DATE: March 24, 2025
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City Manager
FROM: Nate Cruz, Finance Director
Waqas Hassan, Assistant Finance Director
Kay Khin, Accountant II
DEPARTMENT: Finance
SUBJECT: EQUIPMENT REPLACEMENT FUND BUDGET AND INTERNAL SERVICE CHARGES FOR FY 2025-2026
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 2025-2026 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 2025-2026 is $1,256,600 and the total budget transfer to the Equipment Replacement Funds is $1,366,816. There is sufficient fund balance available for these items.
BACKGROUND
The Equipment Replacement Fund was developed for the purpose of reserving the funding needed to replace high-value assets. There are three Equipment Replacement Fund lists, one each for the General Fund, Water Enterprise Fund, and Wastewater Enterprise Fund. General Fund Equipment Replacements reside in the Internal Services fund group. The Water and Wastewater Equipment Replacements reside in their respective Enterprise Fund groups. Changes to the fund asset listings are summarized in the attachments to this report.
ANALYSIS
Every asset on each of the three Equipment Replacement Fund lists was carefully reviewed by the Fund Administrator and the Department that uses the asset and replacement values and useful life estimates were adjusted to accurately reflect the best information currently available about each asset. Assets that are no longer needed were removed from the list and existing assets were added to the lists as appropriate. The attached lists represent the staff’s recommendation for the most efficient maintenance and replacement of equipment assets.
Attached are the summary spreadsheets for the Equipment Replacement Fund. There are no significant changes to the fund assets.
CEQA
Not Applicable
FISCAL IMPACT
There are two budget impacts associated with the Equipment Replacement Fund:
•Budgeted cost to replace assets that have reached the end of their useful lives; and
•Annual transfer to reserve funding for future replacements (replacement charge) Assets for Replacement
The funding to replace assets that have reached the end of their useful lives is appropriated in the respective Equipment Replacement Funds. The replacement value of assets that are scheduled for replacement in FY 2025-2026 is summarized in Table 1.
Table 1: Budget for Purchase of Assets Scheduled for Replacement Fund Replacement Reference
General 891,900$ Attachment 5
Water Enterprise 59,700$ Attachment 12
Wastewater Enterprise 305,000$ Attachment 19
Total 1,256,600$
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 2025-2026, the difference between 100% and 85% chargeback methodologies is approximately $100,232. Based on a similar fund balance analysis for the Water and Wastewater Enterprise Funds, balances were not excessive, so staff does not propose a replacement charge reduction in these funds.
Table 2 summarizes the annual replacement charges for FY 2025-2026, and a general overview of the reasons for the changes in Replacement Charge is included below.
Table 2: Equipment Replacement Fund Annual Replacement Charge Summary - All Funds Fund FY 2024-25 FY 2025-26
Increase
(Decrease)
%
Change Reference
General (85%) 751,554 567,981 (183,573) -24%Attachment 4 Water 456,767 396,971 (59,796) -13%Attachment 11
Wastewater 462,234 401,864 (60,370) -13%Attachment 18
Total 1,670,555 1,366,816 (303,739) -18%
•General Fund. There were several major adjustments to replacement costs in this year’s review of the General Fund assets. A complete list can be found in Attachment 8, but highlights include the update of the cost to replace Lagoon pump – engine #3 and #4, Police Department communication infrastructure, Park Department Mowers, and Pontoon Boat.
•Water Fund. The changes to the replacement charge in the Water Division were insignificant and related to general updates to individual items. •Wastewater Fund. The overall Wastewater Fund replacement charges decreased due to a decrease in division share for portable air compressor replacement cost exceeding an increase in replacement costs for pump and gym equipment.
Fund Balances
Table 3 shows that there is sufficient funding for the amount committed to the replacement of identified equipment through the end of FY 2024-2025 based upon a Finance Department Mid-Year Financial analysis.
Table 3: Equipment Replacement Fund Excess Balance Analysis Fund
Projected
Balance
6/30/2025
Fund
Requirements
6/30/2025
Contingency
Reserve
Excess
Balance
General Fund 5,892,688 (6,341,338)$ (100,000)$ (548,650)$ Water Fund 4,551,392 (4,516,653)$ -$ 34,739$ Wastewater Fund 2,935,802 (2,644,623)$ -$ 291,179$ Based on the above discussion of the fund balance, the Equipment Replacement Funds for the Water and Wastewater Fund are adequately funded. The General Fund, however, is underfunded by $548,650. As described in the Internal Service Funds Summary staff report, Staff recommends transferring $550,000 of uncommitted balance from the Vehicle Replacement Fund to eliminate this underfunded amount. 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 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