1 DATE: May 3, 2022
TO: Justin Hess, City Manager
FROM: Ken Berkman, Public Works Director
SUBJECT: Fund 532 Fuel Cost Impacts
BACKGROUND
The Vehicle Equipment Replacement F und (Fund 532) is used to account for the operation, maintenance, and replacement of the vehicular fleet and equipment utilized by general government (non-BWP) departments on a rental fee basis. Rental rates are collected from each department based on vehicles’ annual depreciation and operating and maintenance (O&M) costs, which includes fuel.
The FY 2021-22 Fund 532 budget is $13,645,187, which not only covers $4,624,500 of vehicle replacements, but also $1,598,578 in salaries and $7,422,109 of Materials, Supplies, and Services (consultants and contractors, supplies, fuel, utilities, etc.) The proposed overall budget for FY 2022-23 is $16,910,031; the change primarily coming from an increase of about $2,000,000 in vehicle replacements and from several capital improvement projects.
Within Fund 532 is fuel account 532.PW34A.62780, which has been budgeted at approximately $1.5M since FY 2013-14. This account is used to pay for all unleaded, diesel and compressed natural gas ( CNG) fuel for the vehicles that Public Works maintains, including Fire equipment.
The City purchases unleaded and diesel via a cooperative agreement that allows the participating agencies to pay .013 cents per gallon above the pricing established by the Oil Pr ice Information Service (OPIS). While this is a significant discount compared to what the average customer would pay at the pump, it is not a fixed rate and is subject to the same fluctuations in gas prices as the economy at large.
CNG is purchased through Clean Energy at a discounted rate. Additionally, the City has received a $0.25 Alternative Fuels Tax Credit (AFTC) since 2016 for using CNG as an alternative fuel.
This credit is subject to approval by Congress each year and is not guaranteed. The credit has not been approved for 2022 yet.
The City’s purchase cost for unleaded fuel in 2013 averaged $3.01 per gallon for the year; in 2020 the average was $1.97; and while it spiked in March 2022 to $4.76 per gallon; it is currently at an
2 average of $3.83 per gallon this year. Diesel fuel averaged $3.13 per gallon in 2013 ; in 2020 it averaged $1.86 per gallon, and while it too spiked more recently in April at $4.69 per gallon; it is currently at an average of $3.83 per gallon this year as well.
Fuel prices fluctuate over time, sometimes markedly so in response to major events, such as the Russian invasion of Ukraine or the COVID-19 pandemic. The City’s cost per gallon for gas and diesel over the past decade are shown in Exhibit A, as are hypothetical costs per gallon if prices increased with inflation (CPI-U) each year.
DISCUSSION
As noted herein, vehicle rental rates are made up of a combination of depreciation, operation and maintenance (O&M), capital inflation, and overhead. If vehicles are requiring the same fuel usage and prices are increasing, there will be a subsequent increase in O&M costs. The Finance Department calculates rental rates each January using the last c losed fiscal year to project the future fiscal year. For example, FY2023/24 rental rates would be based on FY2021 /22 actuals.
This means fuel prices changing now would have an impact on FY2023/24 rental rates.
As of April 25th, the Fund 532 fuel account has about $510,000 remaining, or 26%. At this time last year, it had about $650,000 remaining, or 41%, which is a 15% increase over last year. Given the anticipated additional cost s for next fiscal year, a $ 158,000 increase in Fund 532’s fuel account line item has been requested. This increase of 10% brings the City’s fuel budget from $1,580,000 to $1,738,000.
Public Works s taff recently worked with a consultant to complete a Fleet Optimization and Diversification Study (Study). The recommendations to be implemented will both reduce the number of vehicles in the fleet and commence phasing in alternative fuel vehicles. Staff is working with all non-BWP City departments to implement the reduction and repurposing of vehicles and developing future plans to transition into a more renewable fuel -based f leet to meet State mandates and the goals of the City’s Greenhouse Gas Reduction Plan . There are Federal and potential State government assistance measures that staff will monitor for impacts to the fuel fund, such as the release of millions of barrels from the country’s Strategic Petroleum Reserve and the State legislature’s considerations of pausing the gas tax or providing fleet incentives to reduce the number of internal combustion engine vehicles.
CONCLUSION
Fuel prices fluctuate because they are driven by anything from demand, geographical loc ation, worldwide events, and economic policies. We have recently seen prices drop due to the pandemic and then rise as the country’s economic recovery began and people returned to work . Notably, the most significant current impact is from the Russian invasion of Ukraine.
Although there has been a significant increase of fuel costs in the past few months, the current cost drivers are unique and Fund 532 is in a healthy position. The increase requeste d for the MS&S account in FY 2022-23, and specifically in the fuel account, is anticipated to cover any additional increased costs in the upcoming fiscal year. Staff will continue to monitor fuel prices and anticipate reduced fuel needs and costs in upcoming years with the implementation of the recommendations of the Fleet Optimization and Diversification Study.
ATTACHMENTS
Exhibit A: 10-year Fuel Cost History
3 EXHIBIT A
Notes:
• Current costs are actual averages for each year.
• CPI-U is used as an inflation factor starting in year 2013. • Gas and diesel costs do not include taxes or other fees.