DATE: March 23, 2026
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City Manager
FROM: Nate Cruz, Finance Director
Kay Khin, Accountant II
DEPARTMENT: Finance
SUBJECT: EQUIPMENT REPLACEMENT FUND BUDGET AND INTERNAL SERVICES CHANGES FOR FY 2026-2027 AND FY 2027-2028
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 FY 2026-2027 and FY 2027-2028 Preliminary Budget as outlined.
EXECUTIVE SUMMARY
The Equipment Replacement Fund was developed for the purpose of reserving the funding needed to replace assets over $5,000 (increased from the prior threshold of $1,000). 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 2026–2027 and FY 2027–2028 is $272,800 and $1,111,100, respectively. The total budget transfer to the Equipment Replacement Fund for FY 2026–2027 and FY 2027–2028 is $1,842,918 and $2,145,372, respectively. The total transfer to CIP fund in FY 2026-2027 is $770,000. Sufficient fund balance is available to support these allocations.
BACKGROUND
The Equipment Replacement Fund was developed for the purpose of reserving the funding needed to replace high-value assets. There are three Equipment Replacement Fund lists, one each for the General Fund, Water Enterprise Fund, and Wastewater Enterprise Fund. General Fund Equipment Replacements reside in the Internal Services fund group. The Water and Wastewater Equipment Replacements reside in their respective Enterprise Fund groups. Changes to the fund asset listings are summarized in the attachments to this report.
ANALYSIS
Every asset on each of the three Equipment Replacement Fund lists was carefully reviewed by the Fund Administrator and the Department that uses the asset and replacement values, and useful life estimates were adjusted to accurately reflect the best information currently available about each asset. Assets that are no longer needed were removed from the lists and existing assets were added to the lists as appropriate. The attached lists represent the staff’s recommendation for the most efficient maintenance and replacement of equipment assets.
Attached are the summary spreadsheets for the Equipment Replacement Fund. There are no significant changes to the fund assets.
CEQA
Not Applicable
FISCAL IMPACT
There are two budget impacts associated with the Equipment Replacement Fund:
Budgeted cost to replace assets that have reached the end of their useful lives; and
Annual transfer to reserve funding for future replacements (replacement charge) Assets for Replacement
The funding to replace assets that have reached the end of their useful lives is appropriated in the respective Equipment Replacement Funds. The replacement value of assets that are scheduled for replacement in FY 2026-2027 and FY 2027-2028 are summarized in Table 1.
Table 1: Budget for Purchase of Assets Scheduled for Replacement FY2026-27 FY2027-28
General 127,800$ 498,100$ Attachment 4
Water Enterprise 65,000$ 370,500$ Attachment 10 Wastewater Enterprise 80,000$ 242,500$ Attachment 16 Total 272,800$ 1,111,100$
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 and FY 2026–2027, the difference between the 100% and 85% chargeback methodologies is approximately $166,682 and $166,388, respectively. 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 2026-2027 and FY 2027-2028, 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 General (85%) 567,981 944,527 376,546 66.30% 942,865 (1,662) -0.18% Attachment 3 Water 396,971 523,853 126,882 31.96% 828,138 304,285 58.09% Attachment 9 Wastewater 401,864 374,538 (27,326) -6.80% 374,369 (169) -0.05% Attachment 15 Total 1,366,816 1,842,918 476,102 34.83% 2,145,372 302,454 63.53% General Fund. Several adjustments were made to replacement costs following the review of assets. The increase in the FY 2026-2027 replacement charge are mainly due to increased replacement cost for playground equipment at multiple parks, pistols, and a street sign applicator. A complete list is provided in Attachment 6 and 7. Water Fund. Changes to the FY 2026-2027 replacement charge in the Water Division are primarily due to the accelerated funding need to replace the City Hall meter read tower receiver in FY 2026-2027 and an increase in the annual cost escalator for water meters from 5% to 10% due to inflation and tariffs.
Changes to the FY 2027-2028 replacement charge are mainly due to increased replacement costs for the booster engine pump and booster motor pumps, as well as the application of the 10% cost escalator to all categories of water meters. A complete list of changes is included in Attachment 12 and 13.
Wastewater Fund. The decrease in the FY 2026-2027 replacement cost is mainly due to the deferred replacement timeline for the expansion joint and pumps at Lift Station
59. A complete list of changes is included in Attachment 18 and 19.
Fund Balances
Table 3 below shows that there is sufficient funding for the amount committed to the replacement of identified equipment through the end of FY 2026-27 and FY 2027-28.
Table 3: FY2026-2027 and FY 2027-2028 Equipment Replacement Fund Excess Balance Analysis FY 2026-2027 FY 2027-2028
General F und
E stimated B eginning F und B alance 8,099,273 E stimated B eginning F und B alance 8,146,000 A nnual A llocations 944,527 A nnual A llocations 943,025 C urrent-year replacement expenditures (127,800) C urrent-year replacement expenditures (498,100) C urrent-year replacement (T ransfer to C IP )(770,000) C urrent-year replacement (T ransfer to C IP ) - E stimated E nding F und B alance 8,146,000 E stimated E nding F und B alance 8,590,925 R eserved for future equipment replacement(5,359,155) R eserved for future equipment replacement(5,878,795) C ontigency (100,000) C ontigency (100,000)
A vailable F und B alance 2,686,845 A vailable F und B alance 2,612,130 Water F und
E stimated B eginning F und B alance 5,143,398 E stimated B eginning F und B alance 5,602,251 A nnual A llocations 523,853 A nnual A llocations 828,138 C urrent-year replacement expenditures (65,000) C urrent-year replacement expenditures (370,500) C urrent-year replacement (T ransfer to C IP ) - C urrent-year replacement (T ransfer to C IP ) - E stimated E nding F und B alance 5,602,251 E stimated E nding F und B alance 6,059,889 R eserved for future equipment replacement(4,513,376) R eserved for future equipment replacement(4,902,369) C ontigency (100,000) C ontigency (100,000)
A vailable F und B alance 988,875 A vailable F und B alance 1,057,520 Wastewater F und
E stimated B eginning F und B alance 4,902,994 E stimated B eginning F und B alance 5,197,532 A nnual A llocations 374,538 A nnual A llocations 374,369 C urrent-year replacement expenditures (80,000) C urrent-year replacement expenditures (242,500) C urrent-year replacement (T ransfer to C IP ) - C urrent-year replacement (T ransfer to C IP ) - E stimated E nding F und B alance 5,197,532 E stimated E nding F und B alance 5,329,401 R eserved for future equipment replacement(2,580,622) R eserved for future equipment replacement(2,692,711) C ontigency (100,000) C ontigency (100,000)
A vailable F und B alance 2,516,910 A vailable F und B alance 2,536,690 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
ATTACHMENTS:
General Fund Details
Attachment 1 – Equipment Replacement Fund Budget Narrative Attachment 2 – Equipment Replacement Fund Expenses
Attachment 3 – Equipment Replacement Fund – General Fund Charges and Variance Analysis
Attachment 4 – Items to be Replaced
Attachment 5 – Items Added To or Deleted From the Equipment Replacement List Attachment 6 – Changes to Estimated Useful Lives
Attachment 7 – Changes to Replacement Values
Water Enterprise Fund Details
Attachment 8 – Water - Equipment Replacement Fund Expenses Attachment 9 – Equipment Replacement Fund – Water Fund Charges and Variance Analysis
Attachment 10 – Items to be Replaced
Attachment 11 – Items Added To or Deleted From the Equipment Replacement List Attachment 12 – Changes to Estimated Useful Lives
Attachment 13 – Changes to Replacement Values
Wastewater Collection Enterprise Fund Details
Attachment 14 – Wastewater - Equipment Relacement Fund Expenses Attachment 15 – Equipment Replacement Fund – Wastewater Fund Charges and Variance Analysis
Attachment 16 – Items to be Replaced
Attachment 17 – Items Added To or Deleted From the Equipment Replacement List Attachment 18 – Changes to Estimated Useful Lives
Attachment 19 – Changes to Replacement Values