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CAB Fuel Decision Costing Big Bucks
March 4, 2009 - With gas and diesel on the rise, the Charles A. Beard Memorial School Corporation decided to gamble when it signed its new yearly fuel contract last summer.
The wager, it turned out, was not a good one for CAB, with estimated losses already exceeding $44,000.
The new fuel contract with Van Hoy Oil, approved by the school board last June, set fixed prices of $3.83 and $4.60 a gallon for gas and diesel, respectively. Not expecting prices to drop, CAB opted not to use the fluctuating pricing options used in previous years' contracts. Those contracts resulted in costs more closely tied to actual pump prices.
The price of gas and diesel did drop, however, making CAB's decision to go with fixed prices an expensive one.
According to a spreadsheet prepared by CAB Business Manager David Bundy, CAB had paid $102,724 as of Feb. 7 for 22,975 total gallons of gas and diesel under the new contract. Using average pump prices on dates CAB made its purchases, the spreadsheet shows that the higher, fixed prices in CAB's fuel contract resulted in CAB paying an estimated $44,265 more than it would have if the fuel contract called for fluctuating prices.
"We haven't been very good at predicting the futures market on fuel, obviously," Bundy (one of CAB’s highest-paid employees – Pub.) told The Banner on Monday. According to average daily pump prices compiled by AAA, the highest price in Indiana for unleaded gas and diesel since July 1 was $4.17 a gallon on Sept. 16 and $4.84 on July 16, respectively. As of Monday afternoon, AAA was reporting an average price for unleaded gas of $1.88 a gallon in Indiana, and $2.18 a gallon for diesel, 51 percent and 53 percent less, respectively, than the fixed prices CAB agreed to last summer.
The recommendation to drop the fluctuating pricing option for fixed prices had been made to the school board last June by Transportation Director Janet White. In a letter to board members, White explained why she thought CAB should change its approach to the fuel contract.
"Although we have previously purchased fuel on a fluctuating bid basis, and Van Hoy's have done a good job purchasing fuel for us at fair market prices, I feel with the uncertainty of the oil market today, we need to do as much as possible to protect our budget with fixed pricing," White wrote to the board.
With very little discussion of the issue, six of the school board's seven members went with White's recommendation to enter into a one-year fixed price contract with Van Hoy that started July 1. The board's seventh member, Wade Beatty, abstained from the vote due to a conflict of interest -- his employer, Harvest Land Co-op, was one of the vendors who had bid on the fuel contract. Since then, the board has gotten four new members, leaving only two of those who voted for the fixed prices still on the board.
While the official recommendation that the school board go with the fixed prices came from White, both she and Bundy said the recommendation had been the result of consensus reached by them and then-interim Superintendent Ray Pavy, who left CAB at the end of June.
"We talked about it and we tried to get as much input as we could get," Bundy said. "We talked about it amongst ourselves, we tried to talk about it with board members on an individual basis and try to get their feelings, and just try to make the best decision."
"That was probably one of the hardest decisions we made," White said. "Everybody was saying, 'Well, you know, it's going to go up,' and 'It's been going up,' and 'We need to protect ourselves and we need to know how much we're going to spend,' and all that kind of thing. ... It was a very tough decision, honestly."
Bundy told The Banner that he also thought CAB's handling of its previous fuel contract for the 2007-2008 school year, which used fluctuating prices, had also been a mistake.
"Obviously, for, I think, two years in a row now, we've made the wrong decision," Bundy said. Because fuel prices rose during the 2007-2008 school year, he said CAB would have been better off if that contract had locked in prices instead of using fluctuating ones.
While he said school board members might be "gun shy" about signing another fixed price fuel contract, CAB Superintendent Gary Storie said he was not prepared to say he wouldn't recommend a similar arrangement for next year. With fuel prices as low as they are now, he said having fixed prices next year could work to the school corporation's advantage.
"I would like to think we're going to have these prices for a good long time, but I don't know that we will," Storie said.
Storie said another option to help reign in fuel costs in the future might be for CAB to purchase its diesel fuel as part of a consortium of several school corporations. He said CAB does this with its natural gas purchases and has benefited from this type of arrangement.
Bundy said CAB also might consider asking its fuel vendors to agree to contracts of durations less than a year, possibly three months or six months. That way, if fixed prices are opted for again, the school corporation won't have to wait an entire year to renegotiate or shop around for a better deal.
"I think with the volatility that we have with this type of product, I'm thinking that that's something at least that I'm strongly going to consider having some discussion about," Bundy said, "because I don't want to be in the position where we're giving away the amount of money we've given away trying to guess."
Fuel costs and the decision to lock in fixed prices for this school year have not been a topic of school board discussion during public meetings since the new contract was approved last summer. Board President Kevin Knott and Board Vice President Steve Dalton, however, did respond to The Banner's request for comment on this issue.
"Decisions are based on information available at the time and this country has seen an economic downturn unlike any in many recent years," Knott, who voted for the fixed prices last June, said. "… It is important we attempt to make the best overall decision for our corporation to utilize saving for our taxpayers whenever possible. I do believe we do need to take a hard look at whether or not we enter a fixed price contract in the future as we want to save our taxpayers and corporation money whenever we can."
"Although I was not on the board when this decision was made, I spoke at the meeting and asked the previous board why they were considering locking in fuel prices at all time historical highs," Dalton, who joined the board July 1, said. "I thought it was a mistake at the time, and clearly it was. In the future, I think we can exercise better judgment."
Besides Dalton, there are three others who have joined the board since last July and were not involved in making the decision to lock in the fixed prices – Mark Fort, Tim Wehr and Tom Schaetzle. Of the two other members besides Knott who were on the board at that time of the vote, only Leah Kopp voted for the contract, with Beatty abstaining.
Kopp told The Banner that she thought locking in the prices was best for the school corporation due to the rising fuel costs. "With what I had seen in the newspaper and on TV it didn't look like the prices were going down, it seemed like they were soaring," she said. "So there again I thought I was doing what was best." She went on to say that she has "no experience in this field," and thought that those who did "didn't have a clue as to what was about to happen.”
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