By Mike Antich

The forecast is that calendar-year 2011 will be a repeat of 2010 for most public sector fleets. The persistently sluggish economy promises to dominate the majority of fleet decisions in calendar-year 2011, just as it did in 2010. Public sector fleets will continue to be pressured to lower capital expenditures and reduce operating costs to compensate for tax revenue shortfalls.

In 2011, the primary issue affecting public sector fleets will boil down to revenue versus cost. At all public sector fleet operations, the initial economic crisis (and its aftermath) has translated into reduced funding resulting in older fleet assets and reduced staffing. Public entities are funded largely through sales and property taxes — the two areas most devastated by the economic downturn. These two sources of revenue are not likely to recover in the near future.  

Fleets have been buffeted by the current economic slowdown for the past three years. Historically, counties and cities recover from recessions about 18-24 months after a national economic recovery because of the lag in tax revenue collection. The concern, as expressed by the National League of Cities, is the current downturn will last much longer in certain areas as property tax revenues may be reduced for even longer than anticipated due to depressed property values. Also, business tax revenues will continue to be anemic as many small businesses have closed or relocated to other areas and there are fewer new-business start-ups. In fact, in many markets, property tax revenues are not forecast to return to 2007 levels for another five to eight years. The National League of Cities states these budget shortfalls are expected to be much more severe in 2011-2012. The municipal sector will likely see a fiscal shortfall of $56-$83 billion from 2010-2012 as a result of declining tax revenues and cuts in state funding.

Managing a Fleet with a Zero-Growth Budget

The No. 1 challenge facing public sector fleets in 2011 is budget constraints due to the decline in tax revenues. Over the past three years, fleet managers have watched capital replacement budgets fall prey to the budget axe.

Everything fleet does revolves around money: facilities, salaries, vehicles/equipment, parts, shop supplies, tools, maintenance, fuel, etc. Financial constraints will continue to affect public sector fleets for years to come. Most tax bases remain stagnant. As a result, there is an ongoing push to minimize fleet capital procurements by keeping vehicles and equipment in service longer. All capital expenditures are being intensely scrutinized.

Some fleets report no capital funding approval for FY-2011, resulting in a lack of funding for vehicle/equipment replacements for the third year in a row. This has a significant impact on fleet maintenance as equipment and vehicles are rapidly aging, requiring more funds to keep them running. It's a true case of "pay me now or pay me later." Many fleets are internal service funds, meaning all costs are recaptured through user rates charged to customers. As the economic sluggishness continues, user departments have turned in large numbers of assigned vehicles. Although this is beneficial in "right-sizing" the fleet, it is also detrimental because fewer vehicles assigned to customers mean a fleet's fixed overhead is spread over fewer units, leading to higher charges to the remaining customers.

The challenge for fleet management is to stretch the capital outlay budget as far as possible. Defrayed vehicle purchases must be considered and weighed against the increased expenses of operating an aging fleet. Other funding sources may need to be considered to offset the lack of capital funds, such as lease agreements. Cooperative purchasing agreements are increasingly considered for vehicles, equipment, and parts purchases.

 The budgetary shortfalls have caused grant requests to increase. Grants, and so-called "free" money, are helpful if they allow fleets to acquire needed vehicles. Misapplication, shorter lifecycles, and under-utilization are some of the concerns fleet managers voice about grants that hamstring them into acquiring less-than-optimal vehicles for their fleet applications. While the federal stimulus monies plugged budgetary gaps, all fleets realize this was a temporary fix and anticipate a drop in funding in FY-2012.

A Silver Lining to Lean Budgets

Fleets have made adjustments to deal with tax revenue shortfalls and are not expecting any relief in CY-2011. Fleets are taking various steps to address these economic constraints. The silver lining to lean budget years and fiscal problems is that fleets have been able to make operational changes not otherwise feasible in better years. Successful examples are widespread decreases in the number of take-home vehicles, fleet right-sizing and consolidations, along with increased insourcing.

Let me know what you think.

mike.antich@bobit.com