaying its replacement somewhat may or may not have a material impact on the total life cycle cost of that vehicle or fleet. For example, for the typical sedan and other light-duty vehicles in a fleet, this flat section usually represents a period from age 5 to 7 years or from 75,000 to 100,000 miles. The total cost curve is different for every type of vehicle and for every individual vehicle of a particular type. This variability is caused by differences in the design and engineering of different types of vehicles, the effects of differences in operating environments, the quality of care the vehicle receives, and other factors. As a result, it is impractical to apply these principles to a real fleet except by using recommended replacement cycles for a class or type of vehicles, which will approximate the optimal replacement cycle for most of the units in that particular class. Even the best replacement cycle estimation efforts (or policies, for that matter) will not ensure the timely replacement of vehicles if an organization does not make funds available to replace vehicles in accordance with established guidelines or policies. This means that an understanding of the characteristics of different approaches to financing or paying for the replacement of a fleet of vehicles is every bit as important as an understanding of the nature of vehicle life cycle costs. Mercury Associates, Inc. 17

21 There are three basic approaches available to SAMPLE organizations for financing the costs of replacing fleet assets: cash, savings, and borrowing. The graph at right illustrates a 20-year replacement plan for a state government fleet of about 9,300 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 year-to-year fleet replacement funding requirements volatile and somewhat unpredictable because the long-term replacement spending requirements of most fleets are inherently and unavoidably lumpy. This is due, in part, to the 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. It also is results from the fact that, under a cash financing approach, the entire cost of buying a vehicle is paid in a single year the year its is purchased and placed in service. For the balance of the vehicle s service life, there is no capital funding requirement. As can be seen in the graph, there are some pronounced peaks and valleys in future spending needs in this state that any organization would have difficulty accommodating. For example, projected replacement costs are about 45 percent higher in 2009 than in 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. Fortunately, there are two widely used fleet replacement financing approaches that allow government jurisdictions to spread out the capital costs of vehicles over their useful lives. These two approaches make year-to-year replacement funding requirements relatively smooth and predictable, thereby reducing the likelihood that critical replacement purchases will be deferred and that a backlog of replacement spending needs will develop. Mercury Associates, Inc. 18

22 volatile. SAMPLE The graph at left shows the long-term funding requirements associated with financing the replacement costs of the 9,300-vehicle fleet above with a fleet replacement reserve fund and chargeback 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 One of the challenges of managing a reserve fund properly is calculating charge-back 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 cases, fleet replacement reserve funds are raided during tough economic times, regardless of whether they have too much or too little money in them, to help SAMPLE balance the budget. The next graph shows the funding requirements associated with financing the replacement of our sample 9,300-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. Mercury Associates, Inc. 19

23 As in the two previous exhibits, the bars represent projected annual replacement spending requirements. The line in this graph illustrates projected principal and interest payments and, consequently, the fleet s replacement funding requirements. Although the volatility of future spending needs has not changed, funding requirements are now fairly smooth and predictable. 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 (potentially vulnerable) replacement fund balance, 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. Equally, if not more, important to many jurisdictions, 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 or lease purchasing 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 before they are used, whereas lease purchasing permits an organization to pay for its vehicles and equipment while these assets are being used. In the following section of this report, we describe the process we used to quantify the Town s long-term fleet replacement costs and funding requirements under each of the above financing approaches. Development of the Replacement Plan The first step in developing a long-term fleet replacement plan for the Town of Groton was to obtain a current inventory of all vehicles and equipment in the fleet. Required information for each vehicle included a unique identification number; description of the unit; agency name; year, make and model; in-service date; original purchase price; latest meter reading and date taken; and information regarding whether the unit will be replaced, and if so, what type of unit it will be replaced with. The next step was to develop class-specific replacement planning parameters. Establishment of detailed replacement criteria based on the age of the unit and the lifeto-date utilization (miles or engine hours) will enable the Town to better plan for replacing the various types of fleet assets at the most economical point during their useful life. Therefore, once a complete and accurate listing of the fleet assets was compiled, we developed replacement cycles (in years and/or miles of service) and other planning parameters for each of approximately 65 different classes of vehicles and equipment. We developed these parameters based on our experience in developing replacement plans for dozens of other municipal clients. They are consistent with Mercury Associates, Inc. 20

24 industry standards throughout state and local government fleets. It is important to develop fleet replacement parameters that are reasonable and implementable for the specific organization. A sample of the replacement cycle parameters that were established though this process is shown in the following table. 1 Description Town of Groton Fleet Replacement Parameters Replacement Age (Years) Replacement Usage (Miles or Hours) Administrative Sedan ,000 Police Patrol Sedan 3 100,000 ½-ton Pickup Truck ,000 Sport Utility Vehicle ,000 Backhoe 15 10,000 Truck, Medium Duty, Dump ,000 Once the fleet inventory was obtained and the replacement criteria established for the various vehicle and equipment classes in the Town s fleet, we input this information to our computerized fleet replacement planning and cost analysis program. This program is a Microsoft Excel -based simulation program called CARCAP (Capital Asset Replacement Cost Analysis Program). This program is designed to assist organizations in projecting near and long-term vehicle (and/or other fixed asset) replacement costs, depreciation costs, residual values and funding requirements. CARCAP is also used to determine the best way to finance the replacement of capital assets such as vehicles and motorized equipment, and to assist organizations in managing a systematic asset replacement program on an ongoing basis. As expected, given the average age of the vehicles in the Town s fleet, the initial, or baseline, plan we developed reflected a backlog of vehicle and equipment replacement needs. This plan is shown in the following graph. As can be seen, more than $1.4 million worth of assets would need to be replaced during the first year if this plan were followed. OR 1 A complete table of planning parameters used in developing the Town s fleet replacement plan is provided in the Appendix to this report. Mercury Associates, Inc. 21