West Virginia's plan to save money: Buy used cars

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Like many states in the U.S., West Virginia is facing a budget shortfall; while this is nowhere near the magnitude of Governor Schwarzenegger's "IOU State," the mountainous corner of "almost heaven" will need some creative thinking. After all, squeezing out an additional $184 million in a state of only 1.8 million residents calls for serious accounting magic.

They may have found a first step. According to the West Virginia Gazette, the state has OK'd a contract with Chrysler Financial Services to provide 115 used, previously-leased Chryslers, Jeeps and Dodges to add to its fleet, thereby saving it $800,000 over the price of buying them new.
Buying used has been a tactic of shrewd consumers since the first cranky, dissatisfied Model-T owner put his Tin Lizzie back on the market. The first few years of a car's life are the steepest part of its depreciation curve, making them the most expensive miles to drive. A wisely-chosen used car can drop the per-mile cost of travel dramatically.

Has West Virginia selected its vehicles wisely? The standards for these rides is a little higher than the Cash for Clunkers program: there can be no more than 36,000 miles on the odometer, and only 2006 and 2007 models need apply. West Virginia is also buying extended warranties for these cars, I suspect at a very favorable rate. 52 of the 115 vehicles included in this purchase will be financed with three-year loans.

I spoke to Joe Spina, the used car expert for Edmunds.com, about this purchase. He believes, "This could be a good business model for manufacturers and any state or company that is buying a fleet." Although the price of used cars has remained high during the recession, Spina points out that, at this time three years ago, manufacturers were offering exceptional discounts. Many of those cars are now coming off lease, creating a potential glut that could drive down auction prices.

For Chrysler, the West Virginia sale will not only reduce its inventory, but will also keep these cars off the auction block, which could help prop up the sales value of other vehicles coming off lease. Spina also told me noted that, because Chrysler suffers low consumer confidence and its vehicles are among the worst in retained value, such a sale could be of particular benefit, as it would alleviate the need to compete on the auction market against more respected brands.

Spina also believes that this program, if successful, could be adopted by other manufacturers as a way to control inventory and defend price points. Struggling states should also have great incentive to consider similar purchases.

One blip to be aware of, though: Spina warns that, due to the moribund car lease market in the past year, the used car market three years from now could be very tight. This could increase used car costs and reduce potential state savings.

While this is certainly a worthy idea with great potential, it will be interesting to see the first used car assigned to Governor, Joe Manchin. A nice used Jeep Liberty would set a great example -- or it could convince him to ride his Harley to work. Either way, the Mountain State saves money.

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