Internal service fund stabilizes budgeting for vehicles and heavy equipment.

• Author: Rogers, Maureen
• Position: Solutions

Government agencies need a funding method that allows them to purchase vehicles and heavy equipment without depleting the entire budget, especially when several expensive units have to be replaced in the same year. Budget processes often become tense as departments compete for limited dollars, especially if revenues are down and scheduled replacements are high. The City of Olathe, Kansas, devised a program called the Vehicle and Equipment Replacement Fund (VERF) that has become a valuable process for making vehicle and heavy equipment purchases.

The purpose of the VERF is to ensure that adequate funds are available to purchase vehicles and equipment, to stabilize budgeting for major purchases, and to provide a systematic, citywide approach to procurement and disposition of the fleet. The goal is to provide sufficient cash flow for annual purchases. The VERF is not designed to equal the replacement value of the fleet.

Olathe, a growing city with a population of approximately 125,000, has centralized purchasing and in-house vehicle maintenance. However, the VERF concept can be adapted to any size governmental agency, regardless of structure. The VERF is an internal service fund that owns all the city's vehicles and large equipment. Each departmental cost center pays a monthly lease fee into the VERF, based on the individual assets used by the department. A detailed administrative policy defines staff roles in the process, the lease fee calculation, asset lives, and procedures for acquisition and disposal.

Several key personnel are involved in coordinating the VERF budgetary, purchasing, and accounting process with the city's frontline service departments. The finance director is the "owner" of the VERF and is the decision maker when questions arise. The city manager's office serves an appellate function if needed, and is the final approval point of budgetary decisions. The fleet manager determines when early replacement or extended life of a vehicle is warranted and is responsible for the city's internal vehicle maintenance department. The budget manager coordinates approval of additions and replacements to the fleet; the purchasing division handles procurement; and the accounting department maintains all the capital asset transactions as well as lease fee calculations and payments.

Exhibit 1: Lease Fee Calculation [A + B - D] / life * C = X A = asset cost B = fund shortage C = inflation factor D = Salvage value X = normal annual lease fee Lease fees are based...