Building your fleet To buy or not to buy? That is the question

As budgets become tighter and vehicle prices rise, many municipalities have had to re-examine how they spend money on fleet vehicles and take a hard look at creative alternatives.

Leasing — something consumers have been doing for years as a way to get more vehicle for the money — is one option that may or may not be feasible, depending on numerous factors.

A municipality’s decision may rest largely on its cash flow and projected fiscal situation — whether it has sufficient cash on hand to buy and what future revenues look like.

Other factors include interest rates, maintenance costs, local availability of leasing services and a municipality’s needs in terms of types of vehicles and their intended uses.

“Leasing is appropriate in certain circumstances and certain financial situations, depending on the intentions and the plans of the user,” says Michael Payne, president and CEO of the Truck Renting and Leasing Association, Alexandria, Va.

Indeed, whether to lease or buy may not be an across-the board decision, since fleet vehicles vary so much in price, hours of service and types of usage. Some municipalities may elect to lease certain types of vehicles — trucks with dumper bodies, for example — and purchase others such as police cars.

But municipalities contemplating leasing must keep in mind that major business incentives to lease — tax deductions like depreciation, lease payments and debt interest — do not apply since local governments pay no taxes to the IRS.

The question of insurance is another potential drawback since some leasing companies require outside insurers. Many municipalities, however, are self-insured.

Additionally, mileage restrictions, which are written into many lease contracts, might sway a municipality against leasing.

Still, one of leasing’s key benefits to municipalities is that it eliminates a large capital outlay for acquisition of vehicles, enabling the governing body to treat the lease payments as operating expenses instead.

Companies such as Ford Motor Credit’s Municipal Financing Unit, Dearborn, Mich., and LaSalle National Bank’s National Public Finance Division, Denver, Colo., offer the municipal lease, a tool that allows acquisition of equipment and vehicles at low interest rates. The municipal lease does not create general obligation debt and avoids the expense of a bond issue.

It acts, instead, as an installment sales contract with payments composed of principal and interest. Equity grows with each payment, and at the end of the agreement, the asset is owned free and clear at no additional cost.

Financing is structured as a series of one-year renewable obligations subject to the municipality’s ability to appropriate funds for continuation of the lease payments. This type of contract also contains a non-appropriation clause stating that any time after the first year, the municipality can walk away from the lease with no responsibility for future years’ payments simply by not appropriating funds for that year’s lease payments.

NUMEROUS OPTIONS

The decision to buy or lease is not a simple one, because regardless of which choice is made, it invariably leads to more decisions. If a municipality seeks to purchase fleet vehicles, for example, it has the option of buying new or used. But regardless of which road the municipality takes, it can conduct the transaction in a variety of ways: with equipment manufacturers, auto companies or dealerships, through state buying programs, over the Internet or at an auction.

If leasing is the choice, a municipality must do its homework to determine which of the many types of leasing arrangements is most suitable. The variety of leasing contracts range from those in which the lessee handles all maintenance and must pay a per-mile rate if it exceeds the mileage limitation written into the lease, to arrangements that are so complete they cover everything but the fuel.

Duane Berger, director of vehicle and travel services for the state of Michigan, is a proponent of leasing. Berger manages a fleet of 11,000 vehicles — all of which are leased — ranging from police cars to snow plows and heavy duty equipment.

“There’s got to be a buy-versus-lease analysis done,” Berger says. However, he cautions that municipalities conducting such analyses must understand the differences between open-end and closed-end leases.

An open-end lease enables the lessee to build equity in the vehicle and purchase it after the lease is at least 12 months old, up until the lease expires. The vehicle is fully depreciated over the length of the lease, and there is no early termination penalty (other than the loss of equity). This type lease is ideal for police vehicles, since the lessee will need to drill holes to install light bars on top and significantly modify the interior — actions that will reduce the vehicle’s residual value. Moreover, open-end leases generally do not have any mileage restrictions.

By contrast, a closed-end lease — also known as a “walk-away” lease — is one in which the lessee does not build equity in the car. This arrangement features a lower monthly payment, and the lessee can walk away at the end without buying the vehicle.

Leasing can be handled by a leasing company, an automobile manufacturer or through another governmental body. For instance, New Jersey’s Middlesex County Improvement Authority offers local governments the option to fund vehicle leases through a joint bond issue. In Connecticut, the state buys vehicles and leases them to local police units.

In many cases, a maintenance agreement may be a prime reason to do business with a leasing company — regardless of whether a municipality plans to lease vehicles from the company. Some municipalities also contract with leasing companies for management services.

Greg McIntyre, vice president of government services for PHH Vehicle Management Services, Hunt Valley, Md., predicts an increase in leasing by municipalities. “In the last five years there has been more of a movement toward looking at alternative ways of fleet management than I’ve seen in the 25 years that I’ve been in the fleet business,” says McIntyre. Maintenance is the biggest growth area for PHH, he adds.

Miami-based Ryder System also has a large stake in public sector fleet vehicle management and maintenance. Subsidiary Ryder/ATE manages such major fleets as the Dallas Area Rapid Transit (DART) system, while Ryder/MLS provides maintenance services to local governments in 19 states.

In addition to services like maintenance, collision repair and management, leasing companies usually have the resources to provide a variety of other services and benefits. Their fleet experience necessitates sophisticated information management systems capable of tracking billing, maintenance scheduling, inventory control, cost analysis, license plate renewals and a host of other things.

Excellent maintenance documentation not only prevents vehicle down-time, it may also help a municipality command higher prices for vehicles it sells at auctions, notes Matt Pape, national marketing director for Ryder Public Transportation Services.

Leasing companies, as well as other firms can also offer their expertise in areas of logistics including route optimization and routing/scheduling systems. “I think the municipalities are prime candidates for logistics services,” says Payne of the Truck Renting and Leasing Association. Sanitation departments in charge of garbage disposal would benefit greatly from routing, route planning and load analysis to get the greatest degree of productivity out of each physical asset and employee, Payne says.

“The technical revolution has brought to bear some very powerful computer tools and software programs that can provide an immense advantage to people who want to utilize these (products),” Payne says.

However, most municipal fleet managers contacted by American City & County cast their ballots for buying rather than leasing. Some lease only a small portion of their fleet — undercover police vehicles, for example.

“We believe that with very few exceptions, purchasing is always cheaper than leasing,” says Catherine Mitchell, fleet services division manager for Tacoma, Wash. A major piece of equipment that is too costly to purchase would be the exception, says Mitchell, who oversees about 2,200 vehicles for the city of 180,000 people.

Sonoma County, Calif., population 500,000, also owns the majority of its fleet vehicles. “From what I’ve seen, the trend is still to own vehicles,” says Dave Head, fleet manager for the county, which has 1,100 vehicles in its fleet and handles most general maintenance in-house.

However, Head says Sonoma County is not totally averse to leasing.

The county receives some federal grant money that only allows for leasing — typically vehicles used for public health and social services. Sonoma also is considering leasing heavy equipment and a prisoner transport bus.

Milton Reid, director of fleet management for Gainesville, Fla., population 100,000, is also in favor of buying. “If you have the funding available, the cost of borrowing money is so cheap that it doesn’t make any sense (to lease),” he says.

Reid says the only instances in which he’s seen municipalities lease fleet vehicles involve specific undercover police operations. Leasing enables frequent replacement of cars, desirable for undercover work.

Software spreadsheets are available to help fleet managers make the comparison between buying and leasing, and leasing companies can offer their own comparisons tailored to a city’s specific needs.

As would be the case in buying from auto dealerships and patronizing certain service garages, municipal fleet managers are more likely to lease from a company they know and trust.

“Our experience dictates that there’s usually a period of ‘get to know you’ before you want to lease,” says Bob Bowes, vice president of sales and marketing, NationaLease, Oakbrook Terrace, Ill, which has franchises in about 20 states. “After the ‘get to know you’ period, when it comes to replacing equipment, [municipalities] are comfortable with what we can provide them.”

While buying still seems much more prevalent, leasing appears to be catching on, according to National Association of Fleet Administrators spokeswoman Lydia Pickens.

Michigan’s Berger agrees. “I think there’s a lot more discussion (of leasing as an option) because I think cash is short and that is forcing some discussion of alternative ways,” he says. A key reason for this is that many municipalities are stuck with aging fleets but are having difficulty coming up with enough cash to acquire new vehicles.

Fuel management streamlines recordkeeping

In addition to taking such steps as outsourcing fleet maintenance and hiring professional management services, some local governments have discovered the cost savings available through use of computerized fuel management systems.

The Kern County (Calif.) Sheriff’s Department, for example, is saving between $17,000 and $23,000 per month since installing its new fuel management system.

The new system, by Fleet Card Fuels, Bakersfield, Calif., has eased the department’s administrative workload, making it possible to reduce from 16 to five the operations staff employees in charge of department vehicles.

The savings are being used for new vehicle acquisitions and improved maintenance, says Fleet Manager Sgt. Charlie Fivecoat.

So far, 20 patrol vehicles have been equipped with the passive fueling system, which uses state-of-the-art technology that eliminates the need for cards or keys to activate the fueling process. The department will equip another 80 vehicles with the system within six months, and nearly 300 patrol cars should have it within a year, says Fivecoat.

The sheriff’s department pays $430 per month to lease the system, plus $5 per vehicle per month for the on-board computer modules.

The system is activated when a ring around the fuel nozzle comes within six inches of an antenna ring affixed to the inside of the fuel spout. An on-board computer unit, which is mounted in an out-of-sight area such as the trunk, records all statistics about the vehicle including vehicle ID number, odometer reading, type of fuel and gallon limit. This data is transmitted to the department’s computers for accurate record-keeping.

Deputies using the passive fueling method no longer have to worry about losing their cards or remembering personal identification numbers prior to fueling.

This passive fueling system is just one portion of an entirely new fuel management system installed for the sheriff’s department. Vehicles not currently equipped with passive fueling can also take advantage of magnetic strip fueling cards that can be activated at their own facilities as well as at hundreds of fueling locations within the jurisdiction.

Additionally, the department has spent about $21,000 to purchase fleet management software from Consolidated Services, Elk Grove Village, Ill., that is compatible with the new fueling system. Prior to installing the new fueling system, department staff had to manually record odometer readings, provide data input needed for paperwork and provide maintenance and upkeep of the fleet.

“We’re quite pleased with the concept and the way it’s working for us,” Fivecoat says.

Outsourcing maintenance can cut overhead

Whether a municipality owns or leases its vehicles, outsourcing maintenance services — or paying someone else to manage those services — are options that ought to be considered.

As is the case with leasing agreements, maintenance contracts can vary greatly in expense and structure. Some contracts call for the lessee to pay so many cents per mile to the lessor, which then assumes responsibility for all maintenance.

Others include extended service agreements that are the equivalent of buying an insurance policy to protect against high repair bills, and still others might call for the lessor to simply manage and coordinate repairs and maintenance.

“The real key in this business is management,” says Dennis Laliberty, vice president of marketing for Wheels, Inc., a leasing company based in Des Plaines, Ill., “making sure the work is done at the right facility, and that the right work is done.” Management also entails keeping tabs on which repairs are covered by manufacturers’ warranties.

Miami-based Ryder System does little in the way of leasing to municipalities, but the company is heavily involved with local governments on the maintenance and management ends.

Outsourcing maintenance offers several advantages to municipalities, says Dave Dawson, director of public relations for Ryder. Among them are not having to keep a parts inventory, purchase expensive diagnostic equipment and retrain technicians to keep them abreast of ever-changing technology.

These things are extremely costly for a small local government, but if many customers share the cost, it is reasonable. “This is the kind of expertise where scale matters,” Dawson says.

The cost of owning and operating a maintenance facility can be a major burden, too. “There’s a great deal of overhead cost associated with that, for heat, light and water,” says Bob Bowes, vice president of sales and marketing with NationaLease, Oakbrook Terrace, Ill. A large leasing company has much better buying power on parts and lubricants than any municipality, he says. In some cases, NationaLease offers to buy or lease a maintenance facility from a municipality, Bowes says.

Handling fleet vehicle service and repairs in-house also means maintenance of underground storage tanks for used oil, transmission fluid, antifreeze and other potentially hazardous substances. Compliance with EPA and OSHA regulations pertaining to these tanks and the proper handling of hazardous materials is expensive, notes Greg McIntyre, vice president of government services for PHH Corp., a fleet leasing company based in Hunt Valley, Md.

Some municipalities have sufficient money and resources — and large enough fleets — to justify doing maintenance in-house and may even be capable of taking on more work. Tacoma, Wash., for example, has become so proficient at maintaining its fleet of 2,200 vehicles, it has approached nearby smaller municipalities with an offer to handle their vehicle maintenance needs.

The city had signed up one municipality for maintenance services as of mid-December 1996, says Catherine Mitchell, fleet services division manager.

Municipalities that handle fleet maintenance in-house often hold onto older vehicles longer, says Tom Moore, executive editor of Fleet Owner magazine. By doing so, they stretch the taxpayers’ dollars while keeping their shops and technicians fully occupied.
— Tom Black