5 5
7 DATE: March 25, 2024
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City Manager
FROM: Edmund Suen, Finance Director
‘Andra Lorenz, Principal Management Analyst
DEPARTMENT: Finance
SUBJECT: EQUIPMENT REPLACEMENT FUND BUDGET AND INTERNAL SERVICE CHARGES FOR FY 2024-2025
RECOMMENDATION
It is recommended that the City Council review this report and its attachments and by Minute Order provide policy direction on the proposed Equipment Replacement Fund budget, including the scheduled replacement purchases and Equipment Replacement Fund charges in the FY 2024-2025 Preliminary Budget as outlined.
EXECUTIVE SUMMARY
The Equipment Replacement Fund was developed for the purpose of reserving the funding needed to replace high-value assets. These assets are listed along with their anticipated replacement costs and estimated useful lives and then funding is set aside each year in an amount adequate to fund the replacement at the identified time. Every asset was reviewed, and replacement values and useful life estimates were adjusted with the best information currently available about each asset. The total budget for the replacement of items in FY 2024-2025 is $934,650 and the total budget transfer to the Equipment Replacement Funds is $1,670,555. There is sufficient fund balance available for these items.
BACKGROUND
5 5
7 The Equipment Replacement Fund was developed for the purpose of reserving the funding needed to replace high-value assets. There are three Equipment Replacement Fund lists, one each for the General Fund, Water Enterprise Fund, and Wastewater Enterprise Fund. General Fund Equipment Replacements reside in the Internal Services fund group. The Water and Wastewater Equipment Replacements reside in their respective Enterprise Fund groups. Changes to the fund asset listings are summarized in the attachments to this report.
ANALYSIS
Every asset on each of the three Equipment Replacement Fund lists was carefully reviewed by the Fund Administrator and the Department that uses the asset and replacement values and useful life estimates were adjusted to accurately reflect the best information currently available about each asset. Assets that are no longer needed were removed from the list and existing assets were added to the lists as appropriate. The attached lists represent the staff’s recommendation for the most efficient maintenance and replacement of equipment assets.
Attached are the summary spreadsheets for the Equipment Replacement Fund. There are no significant changes to the fund assets.
CEQA
Not Applicable
FISCAL IMPACT
There are two budget impacts associated with the Equipment Replacement Fund:
•Budgeted cost to replace assets that have reached the end of their useful lives; and
•Annual transfer to reserve funding for future replacements (replacement charge) Assets for Replacement
The funding to replace assets that have reached the end of their useful lives is appropriated in the respective Equipment Replacement Funds. The replacement value of assets that are scheduled for replacement in FY 2024-2025 is summarized in Table 1.
Table 1: Budget for Purchase of Assets Scheduled for Replacement Fund Replacement Reference
General 566,300$ Attachment 5
Water Enterprise 226,000$ Attachment 12
Wastewater Enterprise 142,350$ Attachment 19
Total 934,650$
5 5
7 Annual Replacement Charges
Replacement charges are the functional mechanism by which funding for assets is transferred from the General, Water and Wastewater Operating Funds to the respective Equipment Replacement Funds so that funding is available when an asset reaches the end of its useful life. Replacement charges are budgeted in the Department line items for those assets assigned to them. Replacement charges vary by year, based on purchase cycles and annual analysis of the asset costs.
Since FY 2013-14, only 85% of the total projected replacement cost has been charged back to departments for the General Fund. Because the annual replacement charge calculation does not take into consideration interest earnings in the fund and cost savings associated with purchases, this fund tends to experience a growing unassigned reserve balance. Using an 85% charge-back methodology reduces the impact of equipment replacement to the General Fund while maintaining a sufficient balance to accomplish the necessary purchases.
For FY 2024-2025, the difference between 100% and 85% chargeback methodologies is approximately $133,000. Based on a similar fund balance analysis for the Water and Wastewater Enterprise Funds, balances were not excessive, so staff does not propose a replacement charge reduction in these funds.
Although the chargebacks were calculated and are listed below in Table 2, the City Council directed that chargebacks to the General Fund be suspended for FY 2023-2024. Therefore, transfers to Fund 502 were not executed and the $439,194 listed below will be assigned to items from the Fund 502 balance.
Table 2 summarizes the annual replacement charges for FY 2024-2025, and a general overview of the reasons for the changes in Replacement Charge is included below.
Table 2: Equipment Replacement Fund Annual Replacement Charge Summary - All Funds Fund FY 2023-24 FY 2024-25 Increase (Decrease) % Change ReferenceGeneral (85%) 439,194 751,554 312,360 71%Attachment 4Water 448,097 456,767 8,670 2%Attachment 11Wastewater 342,955 462,234 119,279 35%Attachment 18Totals 1,230,246 1,670,555 440,309 36% •General Fund. There were several major adjustments to replacement costs in this year’s review of the General Fund assets. A complete list can be found in Attachment 8, but highlights include the realignment of Recreation assets to provide funding for furniture and fixtures associated with the rebuild of the Recreation Center, the comprehensive review and update of the replacement cost for PD communications equipment, and the update of the cost to replace the City’s traffic signal controllers. •Water Fund. The changes to the replacement charge in the Water Division were insignificant and related to general updates to individual items. 5 5
7 •Wastewater Fund. The Wastewater Fund replacement charges increased due to significant increases in the cost to replace pumps as well as the realignment of all Lift Station generators to a standard useful life.
Fund Balances
Table 3 shows that there is sufficient funding for the amount committed to the replacement of identified equipment through the end of FY 2023-2024 based upon a Finance Department Mid-Year Financial analysis.
Table 3: Equipment Replacement Fund Excess Balance Analysis Fund
Projected
Balance
6/30/2024
Fund
Requirements
6/30/2024
Contingency
Reserve
Excess
Balance
General Fund 6,689,496 (5,505,166)$ (100,000)$ 1,084,330$ Water Fund 4,112,780 (4,289,251)$ -$ (176,471)$ Wastewater Fund 2,424,428 (2,277,929)$ -$ 146,499$ Based on the above discussion of the fund balance, the Equipment Replacement Funds for the General Fund and Wastewater Fund are adequately funded. While the Water Fund is somewhat under the funding requirement, staff advises a “wait and see” approach over the next fiscal year. Staff will continue to monitor the Fund balances to ensure that adequate funding remains available to address the needs of the operation.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
Facilities and Infrastructure
Public Safety and Social Equity
ATTACHMENTS
General Fund Details
Attachment 1 – Equipment Replacement Fund Budget Narrative Attachment 2 – Equipment Replacement Fund Expenses
Attachment 3 – Equipment Replacement Fund – General Fund Variance Analysis Attachment 4 – Internal Service Fund Charges Equipment Replacement Fund 502 Attachment 5 – Items to be Replaced
Attachment 6 – Items Added To or Deleted From the Equipment Replacement List Attachment 7 – Changes to Estimated Useful Lives
Attachment 8 – Changes to Replacement Values
Water Enterprise Fund Details
Attachment 9 – Water - Equipment Replacement Fund Expenses Attachment 10 – Equipment Replacement Fund – Water Fund Variance Analysis Attachment 11 – Internal Service Fund Charges Equipment Replacement Fund 408 Attachment 12 – Items to be Replaced
Attachment 13 – Items Added To or Deleted From the Equipment Replacement List 5 5
7 Attachment 14 – Changes to Estimated Useful Lives
Attachment 15 – Changes to Replacement Values
Wastewater Collection Enterprise Fund
Attachment 16 – Wastewater - Equipment Replacement Fund Expenses Attachment 17 – Equipment Replacement Fund – Wastewater Fund Variance Analysis Attachment 18 – Internal Service Fund Charges Equipment Replacement Fund 458 Attachment 19 – Items to be Replaced
Attachment 20 – Items Added To or Deleted From the Equipment Replacement List Attachment 21 – Changes to Estimated Useful Lives
Attachment 22 – Changes to Replacement Values