DATE: May 27, 2016
TO: Board of Mayor and Aldermen
FROM: Eric Stuckey, City Administrator
SUBJECT:
title
Review of Commodity Stabilization Policy
body
Purpose
The purpose of this memo is to provide information to the Franklin Board of Mayor and Aldermen (BOMA) concerning the City policy regarding fuel hedging and commodity stabilization.
Background
After Hurricane Katrina destroyed refineries along the Gulf Coast and fuel prices were dramatically impacted, the City of Franklin joined with Metro Nashville to implore the General Assembly to pass enabling legislation authorizing local governments to hedge financially the price of gasoline and diesel fuel. In 2008, such legislation was adopted and subsequently amended in 2010 to allow continual hedging opportunities.
Metro Nashville, Nashville Schools, the Metropolitan Transit Authority and Regional Transit Authority have been active in the fuel hedging program since inception. The purpose of the program, and the inter-local agreement that supports it, is to reduce the volatility of fuel prices. The price for oil in the marketplace often moves quickly, either for geopolitical reasons or due to supply and demand imbalances. When that occurs, as with the period following Hurricane Katrina, local government budgets can incur costs that are two to four times normally budgeted amounts.
By locking in a price that covers an entire fiscal year, cities and counties can plan expenditures more accurately. When prices are high, hedging contracts offset excessive prices. When prices are lower than expected, savings at the pump are offset in part by the hedging contracts. Overall, budgeted amounts for fuel can be more predictable and thus set at lower rate levels than would otherwise be required by prudent budgeting.
Franklin has received positive results from the program in six of the eight years since fuel hedging has been introduced.
The commodity stabilization...
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