City of Geneva Committee of the Whole met June 17.
Here is the minutes provided by the committee:
Before each Committee of the Whole or City Council meeting, questions that have been posed by the City Council relating to the agenda for that evening will be posted to the City’s website. Below are the responses to this week’s questions.
3. Items of Business
b. Consider Draft Resolution No. 2019-62 Authorizing Execution of a Master Equity Lease Agreement in an Amount Not to Exceed $955,000 and Related Addendums with Enterprise FM Trust, Subject to Final Review by City Attorney
Please Note: Prior to consideration of this item, there will be a short presentation by representatives from Enterprise.
Q: General question - the additional sales tax referendum was supposed to allow for the City to budget for deferred expenditures, including vehicles. Page 19 of our 2020 budget document touts the vehicle purchases made possible by the successful referendum. In light of this additional funding source going forward, is the Enterprise leasing agreement necessary?
A: Several factors were considered prior to the recommendation to consider leasing vehicles. When staff initially started reviewing the process, the non-home rule sales tax had a sunset date of Dec. 31, 2020. While that date is now July 2030 (assuming the Governor signs the bill), staff continued to review whether leasing might make sense. Having a dedicated funding source (even if only partial, keep in mind the revenue from the non-home rule sales tax is not solely dedicated to the Capital Equipment fund, but to the greatest need on a given year) enables the leasing option to make sense in order to modernize the fleet. Leasing will affect the general fund budget by an anticipated decrease in fuel consumption and maintenance expenses. The leased vehicles will have basic maintenance expenses (oil change, wiper blades, brakes, tires). Any work beyond preventative maintenance and wear and tear will likely be covered under the manufacturer’s warranty.
Q: The Executive summary of the Enterprise lease agreement implies the City has limited financial resources to fund vehicle purchases, and that the lease agreement is necessary in order to replace 20 vehicles immediately. Will the additional sales tax revenue from the referendum not be sufficient to fund the capital expenditure requirements of the City going forward? Is this immediate need for 20 vehicles this year an aberration, or do we anticipate this vehicle replacement schedule continuing?
A: The number of vehicles recommended for the lease option is based primarily on age. The goal is to replace those vehicles older than 2007. This will increase not only the safety of the fleet, but maintenance and fuel costs associated with an aging fleet. The sales tax funding will not support all of the vehicle replacements in the Capital Equipment Fund. Large fire trucks, for example, will need to be funded via a long-term debt source. We expect a normal replacement schedule in the future whether by buying outright or participating in lease options.
Q: In June 2018, the City approved the purchase of three police vehicles for $112,450, an average of $37,500 per vehicle. The Enterprise lease vehicle list shows several police vehicles, with total lease costs ranging from 28,560 to $43,920. Can a comparative schedule be provided showing the difference in the cost of buying the vehicles versus leasing? This schedule should show this detail on a vehicle- by-vehicle basis.
A: Enterprise uses a competitive bid process (much like the City) to procure the vehicles. Enterprise also uses the City’s outfitter for any aftermarket equipment. As such, the difference in total lease cost vs buying the vehicles outright is the interest cost.
Q: The amendment to Paragraph 3(c) seems to allow for the lessor to have complete control over the determination of the wholesale value of the vehicle at the end of the lease term. As this value possibly results in another expenditure to the City, what rights does this lease agreement provide the City with respect to challenging this value?
A: This amendment is in reference to how the City accounts for leases under the Governmental Accounting Standards Board (GASB) pronouncements. Both GASB and the Financial Accounting Standards Board are changing their reporting requirements next year such that capital and operating leases will not be separate. All leases are defined as leases and this addendum gives the City the necessary details to properly record the lease in the City’s financial statements. The book value of the lease does not affect the trade-in value, so for reporting purposes, an estimate is acceptable.
Q: What impact will this lease agreement have on future fiscal years? We have been provided fiscal year 2020 information only, which shows that the City can replace 20 vehicles instead of seven. However, these lease payments will continue through years two to five, thus additional financial information is required for us to make an informed decision. Can a pro forma schedule comparing the lease arrangement to a purchasing program be provided for the next five years? We should be evaluating the total cost of the program in addition to the benefit of front-loading 20 vehicles this year.
A: While the amount of the leases are known for year two to five, other variables are not known. Staff has run assumptions and determined that leasing these vehicles makes sense to modernize the fleet. Once the fleet is modernized, the assumptions may change and the City may revert to buying vehicles outright or a combination of lease and purchase. The recommendation is to use fiscal year 2020 as a test market. Staff projects the revenues (mainly from the non-home rules sales tax) and other expenditures (computers, machinery, large vehicles) in the fund on an annual basis to determine the best course of action.
Q: What is the interest rate Enterprise uses in their assumptions, and what is the total finance charge cost of this program? As the City had previously not been borrowing for this type of purchase, all finance charge expense represents a new cost to the City.
A: The rate is fixed at the time of delivery and is based upon the three-year Treasury Bill plus 300 basis points. Today the Treasury Bill rate is 1.79% plus 350 basis points, which is 4.79%.
Q: The City weathered the financial downturn, in part, by deferring the replacement of vehicles. Will the City still have this option under the terms of this lease agreement? Could the revised paragraph 3(c) make this more unattractive?
A: The City is required to follow the Governmental Accounting Standards Board (GASB) pronouncements. Both GASB and the Financial Accounting Standards Board are changing their reporting requirements next year that do not separate capital and operating leases. All leases are defined as leases, and this addendum gives the City the necessary details to properly record the lease on the City’s financial statements.
The City can still determine its replacement schedule for vehicles. A determination will be made on a year- to-year basis as to whether to lease or buy outright.
Q: What benefit or service is the City receiving from Enterprise, other than replacing 20 vehicles now instead of seven as planned? Are there any long-term (5 to 10 years) benefits from this lease agreement over purchasing the vehicles?
A: The lease through Enterprise is not a closed lease, but an open lease. The benefit exists where there is the opportunity to trade vehicles sooner and realize the buying/selling power of Enterprise. At the end of the lease (or sooner upon recommendation by Enterprise), the City will trade the vehicle in and be able to apply any proceeds to reduce the next lease payments (or keep the proceeds to apply towards a purchase). For example, if the City trades a patrol vehicle for $25,000 (with a depreciation value of $5,000) and replaces it with a replacement vehicle valued at $45,000, the lease will be for the difference ($25,000). While the City could attempt to do this on our own (buying/selling), Enterprise moves far more vehicles in the market and can follow the trends.
Q: Paragraph 3(c) requires the City to pay the lessor if the book value exceeds wholesale value at the lease termination. Book value is determined as the delivered price, less the depreciation reserve. How is the depreciation reserve determined, and where in the agreement is this described?
A: Each lease indicates the deprecation reserve, which is a conservative estimate of the trade-in value of the vehicle. The value is based upon their historical data of prior year’s sales of the same/comparable vehicle.
https://www.geneva.il.us/AgendaCenter/ViewFile/Minutes/_06172019-1438
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