Cash – If a city has uncommitted cash on hand, it could be used to start a vehicle replacement fund. Otherwise, this method is rarely available, and it is not viable as a sustainable strategy.
Savings – MTAS advocates the establishment of a replacement fund. Departments would make regular contributions in the form of monthly charges to the fund based on vehicles in department fleets, their cost and expected life. This method reduces volatility and keeps department heads focused on vehicle use levels. The fund will have to be carefully set-up and monitored to ensure that contributions are where they need to be – not too low as to fall short of having money available to follow the replacement plan and not too high as to invite raiding of the fund for other city uses. Note: the accounting of capital and operating funds will have to be kept separate.
Debt – Issuing debt for purchase of most city vehicles/equipment is not recommended as a long-term routine strategy. The perception is that it is fiscally irresponsible to use debt to pay for equipment essential for day-to-day operations. Debt issuance has generally been reserved for large, expensive equipment that is expected to last 15-plus years.
How does a city start a vehicle replacement fund – particularly when there is a backlog? The answer may be using a combination of cash on hand and issuing debt.
As noted above, MTAS recommends:
- An Internal Service Fund from which all maintenance of vehicles and equipment will occur. This fund will track and charge maintenance and repair costs to the appropriate department; and
- A Vehicle Replacement Capital Projects Fund within the city’s general fund to provide a repository for funding of vehicles/equipment. Note: Enterprise funds should have vehicle replacement capital project funds separate from the city’s general fund.