Thursday, February 11, 2016
To say the last few years have been difficult for city and county governments across the U.S. is like saying Hurricane Katrina caused a little flooding along the Gulf Coast. However, fiscal problems are not new to city and county fleet managers, most of whom now find themselves entering a third budgetary cycle brightly highlighted with cuts to capital funds for vehicle replacement, as well as slashed operating expenses.
The secret to maintaining service levels without going over is a combination of thoroughly analyzing the size and capabilities of the fleet versus the demands of the various departments, buying quality merchandise and performing proper maintenance. “We're doing a number of things to control costs across the board,” says Douglas Weichman, director of the Palm Beach County, Fla., fleet management division. “We're cutting our capital outlays for new equipment, stretching equipment replacement cycles, reducing the size of our fleet based on utilization rates, reducing , extending maintenance intervals — the works,” he says. “We've even had to lay some people off, though all of the other cost control measures are helping us avoid doing more of that.”
To cut capital outlays for new equipment, Weichman's department analyzed the entire fleet last year to determine which vehicles needed replacing and which ones could go another year or two. The end result: an $8 million reduction in the normal $20 million annual capital budget for new equipment.“We also went through the fleet and gauged utilization rates, as the economic downturn is resulting in reduced services in many departments,” Weichman says. For example, Palm Beach County's Parks and Recreation Department reduced mowing operations from four times a month to two. Across the county, such operational shrinkage allowed Weichman to trim 300 pieces of equipment from the county's 4,500-unit fleet.
As a result, money earmarked for vehicle purchases was returned to the departments. “Each department within the county got back millions that originally would've paid for new and equipment,” Weichman says. “It helps them in the short term, but we can't keep doing that. At some point, the age of the fleet catches up to you, and you start spending more money on fuel and maintenance as a result.”
In a (DB), the employer guarantees a final retirement payment based on a formula that usually considers the employee's salary, the length of service and an estimated retirement year. Employers and often employees contribute to an employer-managed fund. Regardless of the fund's investment performance, the employer is liable for the full benefit promised by the formula. To the extent that pension assets are insufficient to pay the promised benefit, the employer has an unfunded liability. Accounting rules require that employers keep the unfunded portion of the liability within general guidelines, and a serious shortfall can be hazardous to the employer's credit rating.
Given the markets of the last five years, governments most likely will have to start increasing their pension contributions when the fiscal year begins in the middle of 2011, according to a June 2009 report by New York-based Standard & Poor's (S&P). But, finding the money to devote to the unfunded liabilities will not be easy. “The problem is one of steady future increases [in costs] at a time when municipalities may continue to be strapped for cash because of the effects of the current recession,” S&P concludes.
According to S&P, public pension plans were generally within the 80 percent funding level that accounting guidelines consider acceptable before the economic downturn. But, the public pension plans in 2008 had a median loss of 24.9 percent and a five-year return of 1.95 percent. Given that pension plans typically assume an 8 percent return to meet their funding requirements, the shortfall will become apparent after plans are reviewed in 2010, S&P predicts. Estimates of the total state and local unfunded liability range from $1 trillion to $3.2 trillion, depending on funding assumptions.
From a budgeting perspective, employers prefer DC plans because they know from year to year how much they will be paying, because their contributions are governed by percentage of salary and not by fluctuations in the . In addition, skeptics of DB plans believe they are too vulnerable to changes from employee negotiations and arbitration rulings.
“If you could devise a defined benefit plan that never changes, it's a better plan,” says Doug Williams, who helped convert Oakland County, Mich.'s plan to a DC plan in 1993, when he was deputy county executive. “But, what happens is when you get into bargaining, the employees want to change things — allow people to retire earlier, provide higher factors, require reduced contributions. And the changes go back to the date of hire. All of a sudden, the government is in trouble.”
But, simply closing a DB plan and switching to a DC plan, will not necessarily solve the problem, according to Keith Brainard, research director for the Baton Rouge, La.-based National Association of State Retirement Administrators, First, he notes, when given the choice, 95 percent of public employees opt for a DB plan over a DC plan. He also points out that accounting rules actually raise the cost for employers if they close an underfunded DB plan and convert to a DC plan, until 10 to 15 years after the plan is closed. Finally, he contends, DB plans are important in human resource management, keeping employees on the job and then giving them enough money to retire. Rather than closing the plans, he says, “I believe we will be seeing lower benefits for future hires and higher contribution rates for employers and employees.”