MEMORANDUM
KENAI PENINSULA BOROUGH
FINANCE DEPARTMENT
To: Timothy Navarre, Assembly President
Members, Kenai Borough Assembly
Thru: Dale Bagley, Mayor
From: Jeffrey Sinz, Finance Director
Date: January 24, 2002
Subject: Ordinance 2002-19-31, Authorizing School District Participation in the Borough Equipment replacement Fund and Appropriating $87,500 to Purchase a New Tandem Axle Truck
The borough currently operates an Equipment Replacement Internal Service Fund. The purpose of the fund is to provide capital for the timely purchase and replacement of borough vehicles and equipment on behalf of general government departments. Ownership of all equipment purchased is retained by the fund and the user departments pay an annual rental fee typically equal to the original cost of the equipment divided by the expected useful life. One of the major benefits the fund provides to its users is the elimination of budgetary spikes caused by the governmental accounting requirement that capital expenditures be recorded in the year the equipment is acquired rather than amortized over the equipment's useful life. By using the fund, departments can avoid this requirement and only effectively spread the purchase price out over the life of the equipment in the form of rent payments. This ability is especially helpful to organizations that are experiencing budgetary and/or cash limitations.
Historically, the School District has not been a participant in the fund. The district currently owns and operates a 1986 tandem axle delivery truck that has been used to deliver goods from the district central warehouse to district schools. The vehicle is well beyond its expected useful life and is currently out of service for maintenance reasons. The estimated cost to repair the truck is $20,000. It is not reasonable to spend this amount to repair a 15-year old vehicle. It would be more cost effective to replace the vehicle, but a new truck will cost about $87,500. Because of the budgetary limitations currently facing the school district and the limitations of governmental accounting described above, the district would benefit if it could acquire a replacement truck through the equipment replacement fund and spread the budgetary impact of the purchase over the vehicles expected useful life of ten years.The borough administration has been working with the school district to evaluate the impacts of amending the Equipment Replacement Fund policy to allow for district participation. We conclude that the fund is capable of supporting the limited participation of the school district without additional capitalization and that such participation would benefit the district.
The School Board took action at its January 21, 2002 meeting to request the borough amend its equipment replacement fund policy to allow school district participation and appropriate sufficient funds to purchase a replacement tandem axle delivery truck. The district estimated the amount necessary at $85,000.
The attached ordinance if approved would authorize school district participation and appropriate supplemental funding of $87,500 for the Equipment Replacement Fund for the purchase a new replacement tandem axle delivery truck. We are proposing a slightly higher appropriation than requested by the school district to reflect the borough's estimate of the likely cost. Sufficient fund balance is available within the Equipment Replacement Fund to support this action. The borough administration recommends approval of the attached ordinance with the understanding that the fund is currently capable of supporting only limited participation of the school district. In the event the school district requests expanded use of the fund, it may be necessary to authorize additional capitalization of the fund. This would likely come from the borough's general fund balance.
Attachment