Reserve funds approved

Contingency will be set at 17% of city’s annual budget

On the recommendation of Interim City Manager Peter Marshall, City Council has established a vehicle replacement fund, in hopes of handling vehicle replacements at lower cost and with less disruption of the budget.

It also set up a “contingency reserve” and a “grant reserve fund.”

Council immediately brought the vehicle replacement fund up to speed by allocating $5.7 million to the fund to match the total accumulated depreciation for all 155 vehicles and mobile pieces of equipment in the city’s inventory.

Henceforth, the payments for vehicles in the inventory — they range in model year from 1989 to 2019 — will represent annual depreciation amounts.

The city will calculate those amounts by dividing the initial purchase prices by the number of years of expected service for each vehicle, according to a memo from Marshall.

Thus, a $1 million fire truck expected to last 35 years would require an annual depreciation payment of $28,571, according to the memo.

The replacement fund method is one of three possible methods of paying for vehicle replacements, along with borrowing and lump-sum allocations from the operating budget, according to the memo.

The disadvantages of borrowing from a bank or with bonds are the interest costs and the costs of legal and financial consultation, according to the memo. Borrowing $1 million at 3 percent costs $243,000 in total interest.

Lump-sum borrowing from the operating budget can cause shortfalls in funding for other needs. There are no real disadvantages to using the replacement fund method, according to the memo.

The city can handle the increasing costs of equipment — it normally costs more to replace a vehicle — through the interest earned on the money in the fund, through the stretching of service duration by a year or two; while continuing to make annual depreciation payments; and by allocating revenue from selling those vehicle into the fund, according to the memo.

The contingency reserve will be set at 17 percent of the city’s annual budget, or $5.3 million, said Finance Director Omar Strohm, in answer to a question from Councilman Bruce Kelley.

That is equal to approximately two months’ income and is a “recommended” level, as a hedge against disasters and other major problems, according to Marshall.

The grant reserve will enable the city to meet match requirements as grant opportunities become available without needing to borrow or disrupt the budget, according to Marshall.

The setting up of the three reserve funds would seem to settle concerns raised last year when the city’s unreserved fund balance was about $12.4 million, or 39 percent of its $31.4 million budget — an amount that was excessive by municipal standards.

Mirror Staff Writer William Kibler is at 949-7038.

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