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Acquisition Options for Public Fleets

Like his counterparts in thousands of government fleets across the country, Steve McCarthy, equipment operations manager for the Utah Department of Transportation, is coping with a “new normal” operating budget that is about half of what it was just a few years ago.

“The state reduced our capital outlay budget by 40% in 2009” for heavy-duty equipment, McCarthy said. “It’s been at that level since and inflation and rising costs have eaten up another 10%, so we’re at about 50% of what we were in 2008.”

When it comes to government vehicle acquisitions, cash is still king. But with budget cutbacks at the state, county, city and municipal levels, purchasing directors and fleet managers are considering multiple acquisition channels. McCarthy and the UDOT are tapping into several options, some old, some new, for the 3,000-vehicle fleet. For example, UDOT has been using short-term three-year contracts with local vendors to get access to new backhoes and other heavy-duty equipment. All contracts contain annual renewal options. The vendor has the option to submit a price increase at the end of each year’s term and the state has the option to walk away. But ultimately, the state is able to acquire equipment without having to dip into funds that aren’t there.

“We’re trying to eliminate dollars out of that capital budget,” McCarthy said.

Money is just as scarce in Jackson County, Ga., but Len Bernat, purchasing manager, has been able to keep the 330 county vehicles on a regular replacement schedule, thanks to cutbacks in other areas.

“Money is tight, but we took the stance that if we allow our vehicles to get far past their usable service life than we normally do, we’re actually hurting the county and the cost of catching up later on would be extremely high,” he told Light & Medium Truck. “We’ve stayed with our vehicle replacement policies to maintain a strong fleet.

The money has come out of the county’s personnel side via reductions in force, furloughs and discontinued retirement match, Bernat said.

“You’ve got to find ways of being creative in doing all this.”

Piggybacking on state vehicle specification contracts by smaller entities within the state has been a standard option for decades. This enables counties, towns and municipalities to benefit from the volume discount that they otherwise couldn’t receive.

Regional cooperatives are getting greater scrutiny for similar reasons; smaller participating fleets can acquire vehicles at overall savings in spec’ing and administrative costs.

The Mid America Council of Public Purchasing has about 14 entities, including Illinois, Idaho and others, said Dale Bauer, with the Johnson County, Kan., purchasing division. Bauer’s division, in turn, buys for 40 smaller entities, he said.

In some cases, regional cooperatives are cooperating. The Kansas City Regional Purchasing Cooperative, which serves 64 agencies in its area, uses the Houston-Galveston Area Council, another purchasing cooperative in Texas, to acquire fire trucks, sewer cleaning trucks and other small-volume heavy equipment, said Rita Parker, program coordinator with KCRPC.

Leasing

There is growing interest in commercial leasing as a means of acquiring vehicles, but it is still a new process for governments and can require some deft management by the parties to work, several experts said.

“With the economic problems experienced nationwide, many, especially smaller governments, are looking favorably at leasing because their own capital resources are so limited,” said Bob Stanton, director of fleet management with Hillsborough County, Fla. “Leasing allows them to spread their capital over a broader spectrum of vehicles.”

Typically, the leases are for short terms or with annual renewals to give the entity an “out” at no obligation if the funding changes or stops, Stanton noted.

Many states and counties have set up internal leasing programs which are essentially internal accounting maneuvers. The agencies acquire and then “lease” vehicles to other agencies.

“The cities benefit by spreading out their capital, the county benefits by increasing their purchase volume which (hopefully) gives them more purchasing leverage with their suppliers,” Stanton said.

Utah’s light-duty fleet relies on an internal leasing program that effectively pays for itself, said Sam Lee, director of the fleet operations division.

Lee oversees about 4,300 vehicles leased to about 45 agencies and state-run entities, such as schools. The agencies pay a monthly fee that covers all costs and a guaranteed replacement vehicle.

“The lease payment is like money in the bank toward the next vehicle,” Lee said. “Agencies pay along the way, and as soon as we reach the trigger, whether it’s age or miles, then we replace the vehicle.”

Although the lifecycle for all vehicles have been extended by about 15%, the regular payments have helped the fleet avoid big disruptions in availability, Lee said.

Oklahoma State University has about 150 leased vehicles in the 600-vehicle fleet, said Chris Hoffman, fleet manager, and current president of the National Conference of State Fleet Administrators. The vehicles are spread around the state at the school’s campuses. They run on a three- to four-year life cycle depending on mileage.

“Small fleets are doing more leasing than in the past,” he said.

Although more fleets are looking at leasing, it’s not clear how many are signing on the dotted line.

“We are seeing an increase in requests for leasing in bids,” said Cheryl Graham, business development manager for State & Government with fleet management company ARI, Mt. Laurel, N.J. “Leasing is a topic in more roundtable discussions and it’s something public fleets are starting to explore. Some public fleet sectors are starting to become more corporate-oriented in the way they manage their fleet,” she said.

There are two primary types of lease structures available, Graham noted in an email; closed-end and open-end.

“Generally, an open-end lease is treated as an operating lease,” Graham said. “The asset is on the books of the management company and the government entity will simply treat it as an operating expense for accounting purposes.

“In a closed-end lease, a flat monthly rental rate is determined for each make and model based on term and expected mileage. A residual is placed on the lease based on these factors and the monthly rental rate is calculated on the depreciated portion. This lease allows you to walk away at the end of the term with no other responsibility other than possible expenses for excess wear and tear or mileage overages.

“Our experience has been that closed-end leases are preferred by government entities. The purchasing divisions are more experienced in the concept and are more comfortable with this type of contract,” Graham said.

Matthew Betz, vice president of government fleet services with LeasePlan USA, Alpharetta, Ga., said more of the requests for proposals from government entities include both vehicles and maintenance.

“It’s no secret that the economy has really stressed the budgets of governments at all levels. Due to staff reductions, there may be fewer technicians to repair . . . vehicles. The impact begins to ripple into other areas including longer turnaround times

for repairs, more downtime, reduced productivity and lower internal client satisfaction scores. For that reason, many of the RFPs we see from government fleets are for leases that include all maintenance and collision services,” he said.

Reverse Auctions

Another growing option is to let vendors bid down the cost of vehicles and equipment via an online reverse auction. Instead of receiving one bid from several vendors and selecting the lowest, vendors compete against each other, driving down the contract price. The city of Chicago saved about $16 million on 100 new police sedans and SUVs in late February this way.

The auction, in this case run by Electronic Auction Services Inc., Hudson, Ohio, included four vendors bidding to supply the police interceptors and four-wheel-drive SUVs.

The vendors do not see who is bidding or the other prices, said Ben Koberna, EASI managing partner. The only thing they see is where their latest bid puts them in relation to the other bids.

“All they see is their [relative] place,” he said.

The Chicago auction was conducted in two groups; one for the sedans and one for the SUVs. The sedan auction took five hours and 20 minutes, Koberna said.

The city received “a few hundred” counter bids from the four vendors in one of the packages, according to the Chicago mayor’s office.

“This . . . brings down the cost, of course, but it also improves the transparency around the process and its credibility,” said a spokeswoman for the mayor’s office.

Reverse auctions enjoyed early success about a decade ago, but “fizzled,” Koberna said, because of ethical issues and the methodology. New technology has improved the process and credibility, he said.

The recession also has helped to increase interest, he said.

“In 2007 and 2008, it was hard to convince buyers they needed to use it,” Koberna told L&MT. “It was hard to convince vendors to use, too. But with the downturn, there was suddenly renewed interest.”

Vehicles rank in the top 5 equipment categories that do best in reverse auctions, Koberna said, adding that most vehicles types are suitable for reverse auctions with savings generally ranging from 8% to 14%.

The best deals are for hardware, software and telecom products. The savings there are in the 30% to 40% range, Koberna said.

This was the second reverse auction Chicago has done, and it is scheduling more for other equipment, the Mayor’s office said.

By Jim Galligan, Editor

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