South Florida Sun-Sentinel (Fort Lauderdale)
BYLINE: Larry Barszewski, Sun Sentinel, Fort Lauderdale, Fla.
FORT LAUDERDALE — Taking a page from the airline industry, City Manager Lee Feldman wants the city to start hedging its fuel costs by buying oil, gas and diesel futures.
Call it insurance or call it gambling, Feldman sees it as an effective way to budget the city’s money more accurately in the face of volatile fuel prices.
“What I’m looking at is budget certainty,” Feldman said. “When we start budgeting, we don’t want to artificially inflate our budget to make sure we have enough money in our fuel budget to protect against price increases.”
Over-budgeting for fuel could force the city to cut positions or programs, while not budgeting enough could lead to emergency cuts later on or force the city to dip into its reserves.
The idea of using futures isn’t to speculate in the market, but to keep costs under control, said Mayor Jack Seiler, who supports the idea. The commission is expected to vote on Feldman’s proposal in July.
“We’re not in the business of playing the market,” Seiler said. “The problem we have is you have such a fluctuation in gas prices.”
Jeffrey LeMunyon, a financial adviser with Linwood Capital in Minnesota, estimated about 50 to 100 cities nationwide use futures to hedge their fuel costs. Many aren’t large enough to take advantage of the futures market, said LeMunyon, who the city may hire as an adviser for its program.
Feldman used fuel hedging in Palm Bay, where he was city manager before coming to Fort Lauderdale.
Palm Bay accumulated almost $600,000 in savings during the three years the program was in place, said John Cady, the city’s fleet services division manager.
“By far, the gains outweighed the losses,” Cady said.
Palm Bay’s fleet is about a third of the size of Fort Lauderdale’s, Feldman said. Fort Lauderdale spent $4.5 million on fuel in its last budget, while Palm Bay spent $1.36 million, officials said.
Palm Bay only budgeted $1.1 million for fuel last year, but was more than able to make up the difference with $312,000 it made from its oil futures, Cady said.
Fort Lauderdale would continue to buy its fuel on the spot market under the plan.
However, as prices rise, the value of its oil futures would increase and offset higher fuel prices. If the price falls too far, the city could end up paying more than budgeted for fuel.
“That’s why you want to have somebody on your team, basically an adviser in the fuel market, telling you now’s the time to place your hedge and now’s the time not to,” Feldman said.
The goal over time is to have the gains and losses balance out, said LeMunyon, who would be paid $2,000 a month by the city.
“When you buy homeowners insurance, you don’t expect to save anything,” LeMunyon said. “What you’re looking for is a reduction in your risk. If that risk ever happens, your life becomes very bad.”
Copyright 2012 South Florida Sun-Sentinel