Report for Executive Committee October 7, 2009 meeting.



Retained Earnings – Use and Disposition

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|Recommendation: |

|That Executive Committee recommend to City Council: |

|That the creation of a Fleet Replacement Reserve be approved. |

|That funds from the current Fleet Services Retained Earnings be |

|allocated as follows: |

|$10M – facilitation of transition to a Fleet Replacement Reserve |

|$7.5M – implementation of a fleet management system |

|$4.5M – procurement of advanced, fuel efficient technology for the |

|Municipal fleet |

|$2.5M – acquisition and installation of a fuel monitoring system for|

|the Municipal fleet |

|That the remaining Retained Earnings balance at December 31, 2009, |

|be allocated on a one-time basis to the Capital Program for |

|tax-supported vehicle fleet requirements. |

Report Summary

This report requests approval for the creation of a dedicated Fleet Replacement Reserve and outlines the specific use and disbursement of Retained Earnings to assure maintenance of the City’s fleet to expected levels.

Report

Fleet Replacement Reserve

Fleet Services’ current billing structure allows for the inclusion of fuel and maintenance costs in fees billed to clients. Budget constraints have prohibited the increase of client billing rates resulting in rates being misaligned with actual maintenance costs. This misalignment has prevented full cost recovery and has required the use of Retained Earnings to cover any shortfalls. This practice has raised concern over the ongoing ability to replace fleet vehicles at the end of their lifecycle.

As a result of this concern, and in ongoing support of the Fleet Services Transformation Program, Corvus Business Advisors (Corvus) was contracted to complete an analysis of current fleet replacement financial practices, requirements, and provisions to identify areas for recommendation. (Attachment 1)

A core recommendation identified in the review was to separate fleet replacement from operating costs and fuel to provide the necessary transparency to monitor and ensure full cost recovery. Charging clients a fleet replacement provision will provide the necessary funds required for the replacement of the fleet as it ages and ensure that the operating charge allows for the recovery of fleet management service costs incurred by Fleet Services. This method of billing will remove the current disparity amongst City departments in the sharing of Fleet Services costs due to the various billing methods.

Another core recommendation was to include the use of a dedicated Fleet Replacement Reserve, which will allow Fleet Services to:

• appropriately fund the Fleet Replacement Reserve on a go-forward basis

• create a simplified budget approval process

• allow for the smoothing of capital cost impacts year-to-year

• be transparent in fleet replacement funding

Transition to a Fleet Replacement Reserve

It is anticipated that in order to move to a Fleet Replacement Reserve while maintaining continuity of replacement needs, $10M should be allocated from Retained Earnings to facilitate this transition over a period of time.

Fleet Management System

Four separate and independent studies, including the Office of the City Auditor’s 2007 MES Audit, identified the need for an effective information system. The current system has severe limitations and is poorly suited to its current use in fleet management.

Aggregate recommendations highlighted the need for management reporting on maintenance activities, customer service level management, and more robust and transparent data integrity.

The findings align with existing major Canadian municipalities who have indicated that fleet-centric data management systems are critical to the optimization of fleet service operations. Currently, the City of Edmonton is the only major Canadian centre operating without such a system.

A comprehensive business case prepared by Fleet Services confirmed that a $7.5M investment will yield net future financial benefit to the corporation of between $10M and $17M when coupled with business process rationalization. This level of fiscal benefit is unachievable without a system that provides higher functionality, flexibility, work facilitation, real-time data collection, operational support, and reporting.

The Strategic Enterprise Transformation (SET) team prepared a concept Value Management Case (Attachment 2). Findings suggest that Fleet Services move forward with the Request for Proposal (RFP) process given that the ability to meet the existing critical need for improved service delivery is significantly reliant on the information system in place. Additional long-term benefits identified included flexibility in capacity planning, potential outside revenue sources, and improved cash flow with enhanced supply chain models.

The procurement and implementation of a fleet management system has an estimated timeline of 10-12 months beginning in 2009.

Municipal Fleet Procurement - Fuel Efficient and Alternative Technology Further to a November 26, 2007, Council recommendation, Fleet Services applied for and received a grant to support the generation of a Sustainable Fleet Management Plan (SFMP). Booz Allen Hamilton (BAH) was contracted by Fleet Services to assist with the development of the SFMP.

A Fleet Transition Plan was developed for each branch, with a goal to maximize Green House Gas reduction, minimize both capital and operating cost impacts, and minimize the complexity of the fleet in terms of new fuels and vehicles. The goal proposed in the SFMP is to reduce GHG emissions from the City fleet by at least 20% in 2017 compared to 2007 levels.

Transitioning the City’s fleet profile will require the allocation of additional funds to off-set the increased costs associated with procurement of alternative technologies. Through 2017 it is estimated that the incremental cost to procure fuel efficient and alternative technologies for the entire City fleet is $74.0M, with the following breakdown:

Municipal fleet - $12.4M (excluding EPCOR ($5.3M) and Edmonton Police Service ($1.7M)) – represents the incremental cost to incorporate alternative technologies in the Municipal fleet. The largest expenditures will occur in medium and heavy-duty vehicle segments where approximately 35% of each segment is targeted for hybridization.

Transit fleet - $54.6M - represents the incremental cost to hybridize 40% of the Transit fleet (or 280 buses at $195,000 each) through 2017.

Administration recommends the following strategy be adopted to facilitate the shift towards advanced technology within the City fleet composite:

Municipal Fleet:

Allocate $4.5M from Retained Earnings to provide substantial support to start the transition of the fleet to alternative technologies and provide program funding over the next several years. Based on fuel efficient and alternative technology currently available, this infusion of funds would offset the increased cost to branches for capital replacement purchases over an eight-year replacement period (2010-2017).

Transit Fleet:

Given that Transit replacement and growth purchases are funded through grants, it is recommended that specific unit(s) suitable for hybridization be brought forward to Council in regular annual Transit procurement budget cycles.

Fuel Monitoring System

The upgrade and automation of the fuel monitoring system for the Transit fleet has recently been approved by Executive Committee. This initiative is to be extended to the Municipal fleet to allow for consistent vehicle-level fuel monitoring as odometer readings are communicated directly to the Fuel Master system.

Additional benefits:

• eliminates the need for fuel fobs, manual key entry of PIN numbers, and manual odometer reading

• improves security through prevention of fueling for non-business purposes

• automatically authorizes fuel transactions

• ensures prompt and accurate data, which will enhance accounting, preventative maintenance, fuel consumption, emissions and customer billing

A $2.5M allocation of the Retained Earnings balance will fund this initiative.

Retained Earnings Balance

Upon implementation of the above outlined initiatives, it is projected that there will be a remaining balance in Retained Earnings. This balance can be added to the Capital Program.

Policy

The recommendation outlined in this report for the establishment of a dedicated Fleet Replacement Reserve fund is consistent with City Policy C217A – Reserve and Operating Equity Accounts.

Focus Area

• Preserve and Sustain Edmonton’s Environment.

• Shift Edmonton’s Transportation Modes.

• Ensure Edmonton’s Financial Sustainability.

Budget/Financial Implications

The Retained Earnings balance at December 31, 2008, was $35.6M. The projected December 31, 2009, balance is expected to be $35.2M.

Proposed disbursement:

| |Retained Earnings Disbursement|

| |($M) |

|Transition to Fleet Replacement |$10.0 |

|Reserve | |

|Fleet Management System |$7.5 |

|Advanced Technology – Municipal |$4.5 |

|fleet | |

|Fuel Monitoring System – Municipal|$2.5 |

|fleet | |

The approximate balance of Retained Earnings after distribution will be $10.7M, which would be allocated on a one-time basis to the Capital Program for tax-supported vehicle fleet requirements.

|Justification of Recommendation |

|Adopting the recommendations outlined in this report will allow for:|

|the optimized usage of funds for fleet operations through a Fleet |

|Replacement Reserve |

|an integrated information system for a more effective and efficient |

|fleet operation |

|achievement of Council’s Green House Gas targets (Municipal fleet) |

|the automation of the fuel management system (Municipal fleet) |

|a contribution to the Capital Budget Program |

Attachments

1. Corvus Business Advisors – Fleet Management Audit Analysis & Recommendations – Executive Summary

2. Value Case Summary

Others Reviewing this Report

• J. Tustian, Deputy City Manager

• R. Boutilier, General Manager, Transportation Department

Others Approving this Report

• C. Warnock, Chief Financial Officer and Treasurer

• A. B. Maurer, City Manager

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