oversight

Potential Savings by Replacing Government-Owned Sedans Each Year

Published by the Government Accountability Office on 1971-06-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

REPORT TO THE CONGRESS




Potential Savings By Replacing
Government-Owned Sedans
Eat h Year      Bs158712




General Services Admmlstratlon




BY THE COMPTROLLER GENERAL
OF THE UNITED STATES


                                 JUNE   9,1971.
                  COMFTROL,LER        GENERAL    OF   THE       UNITED    STATES
                      c
                                    WASHINGTON    D C       20548




B-158712




To the      President    of the Senate     and the
Speaker       of the House    of Representatives

       This    IS our            report    on potential             savings        by replacing
                                                                                       I
Government-owned                    sedans    each year.

           Our     review  was made   pursuant   to the Budget                             and Ac-
counting         Act, 1921 (31 U.S.C.   53), and the Accounting                               and
Auditing         Act of 1950 (31 U.S.C.    67).

       Copies   of th;ls report  are being    sent to the                              Director,
Office  of Management       and Budget,   the Admmlstrator                                    of Gen-
eral Services,    and the Secretary     of Defense.                                                     +i




                                                      Comptroller               General
                                                      of the United             States




                  -         50TH     ANNIVERSARY               l921-     1971                           ‘
                                     ,
COMPTROLLERGENERAL'S '                        POTENTIALSAVINGS BY REPLACING GOVERNMENT-
REPORTTO TBE CONGRESS                         OWNEDSEDANS EACH YEAR
                                              General Services Administration        B-158712


DIGEST
------

WHYTHE REVIEW WASMADE
       The Federal clvll agencies had a domestic fleet of 37,000 sedans at the
       end of fiscal year 1969. The cost of operating       them during that year
       was $27.7 m11110n7, of which $77.8 million    was related  to the 22,500
       sedans in the General Services Administration's      (GSA) interagency  motor
       pools.

       The General Accounting Office (GAO) reviewed              GSA's vehicle replacement
       standards to find out whether the Government              could save money by replac-
       ing sedans more often than was permitted.


FINDINGS AND CONCLUSIONS
        GAO estimates that replaclng        GSA's sedans each year would save the Gov-
        ernment $5.1 million      annually   because (1) maintenance,   repair,  and tire
        costs are lowest during the first        year of ownership and (2) the dis-
        count obtained by the Government when It purchases sedans substantially
        offsets  the depreciation     factor during the first     year of ownership.

        Five Government studies during the past 16 years have shown that sub-
        stantial  reductions  in operating  costs could be achieved by replacing
        passenger cars before they meet GSA's current replacement    standard of
        6 years or 60,000 miles.     {See p. 5.)

        Since station wagons and light trucks in the civil  fleet   are purchased
        and operated under conditions  similar to sedans, GAO believes   that re-
        placing them each year may also produce substantial   savings.    (See p. 22.)
        Department of Defense vehicles  are not subJect to GSA replacement                 stan-
        dards and were excluded from this review.    However, GAO's flndings                may have
        application to these vehicles  as well.   (See p. 21.)

RECOMMENDATIONS
              OR SUGGESTIONS
       The Administrator    of General Services should, with the concurrence                   and
       cooperation    of the Office of Management and Budget

             --adopt a l-year   replacement     standard   for   sedans in its   interagency
                motor pools,

Tear Sheet
        --revise   the Federal Property Management "Regulations  to require         other
           Federal civil  agencies to adopt a l-year replacement   standard         for
           sedans, and

       --examine into the feaslbillty   of adopting       a l-year replacement      stan-
          dard for station wagons and light trucks        ln the civil  fleet.
          (See p. 21.)

     In addition, the Dlrector,   Office of Management and Budget, should exam-
     lne into the feasibility   of adopting a l-year standard for Department
     of Defense sedans, station wagons, and light trucks.     (See p. 22.)


AGENCYACTIONS AND UNRESOLVEDISSUES
     GSA agrees that a l-year replacement cycle would be optimal for sedans
     in the civil  fleet.  GSA has initiated a study to determine the Impact
     of replacing  station wagons and pickup trucks each year.   (See p. 17.)
     The Office   of Management and Budget

       --agreed   that a l-year replacement  cycle for GSA sedans was optimal
          in the long run but recommended that GSA continue the current 6-
          year replacement   standard for the present time;

       --expressed    reservations    concerning    some of GAO's assumptions,     lmpli-
          cations,   and conclusions--GAO      considered  these reservations    ln fin-
          alizing  this report;    and

       --suggested   that GAO consider the impact of the additional      capital
          outlay on the overall   Federal budget and the relative   priority     of
          other Federal projects.     (See p. 18.)

    GAO believes  that the potential    savings through replacing         GSA's sedans
    each year makes the payoff on the additional        capital     outlay significant.
    GAO estimates that the additional     cash investment       plus imputed interest
    would be recovered    through annual savings in about 2 years.           GAO be-
    lieves also that, if the funds needed to convert the GSA fleet of sedans
    to a l-year cycle cannot be provided       in 1 year, savings could be
    achieved by converting     as large a portion   of the GSA fleet of sedans as
    possible each year until complete conversion        has been attained.


MATTERSFOR CONSIDERATIONBY TRE CONGRESS
    GAO is reporting   this matter to advise the Congress        of the opportunity
    to achieve substantial   savings by adopting a l-year        replacement cycle
    for Government sedans.




                                          2
                            I      J




                                  Contents
                                                                           Page

DIGEST                                                                       1

CHAPTER

           1   VEHICLE REPLACEMENT STANDARDS                                 3
                    Development    of Government-wide          replace-
                      ment standard                                          3
                   Current   replacement    standard                         4

*          2   SAVINGS BY ADOPTING A MORE ECONOMICAL RE-
                 PLACEMENT STANDARD FOR SEDANS                               5
                    Prior replacement        studies   by GSA and
                       others                                                5
A                   Estimated    cost of various       replacement
                       cycles                                               10    -
                    Other factors     affecting      choice of a re-
                       placement   standard                                 14
                    Replacement    practices       of private   firms       15
           3   AGENCY COMMENTS AND OUR EVALUATIONS                          17
                   GSA comments                                             17
                   OMB comments                                             18
           4   CONCLUSIONS AND RECOMMENDATIONS                              21
                   Conclusions                                              21
                   Recommendations                                          21
           5   SCOPE OF REVIEW                                              23
APPENDIX

           I   Letter   dated September 17, 1970, from the
                  Acting Administrator    of General Services
                  to the General Accounting    Office                       27
      II       Letter    dated November 20, 1970, from the
                  Deputy Director,    Office of Management and
                  Budget,    to the General Accounting Office               29

    III        Present    value    analyses   of replacement       cycle
                  costs                                                     34
    APPENDIX                                                              Page

      IV       Principal   officials    responsible for the
                  policies   and the conduct of the activi-
                  ties discussed     in this report                        38

                                 ABBREVIATIONS

    BOB        Bureau of the Budget         (now Office   of Management    and
                 Budget)

    GAO        General   Accounting      Office

    GSA        General    Services    Administration
L




    OMB        Office    of Management      and Budget‘
COMPTROLLERGENERAL'S '              '        POTENTIAL SAVINGS BY REPLACING GOVERNMENT-
REPORTTO THE CONGRESS                        OklNED SEDANS EACH YEAR
                                             General Services Administration B-158712


DIGEST
------

WHYTHE REVIEW WASMADE
     The Federal c1v11 agencies had a domestic fleet      of 37,000 sedans at the
     end of fiscal   year 1969. The cost of operating     them during that year
     was $27.7 mIllIon    of which $17.8 milllon   was related   to the 22,500
     sedans in the General Services AdmInlstratlon's      (GSA) interagency   motor
     pools.

     The General Accounting Office (GAO) revlewed               GSA's vehicle  replacement
     standards to find out whether the Government               cou'ld save money by replac-
     ing sedans more often than was permitted.


FINDINGS AND CONG'LUSIONS
     GAO estimates that replacing        GSA's sedans each year would save the Gov-
     ernment $5.1 million      annually because (1) maintenance,     repair,  and tire
     costs are lowest during the first        year of ownershlp and (2) the dis-
     count obtained by the Government when it purchases sedans substantially
     offsets  the depreciation     factor during the first     year of ownership.

     Five Government studies during the past 16 years have shown that sub-
     stantial  reductions  in operating  costs could be achieved by replacing
     passenger cars before they meet GSA's current    replacement standard of
     6 years or 60,000 mi‘les.    {See p. 5.)

     Since station wagons and light trucks in the clv11 fleet    are purchased
     and operated under conditions  similar to sedans, GAO believes   that re-
     placing them each year may also produce substantial  savings.     (See p. $2.)

     Department of Defense vehicles  are not subject to GSA replacement                   stan-
     dards and were excluded from this review,    However, GAO's findings                  may have
     application to these vehicles  as well.   (See p. 21.)


RECOMMENDATIONS
              OR SUGGESTIONS
     The Administrator    of General Services should, with the concurrence                    and
     cooperation    of the Office of Management and Budget

         --adopt    a l-year   replacement     standard   for   sedans In Its   Interagency
            motor   pools,
           --revise    the Federal Property Management Regulattons  to require        other
               Federal clvll  agencies to adopt a l-year replacement standard         for
              sedans, and

           --examine into the feasibility   of adoptlng     a l-year replacement      stan-
              dard for station wagons and light trucks      in the c1v11 fleet.
              (See p. 21.)

         In addltlon, the Dlrector,   Office of Management and Budget, should exam-
         ine into the feaslblllty   of adopting a l-year standard for Department
         of Defense sedans, station   wagons, and light trucks.   (See p. 22.)


    AGENCYACTIONS AND UNRESOLVEDISSUES
         GSA agrees that a l-year replacement    cycle would be optimal for sedans
         in the civil  fleet.  GSA has initiated   a study to determine the impact
         of replacing  station wagons and pickup trucks each year.     (See p. 17.)

         The Office   of Management and Budget

           --agreed   that a l-year replacement  cycle for GSA sedans was optimal
              in the long run but recommended that GSA continue the current 6-
              year replacement   standard for the present time;

           --expressed    reservations    concerning some of GAO's assumptions,      tmpli-
              cations,   and conclusions--GAO      considered these reservations   In fln-
              alizlng  this report;    and

           --suggested   that GAO consider the impact of the additional      capital
              outlay on the overall   Federal budget and the relative   prlorlty     of
              other Federal proJects.     (See p. 18.)

        GAO believes  that the potential    savings through replacing         GSA's sedans
        each year makes the payoff on the additional        capital     outlay significant.
        GAO estimates that the additional     cash investment       plus Imputed interest
        would be recovered    through annual savings in about 2 years.           GAO be-
a       lieves also that, if the funds needed to convert the GSA fleet of sedans
        to a l-year cycle cannot be provided       in 1 year, savings could be
        achieved by converting     as large a portion of the GSA fleet of sedans as
        possible each year until complete conversion        has been attained.


    MATTERSFOR CONSIDERATIONBY TRE COiKRESS
        GAO is reporting  this matter to advise the Congress of the opportunity
        to achieve substantial  savings by adopting a l-year replacement cycle
        for Government sedans.
                             .      u




                                        CHAPTER 1

                        VEHICLE REPLACEMENT STANDARDS

            As of June 30, 1969, the Federal           civil     agencies  owned
    and operated      a large domestrc fleet        of motor vehrcles        whrch
    included     about 37,000 sedans.        The total       cost of operating
    the sedans in the civilian        fleet    during     fiscal    year 1969 was
    about $27.7 million.       Of these costs, about $17.8 million
    related    to the approximately       22,500 sedans in the General
    Services    Administration     (GSA) interagency          motor pools.

            Subchapters    E 101-25.4   and G 101-38.9    of the Federal
    Property    Management Regulations,       issued by GSA, prescribe      re-
    placement     standards   for the various     classes of motor vehicles,
'   The regulations       are mandatory   and are applicable      to all ex-
    ecutive    agencres except the Department         of Defense.

    DEVELOPMENT OF GOVERNMENT-WIDE
    REPLACEMENT STANDARD

           The first       Government-wide      replacement     standard    for motor
    vehrcles     was developed      by the Bureau of the Budget (BOB).
    The functions        of the Bureau of the Budget were assumed by the
    Office     of Management and Budget on July 1, 1970.                 In the late
    1940's,     BOB, in cooperation         with an Interdepartmental           motor
    equipment      committee which was concerned wrth the improvement
    of motor equipment management in the Federal Government,                         con-
    ducted a study to determine              a uniform,   economical     motor ve-
    hicle    replacement      standard     that would be applicable          to all
    Government agencies.           During the study,        BOB obtained       informa-
    tion from a number of industrres                and businesses     which operated
    automotrve      fleets    and examined into motor vehicle            experiences
    of the Federal         Government.

          In December 1947, BOB reported         its conclusions      to the
    Committee on Appropriations,       House of Representatives,            and
    recommended that a 6-year or 60,000-mile            replacement     standard
    be adopted.    The 60,000-mile      standard    was developed     by aver-
    aging the mileage practices       reported     by seven private       firms
    which operated   more than 7,000 automobiles.             BOB recommended
    also that the replacement      standard     be included     as an instruc-
    tion in the annual requests       for budget estimates        sent to all


                                               3
Government agencies and not be incorporated      into legrslation.
This replacement    standard was subsequently   adopted by GSA
and included   in the Federal Property   Management Regulations.

CURRENT REPLACEMENT STANDARD

        The regulations    provide     that passenger        cars and station
wagons may be replaced        when they have been operated             for
6 years or 60,000 miles,         whichever      occurs first,        The regu-
lations    provide    also that executive         agencies must continue
operating     motor vehicles     which are in usable condition             and
which can be operated        an additional       period     without   excessive
maintenance      cost or substantial       reduction      in trade-in     value
even though the standard         permits     replacement.

       The regulations     provide   further   that an agency owning
eight or more vehicles        in any one of the following       classes
(automobiles,      all other passenger-carrying       vehicles,    and all
trucks and truck tractors)         may replace    not more than 25 per-
cent of its vehicles       in each class during a fiscal        year.    If
the total     number of vehicles     in any class is less than eight,
not more than two of such vehicles           may be replaced    during a
fiscal   year.

        The only exception      to these standards         1s that a motor
vehicle    may be replaced      regardless    of its age or mileage if
the head of the agency or his delegate             certifies      that the ve-
hicle    has been wrecked or damaged, including              wear caused by
abnormal operating      conditions,       and is beyond economical        re-
pair.




                                         4
                        .     .


                                   CHAPTER 2

              -SAVINGS BY ADOPTING A MORE ECONOMICAL
                   REPLACEMENT STANDARD FOR SEDANS

       We estimate      that the adoption      of a l-year   replacement
cycle for the sedans in GSA's interagency              motor pools would
result    in annual savings to the Government of about $5.1 mil-
lion because (1) maintenance,          repair,    and tire   costs are
lowest during the first         year of ownership       and (2) the dis-
count obtained      by the Government when it purchases sedans
substantially      offsets   the depreciation      factor   during   the
first   year of ownership.

       During the past 16 years,           several Government      studies
have been made which indicate            that substantial      reductions     in
maintenance,      repair,   tire,    and depreciation      costs could be
achieved     by replacing     passenger      cars before they meet the
Government's      replacement     standard      of 6 years or 60,000 miles.
Also, rt has been recognized           for some time by commercial
fleet   operators      that a shorter      replacement    cycle for certain
motor vehicles       is more economical         than the Government's      re-
placement     cycle.

PRIOR REPLACEMENT STUDIES BY GSA AND OTHERS

Study   report--March       1954

       In March 1954, GSA published       a report  entitled    "A Pro-
posal for Improving      Federal Motor Vehicle     Management."       In
the report,    GSA concluded    that the Government could substan-
tially   reduce its cost of owning and operating           motor vehi-
cles by replacing     them before    the vehicles   either    were
6 years old or had been operated         for 60,000 miles.

      GSA recommended        that the Government adopt a maximum
3-year or 50,000-mile          replacement standard, whichever occurred
first,   for about 195,000,1 or 75 percent,            of the Government's
260,000 vehicles.         It was considered       impractical       to adopt
this replacement       standard    for the remanning         25 percent    of
the vehicles      because of erther       their   size or the special
equipment    installed      on them.    GSA estimated        that implementa-
tion of the recommendation           would reduce, the Government's
costs by $19.4 million         annually     during a 6-year transition
period   and by $39.9 mrlllon         annually    thereafter.        The latter
amount consisted       of reductions      of $23.4 million        in mainte-
nance cost, $14.6 million          in depreciation       cost, and $1.9 mil-
lion in operating       cost.

        In 1956, BOB rejected        this proposal     because (1) the cost
figures    used by GSA were outdated          and (2) the latest      Annual
Motor Vehicle      Report showed that about one third             of all
passenger-carrying       vehicles     were eligible      for replacement
under existing      standards     but were not being replaced         on
schedule,      BOB expressed      the belief      that there was no point
in adopting      new standards      until  existing    standards    had been
met.

Study   report--May      1963

       At the request of GSA, the Steering                 Committee,    Joint
Financial     Management Improvement           Program, organized        a group
In October 1961 to conduct a broad study of the Government's
motor vehicle      management.       The study group was composed of
representatives        of GSA,  BOB,    the Treasury         Department,    and
the General Accounting         Office.       In its report        to the Steer-
ing Committee in May 1963, the group suggested                      that GSA give
consideration      to the need for changes in the motor vehicle
replacement     policy    and stated,      in part,      that:
    /
       "The Government gets a discount              of approximately
       $500 per automobile        under the commercial            fleet
       price which virtually         eliminates       the depreciation
       factor   the first    year.      Considering        the large


'The GSA report    covered the following     vehicles     which were
  reported   as owned by Federal   agencies,    including     Department
  of Defense,   at June 30,1953:    42,000 cars, 4,000 station
 wagons, and 149,000 trucks and utility        vehicles.

                                         6
        annual cost of $61.3 million            for depreciation       re-
        ported   in the AMVR [Annual Motor Vehrcle              Report]
        on the Federal     fleet     and the controllable        factors
        whrch affect     depreciation,       it is apparent      the
        Government could effect         significant     savings if
        full   advantage   could be taken of these factors               rn
        the buying and selling         of motor vehicles,"

       The study group noted that an economic replacement                       cycle
was the most significant    single factor in motor vehicle                      fleet
management and stated that discussrons    with commercial                     fleet
specialists    indicated:

        "1.   Maintenance   costs increased steadily   but were
              partrally   compensated for by a decline    in de-
              preciation.

        "2.   Total costs per mile moved steadily       upward
              throughout   the period    covered by the study
              due to increased    maintenance    costs and de-
              creased mileage.

        "3.   Gasoline  consumption  per mrle remained virtu-
              ally the same for two operatrng   years but In-
              creased in the third."

        This study showed that (1) the cumulative          cost a mile
for vehicles       sold after   3 years of operation    was three
fourths     of a cent higher     than the cumulative    cost a mile for
vehicles      sold after   2 years of operation     and (2) the cumu-
lative     cost a mile for vehicles      sold after   2 years of oper-
ation was about 1.25 cents higher           than the cumulative   cost
a mrle for vehicles        sold after   1 year of operation.

        In a report      on the Joint  Financial    Management Improve-
ment Program's        progress  during  fiscal   year 1964, a reference
was made to the work done by the study group.               It was noted
in the report       that the residual     value of vehicles    is an-im-
portant    factor     to be considered    in deciding   when to dispose
of vehicles       to reduce the loss in value to an optimal        point.

Study    report--July      1965

        In a report to the Administrator     of General Services in
July    1965, the GSA Audit Division     compared the cost of GSA
                                        7
interagency      motor pool operations           with the costs reported
by other organrzations          conducting       similar    operations.     The
cost comparison        showed that GSA spent about 6.25 cents a
mile to operate        its sedans for fiscal           year 1964 whereas the
Iowa State Highway Commission,              the State of Mxnnesota,         and
the University      of California       operated       thesr sedans at an
average cost of about 4 cents a mile.                    The Audit Divisron
attributed     these lower unit costs to, among other factors,
the replacement        of sedans every 2 years and high utillzatlon
of the sedans.        Therefore      it recommended nmmedrate action            to
change the replacement          policy    of 6 years or 60,000 miles for
sedan vehicles       to a replacement         policy     of every 2 years.

Study   report--April      1967

       In March 1967, the Director,        BOB, requested       GSA to make
a study on replacement       standards    for Federal motor vehicles.
In April    1967, the Administrator       of General Services        replied
that GSA had recently       completed    a study of the GSA fleet          of
passenger     cars which showed the proper replacement            standard
for passenger      cars to be 4 years or 50,000 miles,           whichever
occurred    first.     These conclusions     were consistent      with
those of prior      studies  in that they indicated       that substan-
tial   economies could be obtained        by shortening      the replace-
ment cycle.

       The Administrator     stated that,    from an economic stand-
point,   the optimal     trme to replace GSA cars was at the end
of the first     year of use because the Government would real-
ize a profit     from the sale of l-year-old        cars.    He added,
however,    that it would not be practical         to make replacements
at the end of the first       year of use because of the resultant
severe and unfavorable       reaction    in connection    with the used
car market.      (For a discussion     of this factor     see p. 14.)

       The study showed that a replacement    cycle of 1, 2, 3,
or 4 years was more economical    than a 6-year cycle but that
a 6-year cycle was more economical     than a 5-year cycle.    Al-
though the shorter   cycles were more economical    than a 4-year
cycle,   the 4-year cycle was recommended because it required
the least amount of additional    cash outlay   for the purchase
of new cars.



                                        8
                                 I
                          .




        In July 1967, the Director,        BOB, advised     the Adminis-
trator    of General    Services   that,   because of the cost of the
Vietnam war and of strong pressures             to minimize    other expen-
ditures    wherever possible,      it was not desirable        to adopt
lower replacement       standards.      He stated,   however,     that a
good deal of evidence         had been produced to support lower re-
placement     standards    and that it might be feasible          to provide
for revision      of the replacement      standard    in the 1970 budget.

Study   report--January        1970

       GSA, in a study report            dated January 30, 1970, again
concluded     that a l-year       replacement          cycle for sedans was op-
timal on the basis of the cost of new sedans under either
the then-current        statutory      limitation         or the proposed in-
creased limitation         (which since has become law) on the price
that may be paid for sedans and on the average resale values
of l-year-old       sedans as obtained            from a sample sale held in
the spring of 1969.           GSA stated        that application         of a l-year
replacement      cycle to the sedans            in   its   motor   pools    could be
accomplished      in 1972 within         the existing        capital     structure
of the General Supply Fund.

       In November 1970, the Deputy Director,               Office    of Manage-
ment and Budget,      advised the Administrator            of General Ser-
vices that,    in view of the budgetary          situation,        the present
sedan replacement      policy   should be continued          at least through
fiscal   year 1972.     He acknowledged       that the study generally
supported    a l-year   replacement    policy      for GSA sedans over
the long term.




                                          9
ESTIMATED COST OF VARIOUS
REPLACEMENT CYCLES

       The major costs of owning and operating            a car that vary
under different        replacement     cycles are depreciation    costs;
maintenance,     repair,      and tire costs; and interest      on invest-
ment.    Depreciation,        as used in this report,     is the differ-
ence between the cost to the Government of a new car and
its resale value.           Some operating    costs, such as gas and oil,
do not vary significantly           with the age of a car.

         On the basis of data contained         in GSA's 1970 study re-
port, we compared the costs of owning one sedan in GSA's
interagency     motor pools under replacement          cycles of from
1 to 6 years.       The GSA study showed that the average cost
of new sedans was $1,543 under the then-current               statutory
limitation     and that this cost would be $1,683 under the pro-
posed increased      limitation     (which since has become law),
The average selling         price of l-year-old     used sedans was
$1,443 and this price was progressively             lower for older se-
dans.

        Our comparison was based on (1) the assumption         that
GSA's motor pools would continue            in perpetuity, (2) the
present value of the cost of owning a sedan in perpetuity
under replacement        cycles of from 3. to 6 years computed at an
interest    rate of 8 percent-- the rate that executive        agen-
cies often have used in their           economic analyses,  and (3) the
average cost of $1,683 for new sedans based on the current
statutory     limitation     on the price that GSA may pay for new
sedans.

       Because the statutory       limitation       on the price that may
be paid for new sedans is generally              raised only at intervals
of several     years and used car prices rise more gradually,
we computed the cost of owning sedans under the various                 re-
placement     cycles on two bases:          one, using the GSA-developed
resale values for used sedans; the other,                assuming that an
increase    would follow    in those resale values in proportion
to the increase      in the average cost of new sedans from
$1,543 to $1,683.       We belleve      that it is reasonable       to as-
sume that the resale values of used sedans would increase
in proportion      to an increase     in the average cost of new
cars.

                                    10
                         .          *


      Our comparisons0 on both bases, of the present value                                           of
the cost of owning a sedan in perpetuity   under replacement
cycles of from 1 to 6 years are shown below.1

           GSA-Developed         Resale     Values          for   Used Sedans

Replacement      cycle
  (year)                        1          2            3            4        5                  6

Present value of
   the cost of
   owning one se-
   dan in perpe-
   tuity                     $5,263     $6,508       $6,642       $6,994   $6,694      $6,502

           GSA-Developed     Resale          Values for Used Sedans
                     Increased    in         Proportion  to
                     the Increase            in the Average
            Cost of New Sedans             from $1,543 to $1,683

Replacement      cycle
  (year)                        1          2            3            4         5                 6

Present value of
  the cost of
   owning one se-
   dan in perpe-
   tuity                     $3,626     $5,890       $6,329       $6,850   $6,602          $6,441

Both comparisons    show that             a l-year          replacement      cycle          is
the most economical.

       The extent of the benefits    that would result    from
adopting   a l-year replacement   cycle for the 22,500 sedans
in GSA's motor pools is indicated       by the estimated    annual
savings of about $5.1 million     that would be realized,       as
shown below,



'Details      of our calculations              are     shown in appendix            III.




                                               11
 Annual costs, exclusive     of Interest,    of main-
   talnlng   one sedan under:
      A 5-year replacement     cycle (note a>:
           Cost of sedan                                           $1,683
           Maintenance,  repair,    and tire costs                     680

               Total                                                2,363

          Less resale       value   of a 5-year-old        sedan       445

               Total                                               $1,918

          Average      annual   costs   ($1,918   f 5)                          $   383.60

     A l-year   replacement     cycle:
          Cost of sedan                                            $1,683.00
          Maintenance,    repalr,    and trre      costs                41.00

               Total                                                1,724.OO

          Less resale value of a l-year-old    se-
            dan as established   by GSA zn spring
            1969 adjusted for subsequent price
            increases   (note b)                                    1,567.50

          Annual    costs                                                           156.50

 Annual savings for one sedan by converting                to a
   l-year replacement cycle                                                     $   227.10

 Annual savings for all sedans in GSA's motor
   pools by converting  to a l-year replacement
   cycle (22,500 x $227.10)                                                     $5,109,750

 aGSA1s average replacement       cycle 1s 5 years because the GSA sedans are
  averaging   60,000 miles     In 5 years.
 bThe GSA value,    established    on the basis of the sales that It made In
  the sprzng of 1969, IS $1,443.         A $131 Increase In this amount
  ($1,443 t $131 = $1,574) is proportional         to the $140 increase rn the
  new car purchase price from $1,543 to $1,683.           We have subtracted
  $6.50 selling    costs from the adjusted selling       price of $1,574.


        The greater        economy of a l-year        replacement      cycle is
attributable        to two factors.        First,    maintenance,       repair,
and tire       costs during the first         year of ownership         are lower
than the costs during            subsequent     years;     second, the dis-
count obtained         by the Government when it purchases sedans
 substantially        offsets    the depreciation        factor   during    the
first     year of ownership.
                                             12
       In addition,     the conversion      to a l-year      replacement
cycle would result        in upgrading    the quality       of the sedan
fleet.    No   cars   would  be  more  than   1 year    old    and downtime
for repairs      would be minimized,      making possible         an increase
in the utilization        of the sedans and a possible            decrease in
the number required.




                                      13
OTHER FACTORS AFFECTING CHOICE
OFAREPLACEMENT STANDARD

       We recognize      that the establishment       of a shorter       re-
placement     cycle for Government-owned        motor vehicles       in-
volves    consideration       of other factors    such as the (1) effect
on the new and used car markets,            (2) additional    cash invest-
ment, and (3) costs involved           in purchasing     and selling      the
increased     number of vehicles.        These factors     are discussed
in the following        sections.

Effect  on the new and
used car markets

     An automotive    trade publication  showed that about
8.2 million  new passenger cars and about 15.3 million     used
cars were sold in the United States in 1969.       On June 30,
1969, the civil    agencies of the Government owned and oper-
ated 45,489 passenger vehicles.

       In our opinion,    the economic effect   nationally of a
l-year   replacement   standard    on car sales would be negli-
gible.     On the basis of the 1969 data, the number of passen-
ger vehicles     in the civil   fleet  was only about 0.6 percent
of the number of new cars sold and about 0.3 percent          of the
number of used cars sold.

       A GSA official   has advised us that most of the sales                   of
motor pool vehicles      are conducted   in large communities.
Therefore   we believe    that the impact on used car sales
would not be significant       in most locations.

        GSA has advised us that,   on the basis of its experience
since 1967, GSA no longer believes        that the adoption    of a
l-year    replacement   standard would be impractical     because
of an anticipated      severe and unfavorable    reaction   in con-
nection    with the used car market.

Additional     cash investment

      To convert     GSA's interagency    motor pool sedans from
the current    replacement    cycle to a l-year      replacement    cycle
in fiscal   year 1972 would require       an additional      cash out-
lay of about $8 million        (excluding  Federal     excise taxes

                                      14
which would be recovered),     assuming that the resale values
of used cars increase    in proportion   to the increase    in the
average cost of new sedans.      The additional    cash invest-
ment with imputed interest     at 8 percent,    however, would be
recovered  through annual savings in about 2 years.

Costs involved     in purchasing and
selling  increased    number of vehicles

       Shortening     the cycle for replacing        cars to 1 year
would result       in additional       funds being expended annually    to
(1) prepare      the new cars for service         and (2) prepare   the
used cars for sale.           Preparation    costs for sedans have
averaged about $25 a car.

         Although     the manufacturers      service     and check    out new
cars     before    shipment,   GSA inspects      each car before       placing
it in      service    to ensure proper functioning.           Also,    the cars
must     be washed; have license        plates     attached;   have    the
proper      decals attached;     and may, in some jurisdictions,
have     to be registered      and inspected       prior   to berng   put   into
use.
       When preparing   used cars for sale, the interagency
motor pools clean them inside         and out; remove decals;           and
to the extent    that parts are available         in their     inventor&,
replace   any parts necessary      for operation       of the cars.
GSA's policy,    however , prohibits     incurrence      of expenses in
excess of 10 percent     of the expected       selling    price of a
car.

       GSA estimates   that additional      selling   expenses of
about $6.50 a sedan will        be incurred    under a l-year      replace-
ment cycle.     Car preparation      and selling    costs were con-
sidered   by us in determining       the most economical      replace-
ment cycle and in computing        the potential     savings reported
on page 12.

REPLACEMENT PRACTICES OF PRIVATE FIRMS

      We discussed    vehicle    replacement      practices     with offi-
cials of two large commercial          car rental     firms and of one
large nonprofit    organization.        An official       of one commer-
cial firm informed     us that the firm replaced            its vehicles

                                       15
at least annually or after 20,000 miles of use. An official
of the other commercial firm informed us that the firm re-
placed its vehicles at least annually or when the vehicles
have been operated for 15,000 to 20,000 miles.
     An official    of the nonprofit    organization informed us
that the organization     generally replaced its cars annually
and that cars were usually driven an average of 12,000 miles
a year. He informed us also that the organization         had sold
its cars above their original      costs.




                               16
                           .       .


                                       CHAPTER 3

                  AGENCY COMMENTSAND OUR EVALUATIONS

         We furnished    a draft   of this report     to the Administra-
  tor of General Services        and to the Director,      Office  of Man-
  agement and Budget COMB), for review.           Their comments were
  provided    in letters   dated September 17, 1970, and Novem-
. ber 20, 1970, respectively,        and are included      as appendixes
  I and II of this report.

        We proposed in the draft          report     that the Administrator
  of General Services       with the concurrence           and cooperation       of
  OMB (1) adopt a l-year         replacement      standard    for sedans in
  its interagency      motor pools,      (2) revise      the Federal Property
  Management Regulations         to require     other Federal      civil   agen-
  cies to adopt a l-year         replacement     standard     for sedans, and
  (3) examine into the feasibility            of adopting      a l-year    re-
  placement    standard    for station      wagons and light       trucks    in
  the civil    fleet.    In addition,       we proposed that the Director,
  OMB, examine into the feasibility             of adopting      a l-year    re-
  placement    standard    for Department       of Defense sedans, station
  wagons, and light      trucks.

  GSA COMMENTS

         GSA concurred         with our proposals   for adoption    of a
  l-year   replacement      standard    for sedans in the GSA motor pools
  and for sedans of       other Federal      civil  agencies.    GSA stated
  that it had initiated          a study to determine      the impact of a
  l-year   replacement      standard    on the station    wagons and pickup
  trucks in the GSA       fleet.

        GSA told us that,       contingent    upon OMB concurrence,         it
  was preparing    to include     the necessary        funding  arrangements
  in the fiscal    year 1972 budget that would permit the adop-
  tion of a l-year     replacement      standard     for the sedans in the
  GSA motor pools and was preparing            to issue the necessary
  change to the Federal Property           Management Regulations        to re-
  quire other civil      agencies     to adopt the l-year       replacement
  standard.     However, as discussed        herein,      OMB does not plan to
  give the necessary      concurrences      at the present      time.


                                           17
       GSA stated that it would have no difficulty                    In adopting
the new standard      for the vehicles        in the GSA motor pools be-
cause procurement       of these vehicles          are funded through           the
General Supply Fund.         GSA stated also that other civil                   agen-
cies generally    use appropriated         funds for vehicle            procure-
ment and that they were subject            to statutory        limitations         on
the number of vehicles         in their    fleet.        GSA concluded        that
many agencies would require          specific       action    by the Congress
each year prior     to initiating       disposal        and replacement         action
and that changes in statutory           provisrons        might be required
to permit efficient       and effective       utilization        of the new
standard.

om COMMENTS
       In commenting on our proposal        for adoption  of a l-year
replacement    standard     for the sedans in GSA's motor pools,
OMB agreed that a l-year        replacement    standard would result
in some long-term      savings but stated that it had reserva-
tions concerning      certain   of our assumptaons and conclusions.
OMB stated   that it recommended that GSA continue          the (i-year
replacement    standard     for the present    time.

      OMB's primary   reservation concerns our assumption      that
the resale value of used sedans will      increase in proportion
to the increase    in the average cost to the Government of new
sedans.

         Statistics        show, and it is understood          by purchasers   in
general,       that used car prices           are related    to new car prices
and the general           price level.        We believe   that,    rn effect,
the Congress through              changes that it makes in the statutory
limitation         adjusts     prices   that the Federal      Government may
pay for new cars to recognize                 changes in new car price levels.
However, we need not rely on theory or belief                     in view of the
availability         of wholesale       price    indexes for used cars.

        Our comparison     of the average wholesale       value of l-year-
old sedans in October 1969 with the average wholesale               value
of l-year-old       sedans in October 1970 showed that the values
had increased       by $125 which closely     approximates     the $131
increase     that we had previously      estimated    as being propor-
tionate    to the increase      in the average cost of new sedans.
We believe      that the result    of this comparison      supports  our

                                     I    18
assumption      concerning     increases        in the resale     value    of used
sedans.

         OMB was of the opinion            that the increase        in the statu-
tory lrmitation        on the price that GSA may pay for new sedans
reflected     price-cost       changes which had already              occurred.
Our review shows that car prices                    tend to rise gradually
whereas the statutory           limitation          is raised only at intervals
of several     years.      We believe         that it would have been un-
realistic     to use the increased              cost of new sedans permitted
by the current       statutory       limitation         on the price that GSA
may pay for new sedans wrthout                  bringing     up to date the value
of used sedans as had been determined                     by GSA several      months
before the limitation           was raised.

      OMB stated that,     if the increases      in used sedan values
were invalid,     our estimated    savings would be reduced from
 $5.1 million   to $2.5 million     and the period     for recovery     of
the additional     cash investment     would be increased       from 2 years
to 8 years.     OMB's estimate     of the additional      capital   invest-
ment, since it is based on no increase           in used car prices,
is $14 million     as opposed to our estimate        of $8 million.

        OMB stated that a relatively             small variation       that would
increase      the difference      between purchase prices           and resale
prices     could change the optimal           replacement     period     from
1 year to 6 years.           According     to OMB, if this change occurred
prior    to the end of the 8-year period              for recovery       of the
additional       cash investment,        changing to a l-year        replace-
ment policy       at the present       time would be economically            disad-
vantageous.

        Variations       in the difference         between purchase prices
and resale prices            could,    of course,     affect     the selection     of
the optimal        replacement        period.     But since the values of
used cars normally            increase      as the costs of new cars in-
crease, it is unlikely              that the difference          between used car
prices     and new car prices            would increase        to the point where
a 6-year cycle would be more economical                      than a l-year     cycle.
This possibility           is greater       under OMB's position--which           we
believe      is not realistic--          that no increases         in used car val-
ues should be assumed.

     In any event,    should conditions              change at a later   date,
GSA could easily   revert   from a l-year             replacement  cycle to a
                                           19
longer cycle by spreading       out the purchase of new sedans.
As stated previously,      the addrtional   capital investment
needed to convert     to a l-year    cycle would be recovered   in
about 2 years rather     than in the 8 years estimated      by OME3.

        Other factors    mentioned     by OMB were the impact of the
additional     cash investment       needed to convert    to a l-year       re-
placement     cycle on overall       budget and fiscal    requirements
and the investment       competition      between this project       and
other projects.       OMB stated that the additional          cash invest-
ment would be $14 million;           however, as indicated      previously,
we estimate      that the amount would be about $8 million.

       We recognize       that the change to a l-year             replacement
standard would have some impact on overall                    budget and fiscal
requirements.        We believe,       however,     that the potential         recur-
ring annual savrngs of $5.1 million                 from this addltlonal          one-
time cash investment          are significant.          In addition,      although
our analysis      clearly     indicates      that immediate conversion            to
a l-year    replacement       cycle would result          in maxrmum savrngs,
some savings can be achieved              if portions       of the total      sedan
fleet    are put on a l-year          cycle each year until          the entire
fleet    1s converted       to a l-year      cycle.

        OMB commented on certain         defects    of the earlier      GSA
 studies.     As stated in this report,          the earlier     studies      in-
dicated    that cost reductions        could be achieved        by replacing
passenger     cars before they meet the replacement              standard       of
6 years or 60,000 miles;          however, we do not disagree           with
OMB's statement       that there were certain         defects    in some of
the studies.       Our conclusion      in this report       that a l-year
replacement      cycle is optimal     does not rely on these older
studies.      It is based primarrly        on the comprehensive          infor-
mation subsequently        developed     by our office     and by GSA for
its 1970 report,




                                         20
                                 CHAPTER4

                  CONCLUSIONSAND RECOFQdENlJATIONS
CONCLUSIONS
       As cars become older,     their    resale values decrease
while their   maintenance,   repair,      and tire   costs increase.
The resale values of cars decrease not only because of obso-
lescence brought on by restyling          and technological        innova-
tion but also because of their         loss of operating       efficiency      \
due to wear and tear.      Shortening      of the current      replacement
cycle would have the advantage         of lessening     depreciation,
maintenance,   repair,   and tire costs.

       Since adoption      in 1947 of the current      vehicle    replace-
ment standard      of 6 years or 60,000 miles,       GSA has made or
has sponsored several         studies of the effects      of the length
of the replacement        cycle on vehicle    costs.    All of these
studies,      as well as other information      presented      in this re-
port,    indicate    that a shorter   replacement    cycle will      result
in reduced ownership         costs.

       The average annual cost of owning a fleet    of sedans is
lower under a l-year     replacement cycle than it is under any
cycle ranging     from 2 to 6 years.  Therefore,  we conclude  that
a l-year   replacement   cycle for sedans in the civil   fleet
should be adopted.

      Although  Department    of Defense vehicles   are not subject
to GSA replacement    standards   and are therefore    not included
in the scope of our review,      our findings   may have applica-
tion to these vehicles.

RECOMMENDATIONS

     We recommend that the Administrator      of General Services,
with the concurrence  and cooperation    of the Office   of Manage-
ment and Budget

      --adopt     a l-year    replacement   standard   for   sedans   in its
         interagency       motor pools,



                                       21
      --revise     the Federal Property       Management Regulations      to
         require     other Federal    civil   agencies to adopt a
          l-year   replacement    standard    for sedans, and

      --examine    into the feasibility       of adopting    a l-year    re-
         placement     standard  for station      wagons and light    trucks
         in the civil      fleet because they are purchased         and
         operated    under conditions     similar    to sedans.

      In addition,       we recommend that the Director,       Office  of
Management and Budget, examine into the feasibility               of adopt-
ing a l-year      replacement    standard  for Department     of Defense
sedans,   statron     wagons,   and  light trucks.
                                  CHAPTER5

                              SCOPE OF REVIEW

       Our review was directed          toward determining         the optimum
replacement     standard     for sedans in the Federal           civil    domestic
fleet.    We reviewed      reports    on studies       of replacement       stan-
dards prepared      by GSA and other Government entities                and ana-
lyzed cost and statistical           data developed       by GSA for a 1970
report   on vehicle     replacement       standards.      We also reviewed
the National     Automotive      Dealers Association        wholesale       prices
for used cars and discussed           vehicle     replacement      standards
with officials      of large non-Government           motor vehicle       fleets.

       Department   of Defense vehicles    are not subject   to GSA
replacement    standards   and were, therefore,   not included   in
the scope of our review.

      Our review was conducted           primarily     at GSA headquarters,
Washington,    D.C.




                                        23
APPENDIXES




  25
                                                                                          APPENDIX       I

                        GENERdL          SER*WCES ADMINISTRATION
                                                        Washzngton, D C. 20405




    SEP    17 1970

.   Honorable      Elmer       B. Staats
    Comptroller        General    of
    the United     States
    Washington,        D. C. 20548

    Dear    Mr.   Staats:

    We have reviewed           the draft    of your proposed           report    to the
    Congress      on potential      savings     through  annual         replacement       of
    Government-wide            sedans    (B-158712).

    As noted     m your report,          the GSA study transmltted            to the Office
    of Management            and Budget      on January      30, 1970,    recommended
    the adoption        of a one-year       replacement       cycle for the entire
    Federal     civil     sedan fleet.       We proposed        that GSA be authorized
    to convert       to the new standard           m FY 1972 and that other          civil
    agencies     be authorized         to convert       as soon as fiscal    position
    of the Government           would     permit     such actlon.      No reply has
    been recerved          to date.

    The recommendations               m your report         would    also apply        the one-
    year replacement           standard     to station      wagons      and light      trucks.
    Since we did not mclude             such vehicles        m our test sale,            we do
    not have any speclflc           data to prove        or disprove       your assumption
    that the appllcatlon         of the revised        standard     to such vehicles           might
    produce      substantral      savmgs.      We have recently             mitlated       a study to
    determine       the impact       of such a standard          on the station         wagons and
    pickup    trucks      m the GSA fleet.         You will be advlsed               as to the result9
    of the study.

    GSA IS preparmg       to Include     the necessary       funding     arrangements
    m the FY 1972     budget    to permit      the conversion        of the GSA sedan
    fleet, as recommended.           In addltlon,       we are prepared         to issue the
    necessary   change     to the Federal        Property    Management           Regulations
    to require  other   clvrl   agencies     to adopt the one-year           replacement
     standard,  as soon as the Office          of Management         and Budget concurs.

                            Keep Freedom tn Z’our Future Wzth US   Samngs Bonds


                                                      27
APPENDIX I                                                                L          il




  GSA will have no difficulty                     in adopting           the new standard,                 since
  it funds the procurement                      of its vehicles            through         the General
   Supply     Fund,         However,           other      civil    agencies            generally       use
   appropriated           funds for vehicle              procurement.                   In addition,        they
  are subject          to statutory         lirmtatlons           on the number                of vehxles
  m their       fleet.       Thus,      many        agencies        would require                specific      actlon
  by the Congress              each year,            prior      to lnitlating            &sposal       and re-
  placement          action,       Changes           m statutory            provisions           might     be
  required        to permit        efficient         and effective            utlllzation         of the new
   standard.

   We appreciate   the opportumty                       to review         your report    in draft
  form  and assure    you we will                     cooperate         fully in Its implementation.

  Sincerely,




   Rod Xreger
   Acting       Administrator




                                                            28
                                                                            APPENDIX II
                         .       I
                EXECUYIVE       OFFICE     OF THE            IWESltrENT
                    OFFICE   OF MANAGEMENT           AND      BUDGET
                              WASHINGTON        DC   20503




                                                                          NOV 20 1970

Honorable  Elmer B. Staats
Comptroller  General of the
 Dnlted States
Washington, D. C. 20548

Dear Mr. Staats:

This is in response to Mr. Ahart's August 25, 1970, letter       requesting
our comments on your draft report,    "Potential    Savings by Replacing
Government-owned   Sedans Each Year."    As discussed below, we have some
mayor reservations    concerning a number of the assumptions,    lmplica-
tions and conclusions    contalned UI the report.

A section of the draft report renews GSA studies which were con-
ducted prior to the 1970 GSA study.                  The report points out that those
studies recommended replacement             periods of less than six years and
infers     that savings could have been obtained xf the recommendatrons
resulting      from the prior studies had been adopted.                However, the
draft report fails        to indicate      that:      (1) recommendations       made In
przor studies were not adopted because the Offlce of Management and
Budget beI3eved mappropriate             or mnsufficlent        econoxuc analysis was
used to develop the recommendations                (for this reason OMB requested
further     study);   (2) the conclusion         of the present 1970 GSA study is
that a six-year       replacement     policy is econormcally          preferable    to all
but a one-year policy.           Therefore,      if the prior recommendations          of
tWO-,    three-,    or four-year     replacement       perzods had been adopted, it
would have been econormcally            disadvantageous        to the Government.

The January 1970 GSA study was used as the basis for the GAO draft
report.     However, certain       important    modifications      have been made zn
the data by using a different           assumption concerning         the resale values
for used GSA sedans.           The GAO report assumes that GSA used sedan
values will increase in proportion             to the average increase m the
Federal Government's         cost of new sedans, which 1s directly            affected
by the statutory       llmitatlon.      The report does not provide          any justi-
fication    supporting      the resale assumption which is the basis for
revising     the estimated savings.          To the contrary,      we do not believe
that the price the Government pays for its new cars has any direct
relatzonship      to the value received        for sale of used cars.         The price
received     from the sale of used cars would appear to be based primarily
on national      and local used car markets rather than the price the
Government 1s prepared to pay for new cars.                  Furthermore,    the GSA
                                           29
APPENDIX II                                             ,      l




estimates of resale values were based on actual used car sales at
a time when the statutory          limitation     did not actually     reflect   manu-
 facturers    costs in the new car market.           The recent Increase in the
statutory      limitation   from $1,500 to $1,650 primarily          reflected     price-
 cost changes which had already occurred rather than an anticipation
of future increases.          Consequently,     it would be incorrect        to conclude
that there is an imbalance between used and new car prices estimated
m the GSA study.          In our opinion,     the GSA method of estimating
resale value on the basis of actual sale experience                is more real-
istic     than estimates based upon a percentage          formula relating       to
increases     in statutory     prace limitations.

If the assumption Ln the GAO report is invalid,          the estzmated savings
resulting     from a change to a one-year replacement pol~y is substan-
tially    less.     The annual savings contained on page 12 of the draft
report (which does not include the cost of capital)          would then be
reduced from $5.1 14 to $2.5 M. The resulting         "pay-back" perzod
would then be approximately        eight years, rather than the two- to
three-year      period estimated in the draft report.

We concur in the draft report's     genera2 conclusion   that present
economic analysis indicates     some long-run   savings can be obtained
by adoptzng an annual replacement      policy for GSA motor pool vehicles.
However, the following   factors must be considered in making any policy
deterrmnatlon,   and GAO might wish to recognize these factors in the
final report.

        1. The present cost data indicate        that a relatively   small
variation    which increases      the difference   between resale price and
purchase price (approximately         $100 per sedan according to GSA data)
could change the optimum replacement period to six years, rather
than one year.       If this shift    occurred prior to the eight-year
"pay-back" period,       changing to one-year replacement now would be
economically     disadvantageous.      Such a shift may or may not occur
in the future but should be consrdered 1n any proposed policy
change.

       2. Though no new       appropraatlon     would be required   to shift to
a one-year replacement        policy,    Federal net outlays from existing
balances would need to        be increased by approximately       $14 million.
This, of course, would        have an impact on overall      budget and fiscal
requirements.

      3.    Though the new investment        would be expected to result m
Government savings,    the investment        may not have the highest payoff
or be the highest priority     of all       projects presently  competing for
expenditure    of the Federal dollar.




                                           30
                                                                     APPENDIX II

Enclosed 1s a copy of the letter       we have sent the Adnunistrator            of
General Services recommending (1) continuance         of the six-year/
60,000 mile replacement   crlterla     for the present;     (2) maintenance
of their study of replacement      polwy on a contlnulng        basis; and
(3) study of a more comprehensive        alternative,   the relative        costs
of leasing versus ownership of the Government's          vehicle     fleet.

                                         Smcerely,




                                         Deputy Director




                                        31
APPENDIX       II                      COPY



                         EXECUTIVE OFFICE OF THE PRESIDENT
                          OFFICE OF MANAGEMENTAND BUDGET
                              WASHINGTON,D.C.   20503



                                                                   NOV 20 1970

Honorable Robert L. Kunzig
Admlnlstrator  of General Services
Washington, D.C. 20405

Dear Mr. Kunzig:

This is in response to your January 30, 1970, letter  whach trans-
mitted the General Services AdmInIstration Automobile Replacement
Policy Study and Program Memorandum.

We have reviewed the study and have discussed its           contents with
your staff at various times since you transmitted           the study.    The
study reflects     careful    planning and the competent    application   of
appropriate    analytic    techniques.

Our reaction        to the study may be summarized   as follows:

       1. The economic analysis  generally     supports a one-year
replacement  policy over the long-term     for GSA motor pool vehicles.

       2. Our analysis indicates       that the cost of the added capital
outlay required     to accelerate   the replacement    cycle to one year
would defer the realization       of economic benefits     for at least SIX
years.    Your staff has a copy of this analysis.

        3. The results  of the analysis are highly susceptible   to
relatively   small cost changes, which would reduce or eliminate
anticxpated   benefits.

        4. The estimated long term benefits     do not appear to
Justify    assigning  a high priority to achievement of a one-year
replacement cycle when the investment     required   is considered in
relation    to other demands upon the budget.

Therefore,  in view of the budgetary situation,    the Office of
Management and Budget recommends that the present sedan replace-
ment policy be continued at least through fiscal year 1972. We
suggest that you consider maintaining    your study on a current
basis for possible resubmission   at a time when the budgetary




                                          32
                                                                       APPENDIX II

situation   IS improved and potential       benefits    would represent     a
higher priority    in comparison with other budget requirements.              We
suggest that any updating of the study should also include con-
sIderation    of current factors   lnfluenclng       cost criteria,    such as
the recent passage of P. L. 91-243, approved September 26, 1970,
which could raise the effective        purchase price of new Government
sedans and increase the resale value.           In view of GSA's govern-
ment-wide responsibility     for motor vehicle        operations,    we also
suggest that GSA discuss any future policy proposals ~7th other
Federal agencies to provide      a coordinated       government-wide    approach.

In addition       to maintaining    your study of replacement policy on a
current basis,, we would appreciate          your undertaking an analysis of
the relative        costs of leasing versus ownership of the Government's
vehicle    fleet.      OMB staff will be ln touch with your staff to discuss
the development of a plan for such a study.
                                                              I
                                           SIncerely,

                               /S/       Caspar Weinberger

                                         Caspar W. Welnberger
                                         Deputy Director
                                                     1




                                            33
                                                                        I           .




         PRESENT VALUE ANALYSIS - NO INCREASE IN TRADE-IN                                 VALUES

 Cost of retaining   one sedan under replacement                            cycles        of      from     1 to 6 years.
 Interest  rate.   1 = 8 percent
 n = Number of years In cycle
 Cost of new car     $1683
 Trade-In  values*   Age of car (years)                                                    ----
                     Value                  Slt43                           $1;93         $8;5           $5:6   **$4:8      $3161

 Column     1    Column 2            Column 3              Column 4              Column 5                        Column 6
  Cycle          M&R and             Present            Present    value        Cumulative                    First   cycle
  term              tire              value                 amount               present                            cost
  (yr.)              costs            factor         (col.
                                                      -       2 x co1 35          value                    ($1683 + col.        5‘


     2'                              .857339
                                     .925926              $ 120
                                                             37                         $ 157
                                                                                           37                    $1,720
                                                                                                                  1,840

     i                  164
                        150          .73503
                                     .793833               119
                                                           120                           396
                                                                                         276                       1,959
                                                                                                                   2,079
     5                  184          .680584               125                           521                       2,204
     6                  183          -63017                115                           636                       2,319

                .
          PRESENT VALUE ANALYSIS - INCREASED TRADE-IN VALUES
                                     .
 Cost of retalnlng    one sedan under replacement cycles of from                                            1 to 6 years.
 Interest   rate*   1 = 8 percent
 n = Number of years In cycle
 Cost of new car:     $1683
 Trade-In   values:   Age of car (years)
                      Value
 Column     1       Column 2         Column      3         c01clmn 4             Column 5                         Column 6
  Cycle             M&R and          Present            Present   value         Cumulative                     First    cycle
  term                 tire           value                 amount               present                             cost
  (yr.1                costs          factor         (co1     2 x col. 3)         value                     ($1683 + col.           5
                    $ 41             .925926              $ 37                          $ 37                       $1,720
                     141               857339              120                           157                        1,840
                     150             .793833               119                           276                        1,959
                     164               73503               120                           396                        2,079
                     184               580584              125                           521                        2,204
                     183             . 63017               115                           636                        2,319

aIncludes       $5.50      selling       cost.       See note     on page     36 regarding                column     7.
bA l-year       cycle      1s the most economical.
                                                               APPENDIX III




           Column 7        column 8      Column 9                   Column 10
     Subsequent cycle     Perpetuity    Cost of furure                Total
           cost             factor          cycle5                    cost
    (col. 6 - trade-in)   1/ (i x n>   (col, 7 x rol. 8)      (col.
                                                                ---   6 + col.   9)

       $ 283.5a            12.5              $3,543                $5,263b
           747              6.25              4,668                 6,508
        1,124               4.16667           4,683                 6,642
        1,573               3.125             4,915                 6,994
        1,796               2.5               4,490                 6,694
        2,008               2.08333           4,183                 6,502




           Column 7        Column 8         Column 9             Column 10
-    Subsequent cycle     Perpetuity    Cost of future             Total
            cost            factor           cycles
    (~01. 6 - trade-in)   1/ (i x n)   (col. 7 x col.    8)   (~01.~06~: col.    9)
       $    152.5a         12.5              $1,906                  $3,626b
            648             6.25              4,050                   5,890
        1,049               4.16667           4,370
                                              4,771                   6,329
        1,527               3.125                                     6,850
        1,759               2.5               4,398                   6,602
        1,979               2.08333           4,122                   6,441




                                        35
APPENDIX III                                     1           1




       The major variable       costs of retaining        a sedan in GSA's
interagency     motor pool under different          replacement     cycles
are depreciation       costs; maintenance,      repair,     and tire    costs;
and interest      on investment,      These   costs    are  analyzed    for  a
single    sedan on the preceding       pages to determine        the most
economical     cycle.    The  columns   in  the   analyses    have   the fol-
lowing meanings.

        Column l--The      numbers, 1, 2, 3, 4, 5, and 6 should be
interpreted       as first   year, second year, etc.,  in relation
to columns 2, 3, and 4. They should be interpreted             as
l-year     cycle,   2-year cycle,   etc., with respect   to all other
columns*

     Column 2--These amounts represent     maintenance  and re-
pair (M&R) and tire  costs for the various     years as developed
by GSA for its 1970 report.

     Column 3--For     convenience,        we regard M&R and tire        costs
as occurring    at the beginning    of       the cycle.     For this   rea-
son, we apply the present value            factors     shown in this col-
umn, on the basis of an interest             rate of 8 percent,      to ob-
tain their   present values at the           beginning    of the cycles.

      Colk      4--These    are the present          value       amounts   obtained.


       Column T--The present value of           M&R and tire   costs for
a 2-year cycle will    be $37 the first          year and $120 the sec-
ond year for a cumulative    total   of        $157.  In this column
are accumulated    the items in column          4 to obtain the total
present value of M&R and tire      costs        for each cycle.

      Column    6--Each item in this colwlln represents     the pres-
ent value of     the costs for the initial   cycle consisting     of
the cost of     a new car and the M&R and tire    costs incurred
during each     cycle as shown in column 5,

      Column 7--In   subsequent cycles there will   be cars sold.
The resale values are a setoff     against the purchase price
of new cars.    Taking this into account each item in this
calm    shows the present valve cost of a subsequent      cycle.
An amount of $6.50 has been added to the cost of a l-year


                                      36
i   z
                                                                 APPENDIX III    i   i   )A
                               ,    .

        cycle to cover GSA's estimate of the        additional    cost   of
        selling an increased number of cars,

                Column g--The cycle costs in column 7 cannot be com-
        pared directly      with each other because they are not on an
        equal basis.       For example, the costs of a l-year      cycle are
        incurred     during a l-year     period whereas the costs of a
        6-year cycle are spread unevenly          over a B-year period.    Ap-
        plying    the perpetuity     factors   shown in this column will
        transform     the cycle costs of column 7 into present values
        of perpetuities      and thus put all the cycles on an equal
        footing.                                                         *

             Column 9--These amounts represent the present value of
        the costs for all future cycles based on an interest  rate
        of 8 percent.

               Column lo--This  column shows total   present value costs,
        composed of the present value costs of the initial        cycle
         (col.  6) and the present value cost of all future      cycles
         kol.   9).  The most economic cycle is the one that minimizes
        the present value of total    costs.   The l-year   cycle is the
        mo&t economical.




                                           37
APPENDIX IV
                                          ru          Y

                 PRINCIPAL    OFFICIALS   RESPONSIBLE

          FOR THE POLICIES       AND THE CONDUCT OF THE

              ACTIVITIES     DISCUSSED IN THIS REPORT


                                                  Tenure         of office
                                                  From                            To
                 GENERAL SERVICES ADMINISTRATION

ADMINISTRATOR    OF GENERAL SERVICES:
    Robert L.    Kunzig                        Mar.       1969       Present
    Lawson B.    Knott,  Jr.                   Nov.       1964       Feb.    1969
    Bernard L.    Boutin                       Nov.       1961       Nov.    1964


                 OFFICE OF MANAGEMENT AND BUDGET

DIRECTOR, OFFICE OF MANAGEMENT AND
  BUDGET:
    George P. Shultz               July                   1970       Present

DIRECTOR, BUREAU OF THE BUDGET
   (now OMB):
     Robert P. Mayo                        Jan.           1969      June             1970
     Charles J. Zwick                      Jan.           1968      Jan.             1969
     Charles L, Schultze                   June           1965      Jan.             1968
     Kermit Gordon                         Dec.           1962      June             1965




                                                                    U.S.   GAO,    Wash   . DC
                                   38
r-   -   *
i                    .



             c   .
                         ,



                             ‘      1




POTENTIAL SAVINGS BY REPLACING
GOVERNMENT-OWNED SEDANS EACH YEAR--
GENERAL SERVICES ADMINISTRATION


        The Federal       civ31     agencies            had a domestic            fleet    of 37,000       sedans

at the end of fiscal              year    1969.           The cost of operating              them durrng

that    year was $27.7 mllllon,                  of whrch $17.8 million                   was related       to the

$22,500     sedans III GSA's Interagency                     motor pools.

        We reported       that     replaclng            GSA's sedans each year rather                     than

every     5 years as is currently                 being       done would save the Government                       an

estimated     $5.1 mllllon          annually            because      I11 maintenance,           repair,      and tire

costs are lowest          during        the first          year of ownershlp              and (2) the discount

obtalned     by the Government              when It purchases                sedans substantially                offsets

the depreciation          factor        during         the first     year of ownershrp.

        We recommended that              the Admlnlstrator               of General         Services,       with        the

concurrence      and cooperation             of the Offlce             of Management and Budget                    COMB)
        mm adopt a l-year           replacement             standard        for    sedans

            1n Its     Interagency          motor pools,
        -- revise      the Federal          Property         Management Regulations                to

            require     other      Federal        civrl       agencies       to adopt a l-year

            replacement          standard        for      sedans,     and
        we examine Into           the feasrbillty              of adopting           a l-year

            replacement          standard        for      statlon    wagons and light

            trucks     In the civil          fleet         since     they are purchased            and

            operated      under conditions                 simrlar     to sedans.
       Departments       of Defense        vehicles      are not subject            to GSA replacement

standards      and were therefore           excluded       from our review*               However,       because

our findings       may have appllcatlon               to these vehicles            as well,     we recommended

that   OMB examine into           the feaslbllrty           of adopting        a l-year       replacement

standard     for     Department       of Defense       sedans,     station      wagons,       and light

trucks.

       GSA agreed       with   our proposals,           OMB also agreed            that     a l-year

replacement        cycle for      GSA's sedans was optimal                rn the long run but plans

to continue        the current        replacement       cycle for        the present         time --      primarrly

because of the Impact             of the addltlonal           caprtal        Investment       on the overall

Federal     budget     and the relative         prlorlty         of other      Federal       projects.        We

expressed      the belief      that     the payoff         on the capital          outlay     was slgnxficant

and that      the addrtlonal          caprtal    Investment        plus imputed           interest       would
be recovered         through   annual      savings      in about        2 years.
POTENTIAL SAVINGS BY REPLACING
GOVERNMENT-OWED SEDANSEACH YEAR --                             B-158712
GENERALSERVICES ADMINISTRATION                                 6/9/71


VEHICLES
     Optimum time to replace sedans in Federal civil   fleet   is
       at the end of first year of ownership.
POTENTIAL SAVINGS BY REPLACING
GOVERNMENT-OWNED SEDANSEACH YEAR --                           B-158712
GENERALSERVICES ADMINISTRATION                                6/g/71


PROPERTY
     Procurement:
           Optimum time to replace sedans in Federal civil   fleet
             is at the end of first year of ownership.