1999 Vehicle and Equipment Replacement Programme

The Policy and Finance Committee recommends:

(1)the adoption of the recommendations of the Budget Advisory Committee embodied in the communication (July, 27, 1999) from the City Clerk; and

(2)that all reference to the CNE, in the joint report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services, be replaced with the words 'Exhibition Place' and that staff review that issue to ensure that this error does not occur in the future.

The Policy and Finance Committee reports, for the information of Council, having requested the Chief Financial Officer and Treasurer to submit a report to the Policy and Finance Committee on the use of alternative fuels for these vehicles.

The Policy and Finance Committee submits the following communication (July 27, 1999) from the City Clerk:

Recommendations:

The Budget Advisory Committee on July 27, 1999, recommended to the Policy and Finance Committee, and Council, the adoption of the recommendations of the Policy and Finance Committee embodied in the communication (July 20, 1999) from the City Clerk, subject to:

(1)amending Recommendation No. (2) by adding the words "including the revisions attached thereto" after the words "Appendix 'F'", so that such recommendation now reads:

"(2)the replacement of vehicles identified in Appendix 'F', including the revisions attached thereto, be approved in the amount of $40 million from the Vehicle and Equipment Replacement Reserve and that the Acting Commissioner of Corporate Services report to the Policy and Finance Committee on specific vehicle replacements for the balance of the allocation contained in Appendix 'E'; and"

(2)the Budget Advisory Committee expressing its concerns to the Policy and Finance Committee and Council with regard to the consultants report and lack of savings found therein;

(3)the Acting Commissioner of Corporate Services being requested to report to the Special Meeting of the Policy and Finance Committee on July 28, 1999, providing an update on the 5 percent reduction in the fleet recommended by the Budget Committee and adopted by City Council during the 1999 Budget process;

(4)a joint meeting of the Administration Committee and the Budget Advisory Committee being scheduled to provide a thorough review of the Fleet Operations to find savings, the said joint meeting to also deal with the issue of the depleted Capital Reserves and the need for possible reliance on leasing of vehicles to better utilize cost reductions; and

(5)the Task Force already established to review the savings from amalgamation of Fleet Operations being requested not to duplicate the work being done by the Administration Committee and the Budget Advisory Committee on this matter.

Background:

The Budget Advisory Committee on July 27, 1999, had before it a communication (July 20, 1999) from the City Clerk advising that the Policy and Finance Committee on July 20, 1999, adopted the following motions with a direction that they be tabled until such time as the Budget Advisory Committee has considered and reported thereon to the Policy and Finance Committee; and having further requested that the Budget Advisory Committee meet as soon as possible to give consideration thereto:

Moved by Councillor Ootes:

"That the Policy and Finance Committee recommend to Council the adoption of the joint report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services subject to:

(1)amending Recommendation No. (2) by deleting the sum of '$16.4 million' and inserting in lieu thereof the sum of '$40.0 million'; and

(2)amending Appendix "F" attached to the aforementioned report by adding thereto the attached schedule";

Moved by Councillor Pantalone:

"That all reference in the joint report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services, to the CNE be replaced with the words 'Exhibition Place' and that staff review that issue to ensure that this error does not occur in the future"; and

Moved by Councillor Rae:

"That the Chief Financial Officer and Treasurer be requested to submit a report to the Policy and Finance Committee on the use of alternative fuels for these vehicles."

--------

(Communication dated July 20, 1999, addressed to the

Budget Advisory Committee from the City Clerk)

The Policy and Finance Committee at its meeting on July 20, 1999, had before it a report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services recommending that:

(1)a maximum of $44.2 million be set as the limit for the 1999 purchase of vehicles and equipment which includes the amount previously approved by Council for the Police Services Board, and 10 snowblowers for Transportation Services, and this funding be allocated by program as per Appendix E;

(2)the replacement of vehicles identified in Appendix F be approved in the amount of $16.4 million from the Vehicle and Equipment Replacement Reserve and that the Acting Commissioner of Corporate Services report to the Policy and Finance Committee on specific vehicle replacements for the balance of the allocation contained in Appendix E; and

(3)the Chief Financial Officer and Treasurer in conjunction with the Acting Commissioner of Corporate Services report on the feasibility of leasing the corporation's fleet requirements, or a portion thereof.

The Policy and Finance Committee adopted the following motions with a direction that they be tabled until such time as the Budget Advisory Committee has considered and reported thereon to the Policy and Finance Committee; and having further requested that the Budget Advisory Committee meet as soon as possible to give consideration thereto:

Moved by Councillor Ootes:

"That the Policy and Finance Committee recommend to Council the adoption of the joint report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services subject to:

(1)amending Recommendation No. (2) by deleting the sum of "$16.4 million" and inserting in lieu thereof the sum of "$40.0 million"; and

(2)amending Appendix F attached to the aforementioned report by adding thereto the attached scheduled."

Moved by Councillor Pantalone:

"That all reference in the joint report (July 13, 1999) from the Chief Financial Officer and Treasurer and the Acting Commissioner of Corporate Services, to the CNE be replaced with the words "Exhibition Place" and that staff review that issue to ensure that this error does not occur in the future."

Moved by Councillor Rae:

"That the Chief Financial Officer and Treasurer be requested to submit a report to the Policy and Finance Committee on the use of alternative fuels for these vehicles."

--------

(Joint Report dated July 13, 1999, addressed to the

Policy and Finance Committee from the

Chief Financial Officer and Treasurer

and the Acting Commissioner of Corporate Services)

Purpose:

This report reviews the funding available for the 1999 vehicle and equipment replacement programme, recommends funding envelopes for each major service area, and recommends vehicle replacements where specific purchases have been identified within the funding envelopes.

Funding Sources, Financial Implications and Impact Statement:

Funds up to $44.2 million for 1999 purchases are available from the Vehicle and Equipment Replacement Reserve. Vehicles with a purchase value of $16.4 million (which includes police and ambulance requests) from the $44.2 million are recommended for authorization immediately, with the remainder to be approved by Council in a future report.

There are funding issues associated with the Vehicle and Equipment Replacement Reserve and, depending on the option chosen, there could be significant funding issues in 2000 and/or 2001.

Recommendation:

It is recommended that:

(1)a maximum of $44.2 million be set as the limit for the 1999 purchase of vehicles and equipment which includes the amount previously approved by Council for the Police Services Board, and 10 snowblowers for Transportation Services, and this funding be allocated by program as per Appendix E;

(2)the replacement of vehicles identified in Appendix F be approved in the amount of $16.4 million from the Vehicle and Equipment Replacement Reserve and that the Acting Commissioner of Corporate Services report to the Policy and Finance Committee on specific vehicle replacements for the balance of the allocation contained in Appendix E; and,

(3)the Chief Financial Officer and Treasurer in conjunction with the Acting Commissioner of Corporate Services report on the feasibility of leasing the corporation's fleet requirements, or a portion thereof.

Council Reference/Background/History:

At its meeting of April 16, 1999, the Budget Committee had before it a report (April 7, 1999) from the Commissioner of Corporate Services entitled '1999 Vehicle and Equipment Replacement Programme' requesting that expenditures totalling $60,170,860.00 be funded from the Vehicle and Equipment Replacement Reserve. This matter was referred back to the Chief Financial Officer and Treasurer and the Commissioner of Corporate Services for a further report.

Discussion:

Current status of Reserve:

The January 1, 1998, balance in the Vehicle and Equipment Replacement Reserve was $81.7 million. As at December 31, 1998, there is an uncommitted balance of $62.7 million in the Vehicle and Equipment Replacement Reserve (see Appendix A for balance by former municipality). The Operating Budget will be contributing $18.4 million to the Vehicle and Equipment Replacement Reserve in 1999 which is a slight increase over the 1998 contribution of $17.1 million. The former municipalities funded this reserve in different ways. In most municipalities, the program areas made a contribution directly from the operating budget to a vehicle and equipment reserve while in others (Toronto and Scarborough) the contribution was a corporate amount. As a group, the municipalities have been underfunding the Reserve for more than just one year.

Appendix B shows (a) the amount that should be in the Replacement Reserve, if the Reserve contributions had kept pace with the depreciating value of the fleet (column entitled ' depreciation to date'), and (b) the contributions made in 1997, 1998 and 1999 on behalf of the service areas. If the contributions had kept pace with the wear and tear of the fleet and equipment, then the Reserve would contain $259.1 million instead of the $62.7 million that it currently contains. If it is assumed that the average useful life of a vehicle is 8 years, then in order to keep pace with the depreciation the contribution ought to be $48 million rather than $18.4 million that is being contributed in 1999. As an indication of the nature of the mismatch between contribution and withdrawal, the Police Service program will have contributed $5.9 million in 1998 and 1999 and yet, will have withdrawn $13.6 million over the same timeframe. On the other hand, other programs appear to have been contributing and withdrawing on a more or less even basis.

Not counting the backlog of vehicles and equipment which are fully depreciated (i.e. reached the end of their useful life) and should have been replaced ($46.3 million just for departments), the five year replacement schedule indicates that approximately $40 million will be required from departments and participating ABC's each year in the period 2000 to 2004. Based on the current vehicle and equipment portfolio, the total annual shortfall in the Operating Budget contribution is, therefore, approximately $22 million (approximately $1 million of this is rate supported).

Regardless of how the City proceeds from here on, it is clear that the Vehicle and Equipment Replacement Reserve has been, and as noted below, continues to be, underfunded and this presents a serious issue with regard to any options for replacing vehicles and equipment in the near future.

Issues surrounding future funding of the reserve will be the subject of a separate report.

Long Term:

The current Vehicle and Equipment Replacement Reserve balance, combined with the estimated contribution to the Reserve from the Operating Budget of $18.4 million in 1999, provides total reserve funding of $81.1 million in 1999. The initial fleet replacement estimate proposed was $60.2 million in 1999. There is, however, demand for replacement from the City Fleet Operations totalling $78.7 million of which the initial estimate included $44.2 million in 1999, with the remainder of $37.2 million to be funded in future years. As well, there is demand in 1999 for replacement from other participating entities of $18.4 million.

While the initially requested purchases of $60.2 million could be funded from the Reserve in 1999, this would largely deplete the Reserve and may preclude a phase-in of an appropriate level of fleet funding in the Operating Budget. Even if the fleet value were to be reduced by 5 percent thus reducing the backlog, the resultant purchases would still substantially deplete the reserve.

Funding Options:

Option No. 1 - Initial Request to Budget Committee:

Based on the assumptions that the backlog is cleared in two years, that the Operating Budget contribution does not change, and that the best available information about the 2000 replacement programme is used, there will be a deficit in the Reserve by the end of 2000. If the projected shortfall of $39.2 million were to be made up from the 2000 Operating Budget, this would represent very significant budget pressure. Even allowing for a 5 percent reduction in the fleet on a go forward basis, there would be a shortfall of approximately $20-30 million which would create a significant pressure on the Operating Budget if required in one year.

Option No. 2 - Restrict the 1999 Request to the Replacement of $44.2 million:

Restricting the 1999 withdrawals to $44.2 million would provide sufficient funding in the Vehicle and Equipment Replacement Reserve to fund the 2000 and 2001 replacement programme. Funding would run out in 2001. In order to sustain the Reserve in the long run it would be necessary to increase the Operating Budget contribution. The amount of the increase and the year in which it ought to start would depend on how much pressure any year's Operating Budget could withstand. It is recommended that an amount of $44.2 million be authorized from the Vehicle and Equipment Replacement Reserve to departments and agencies for vehicle and equipment replacement in 1999. Appendix E indicates the recommended distribution of funds amongst departments and agencies which was arrived at by first providing a proportionate share to each service area, consulting with service areas and making modifications where appropriate.

The Commissioner of Corporate Services in a previous report (April 7, 1999) indicated that the deferral of replacements in 1998 resulted in additional maintenance costs of $924,000.00 and a reduction in salvage value of $550,000.00. A deferral of the magnitude indicated above could have a similar impact on maintenance costs and salvage value in 1999.

Vehicle Replacement:

Appendix F is a listing of the vehicles to be replaced as identified so far by departments and agencies. The replacement of these vehicles is within the envelope provided for in Appendix E. It is recommended that the Acting Commissioner of Corporate Services report further as the other departments identify their lists of vehicles to be replaced.

Lease Option:

One of the options which KPMG (fleet consultant) suggests is that the City explore leasing rather than owning part of the fleet. According to KPMG there appear to be four ways in which leasing might present a better financial option for the City than owning. A leasing company might get better initial purchase prices than the City through bulk purchasing because the firm could purchase in even larger quantities than the City. For specialized equipment purchased in small quantities, this would probably not be the case. The second area which might provide a price advantage to the City is that the lessor might have a lower cost of money than the City; however, given the City's high credit rating, it is doubtful that a leasing company could provide a benefit from preferential rates. Third, a leasing company might be able to get a better salvage price on the disposal of equipment. The fourth area is that the leasing company can take advantage of the depreciation of the vehicles and equipment for tax purposes (capital cost allowance) and this might provide a price advantage to the City.

There are four additional advantages that leasing might provide. The leasing costs would be a fixed nondiscretionary operating budget expense which would be included in each program's budget. The appropriate cost would be applied to the appropriate cost centre and programs would know the exact cost of each piece of apparatus. This should lead to a rationalization of the fleet and better utilization between programs. Leasing provides flexibility in lease payments scheduling and this can provide the City with an opportunity to shift fleet expenses to subsequent years when amalgamation pressures would have subsided. Leasing might provide some other side services such as asset management, and planned replacement and reporting which might reduce administration and overhead costs associated with managing the Fleet Operations. As well, there is a further issue. If the Reserve were to become depleted, replacement financing could not come from the issuance of debentures, since the average useful life of a vehicle is 8 years and normally debenturing is for a term of at least 10 years. Therefore, another funding option would have to be pursued. Leasing is one such potential option.

A preliminary review of this option indicates that it is worth pursuing further. Appendix C is one illustration of the impact of leasing. All or some of the fleet could be leased, but in this illustration only cars, light trucks and heavy trucks (approximately 25 percent of the value of the fleet) are leased for a term of 8 years. (See Appendix D for the current mix of vehicles and equipment.) Assuming no savings from leasing vis-a-vis owning, with a modest annual increase in the Operating Budget, the lease payments can be accommodated and the Reserve preserved to be used for the other vehicle and equipment types. If there were savings from leasing, then they would moderate increases to the Operating Budget.

Therefore, it is being recommended that staff proceed to explore a leasing option so that the analysis can proceed with firm numbers. It is still necessary to do serious analysis to confirm whether leasing can be proven to be a financially viable option. If the City did decide to lease, then it is possible that fleet costs could be reduced in the short run (as in Appendix C). Available reserve funding could be used to phase in the lease payments in the Operating Budget over a longer time period. The contribution to the Vehicle and Equipment Replacement Reserve would be converted to lease payments (depending on the proportion of the fleet leased). Given the actual amounts involved, there would still be a shortfall between the amount currently in the Operating Budget and the funding necessary to cover the lease. Changing from a reserve approach to a leasing approach still requires that the Operating Budget increase in the long run. To lessen the immediate impact, the funds remaining in the Reserve could be used to cushion the schedule of this increase. Thus, it would make sense to minimize purchases in the short run so that more new units could be leased right away. In this way the reserve balance is preserved at as high a balance as possible for this purpose.

This option might increase maintenance costs in the short run and reduce the salvage value of the existing units. If the leasing option is viable, it will still take some time to implement and could therefore be explored to take effect for vehicles and equipment delivered in 2000. This option should be jointly explored by the Chief Financial Officer and Treasurer and the Commissioner of Corporate Services with a report to the Policy and Finance Committee in due course.

Conclusions:

The Reserve for Vehicle and Equipment Replacement is underfunded and continues to be underfunded. Any option will require an increase in the Operating Budget whether to sustain a replacement reserve or to pay for lease payments. The challenge is to find the most appropriate way to phase-in this increase. To fund $60.2 million of vehicle and equipment replacements this year from the Vehicle and Equipment Replacement Reserve as originally requested, while affordable in 1999, is not sustainable in the intermediate term. Restricting the replacement to $44.2 million this year and $40 million annually from then on (the 2001 - 2004 replacement programme average) along with a modest increase in the contribution to the Reserve from the Operating Budget is sustainable in the long run. Leasing a portion of the fleet might be a better option than owning. If this is a serious option, then the benefit to the City is maximized by minimizing fleet purchases in 1999 and pursuing a Request for Expression of Interest as quickly as possible. At a maximum, purchases should be restricted to $44.2 million in 1999.

Contact Names:

N. Donald E. Altman, Manager, Financial Planning, Phone: (416) 397-4220, Fax: (416) 392-3649;

E-mail: daltman@mta1.metrodesk.metrotor.on.ca

Len Brittain, Director, Treasury and Financial Services, Phone: (416) 392-5380;

Fax: (416) 392-3649; E-mail: lbrittai@toronto.ca

Stan Burrows, Director, Fleet Management Services, Phone: (416) 392-1034, Fax: (416) 392-7301;

E-mail:sburrows@toronto.ca

--------

Appendix A

Vehicle and Equipment Replacement Reserve

(Net of Commitments)

$ in Million

 --------

Appendix B

Estimated Original Cost and Replacement Value By Programs $000's
Program	Total			1997	1998	1999
	Original Cost	Current Replacement Cost	Depreciation To Date	Cont. to Reserve	Cont. to Reserve	Cont. to Reserve
Tax Supported Programs
Community Services - Other	502	620	358	69.6	85.1	29.8
Community Services - Housing & Shelter	43	60	34	90.2	69.6	69.6
Community Services - Library	544	805	733	8.2	12.9	13.9
Corporate Services - Other	1,617	2,398	2,082	47.3	62.1	108.1
Corporate Services - Facilities	3,341	4,519	3,045	156.8	186.1	195.6
Corporate Services - Clerks	471	641	305	44.7	48.9	40.0
Financial Services -Revenue & Purchasing	757	1,135	819	7.2	7.2	7.2
EDCT - Parks & Recreation	37,412	50,395	33,360	2,807.3	827.1	2,622.8
Urban Planning & Development	1,235	1,732	1,160	118.5	122.0	278.5
WES - Solid Waste	72,153	86,086	39,509	5,331.2	5,576.7	4,522.5
WES - Transportation	51,516	69,690	45,826	1,571.9	1,643.5	1,536.7
WES - Technical Services	615	874	667	89.5	88.1	4.1
WES - Fire Services	41,273	85,818	72,398	874.6	1,080.7	916.5
WES - Ambulance	11,846	14,660	10,210	85.0	2,098.0	2,352.0
Police Services *	26,697	40,780	30,422	0.0	2,800.0	3,500.0
Heritage Toronto Historical Boards *	108	155	90	0.0	0.0	0.0
CNE *	3,055	3,870	2,275	0.0	268.0	269.0
Toronto Zoo	835	1,329	1,067	158.6	158.6	159.0
Other	88	153	153	0.0	0.0	0.0
Sub-total Tax Supported	254,108	365,720	244,513	11,460.6	15,134.6	16,625.3
Rate Programs
Water Supply & Water Pollution	13,791	19,051	13,902	1,190.0	1,260.0	433.5
Water Supply & Water Pollution - Unlicensed	363	961	705	722.1	679.8	1,341.4
Sub-Total Rate Supported	14,154	20,012	14,607	1,912.1	1,939.8	1,774.9
TOTAL	268,262	385,731	259,119	13,372.7	17,074.4	18,400.2

* 0.0 contribution to Reserve - any purchases funded directly from operating budget.

--------

Appendix C

Leasing Cars, Light and Heavy Trucks and

Impact on Reserve and Operating Budget

$ 000's

Assume:Lease has a term of 8 years and no savings from lease payments in the long runAnnual replacement programme (purchases) would have been $40 million if not leasing

Assume leasing valued at $10.7 million

Operating Budget is increased instead of using Reserve to fund lease payments

Cushion in Reserve not to fall below $5 million.

--------

Appendix D

Schedule of Licensed and Unlicensed Fleet Units

* Transfers out were to City ABC's such as the Parking Authority.

** Transfers in were from the former Scarborough Public Utilities Commission.

--------

Appendix E

Allocation of Funds to Departments and Agencies

*Details of replacement vehicles outlined in Appendix F

--------

Appendix F

Vehicles to be Replaced

*To be reported under separate cover to Policy and Finance Committee

**Previously approved by Council on April 26, 1999

--------

Revisions to Appendix F

Vehicles to be Replaced

--------

Revisions to Appendix F

Vehicles to be Replaced

 --------

Revisions to Appendix F

Vehicles to be Replaced

 The Policy and Finance Committee submits the following report (July 27, 1999) from the Director, Fleet Management Services:

Purpose:

This report responds to the request from the Budget Advisory Committee for an update on the 5 percent fleet reduction.

Funding sources, Financial Implications and Impact Statement:

There are no financial implications as a result of this report.

Recommendations:

It is recommended that this report be received for information.

Council Reference/Background/History:

During its consideration of the joint report from the Chief Financial Officer and the Acting Commissioner of Corporate Services regarding the 1999 Vehicle and Equipment Replacement Program, the Budget Advisory Committee requested a report to the Policy and Finance Committee, to provide "an update on the 5 percent fleet reduction as requested by the Budget Committee and approved by Council during the 1999 Operating Budget process".

Comments and/or Discussion and/or Justification:

City Council approved a recommendation from the Budget Committee requesting a 5 percent fleet reduction by December 31, 1999, when it approved the 1999 Operating Budget. To date, Departments have reduced 110 vehicles from the fleet and have projected an additional 80 vehicles by year end.

The Budget Committee also recommended a zero based review be undertaken, which was approved by City Council when it approved the 1999 Operating Budget. The target date for completion of that review is December 31, 1999.

Conclusions:

Departments have projected a reduction in fleet units of 190 by December 31, 1999. Additional reductions are expected to be achieved through the zero based review.

Contact Name:

Stan Burrows, Director, Fleet Management Services, Phone: (416) 392-7791, Fax: (416) 392-7301

Email: sburrows@toronto.ca