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HOW CAN WE MAXIMIZE PRIVATE SECTOR

PARTICIPATION IN TRANSPORTATION?—PART I

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

MAY 18, 2004

Serial No. 108–220

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. ‘‘DUTCH’’ RUPPERSBERGER, Maryland

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY

AFFAIRS

DOUG OSE, California, Chairman

EDWARD L. SCHROCK, Virginia

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

CHRIS CANNON, Utah

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

PATRICK J. TIBERI, Ohio

JOHN F. TIERNEY, Massachusetts

TOM LANTOS, California

PAUL E. KANJORSKI, Pennsylvania

DENNIS J. KUCINICH, Ohio

CHRIS VAN HOLLEN, Maryland

JIM COOPER, Tennessee

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

BARBARA F. KAHLOW, Staff Director

LAUREN JACOBS, Clerk

KRISTA BOYD, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 18, 2004 ............................................................................... 1

Statement of:

Allen, William R., president, Amador Stage Lines, Sacramento, CA;

Katsumi Tanaka, chairman of the board and CEO, E NOA Corp.,

Honolulu, HI; Terrence V. Thomas, president, Community Bus Services, Inc., Youngstown, OH; Dr. Adrian Moore, vice president, Reason

Foundation and executive director, Reason Public Policy Institute; Dr.

Ronald D. Utt, Herbert and Joyce Morgan senior research fellow, the

Heritage Foundation; and Dr. Max B. Sawicky, economist, Economic

Policy Institute .............................................................................................. 54

Frankel, Emil, Assistant Secretary for Transportation Policy, U.S. Department of Transportation ......................................................................... 10

Letters, statements, etc., submitted for the record by:

Allen, William R., president, Amador Stage Lines, Sacramento, CA:

Letter dated May 25, 2004 ....................................................................... 152

Parking lot shuttle bus schedule .............................................................. 165

Prepared statement of ............................................................................... 57

Frankel, Emil, Assistant Secretary for Transportation Policy, U.S. Department of Transportation:

Information concerning audits ................................................................. 37

Information concerning characteristics of contracts ............................... 50

Information concerning grants ................................................................. 22, 33

Information concerning projects ............................................................... 27

Information concerning Sections 5306(a) and 5307(c) of 49 U.S.C. ...... 35

Information concerning standard operating procedures ........................ 52

Prepared statement of ............................................................................... 13

Moore, Dr. Adrian, vice president, Reason Foundation and executive director, Reason Public Policy Institute, prepared statement of .................. 105

Ose, Hon. Doug, a Representative in Congress from the State of California, prepared statement of ........................................................................... 4

Sawicky, Dr. Max B., economist, Economic Policy Institute, prepared

statement of ................................................................................................... 144

Tanaka, Katsumi, chairman of the board and CEO, E NOA Corp., Honolulu, HI:

Poster for ‘‘The Bus’’ .................................................................................. 181

Prepared statement of ............................................................................... 69

Prepared statement of Jennifer Dorn ...................................................... 77

Thomas, Terrence V., president, Community Bus Services, Inc., Youngstown, OH, prepared statement of ................................................................ 87

Utt, Dr. Ronald D., Herbert and Joyce Morgan senior research fellow,

the Heritage Foundation, prepared statement of ....................................... 125

(1)

HOW CAN WE MAXIMIZE PRIVATE SECTOR

PARTICIPATION IN TRANSPORTATION?—

PART I

TUESDAY, MAY 18, 2004

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY POLICY, NATURAL

RESOURCES AND REGULATORY AFFAIRS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2154, Rayburn House Office Building, Hon. Doug Ose (chairman of

the subcommittee) presiding.

Present: Representatives Ose, Schrock, Tiberi and Tierney.

Staff present: Barbara F. Kahlow, staff director; Lauren Jacobs,

clerk; Megan Taormino, press secretary; Krista Boyd, minority

counsel; and Cecelia Morton, minority office manager.

Mr. OSE. Good morning. Welcome to this morning’s hearing of

the Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs.

Today’s subject matter is how can we maximize private sector

participation in transportation. We have two August panels of witnesses, and we will get to an introduction of them shortly.

Our order of battle here is that we make opening statements—

actually, establish a quorum, make opening statements, swear our

witnesses in. Then, the witnesses get to make their statements,

which we have received. Then, we will go to questions by Members

for the witnesses. With that understanding, we will proceed.

Much of the Nation’s transportation infrastructure is aging and

in need of repair. Also, additional ground transportation services

are needed, especially in areas of population growth. There are

many advantages to participation by the private sector in improving America’s transportation system. For example, infrastructure

improvement projects can often be completed more quickly and at

reduced costs, transportation services can often be delivered more

cost effectively, and Federal and State funds can be devoted to

other pressing needs, especially given the deficits we face.

In 1964, the Congress began to enact laws to encourage private

sector participation in transportation. The 1966 law that established the Department of Transportation identified six reasons to

establish the Cabinet-level department. The second reason was to,

‘‘facilitate the development and improvement of coordinated transportation service, to be provided by private enterprise to the maximum extent feasible.’’

2

DOT’s implementing rule assigned primary responsibility for

evaluation of private transportation sector operating and economic

issues to the Assistant Secretary for Transportation Policy, whose

organization is located within the Office of the Secretary and who

is here with us today.

In addition to laws requiring private sector participation to the

maximum extent feasible, Federal regulations support this objective. For example, the governmentwide grants management common rule—which we have a copy of right here just for everybody’s

reference if we need it—provides that Federal grantees and subgrantees, ‘‘must not use equipment acquired with grant funds to

provide services for a fee to compete unfairly with private companies that provide equivalent services.’’

Today, the subcommittee will explore opportunities for further

private sector participation in ground transportation and past experiences with public-private partnerships, service delivery by competitively-awarded private sector providers, and existing private

sector transportation services.

Also, the subcommittee will examine the administration’s record

in facilitating private sector participation in transportation and its

record in faithfully implementing the various private sector participation statutory provisions through its codified rules, oversight, enforcement and other initiatives.

In March 2003, I learned of a public takeover of a contract that

had for the previous 25 years been competitively awarded for mass

transit shuttle bus services in Sacramento, CA. I began a 9-month

investigation. I found three primary items: first, an unneeded expenditure of substantial Federal funds; second, noncompliance by a

local transit grantee with the Federal law requiring private sector

participation to the maximum extent feasible; and, third, inadequate enforcement by the Department of Transportation. Without

evidence of grantee compliance with the private sector participation

requirements, the Department of Transportation awarded $2.4 million to the local transit authority for the purchase of buses and

later allowed this local agency to use these buses in a takeover of

an existing mass transit service that had been provided by a private sector provider and at an estimated additional cost of

$277,000 annually.

Before termination of the existing contract, I requested that the

Department of Transportation investigate the situation to ensure

statutory compliance. After the takeover in August 2003, I recommended that the Department of Transportation initiate a rulemaking to implement the statutory private sector participation requirements outlined in the 1994 law passed by Congress and for

the Department of Transportation to take an appropriate enforcement action against the noncompliant Federal grantee. Sadly, to

date, the Department of Transportation has neither initiated a

rulemaking nor taken any enforcement action that I am aware of.

Since my investigation of this case, I have learned of additional

cases, some of which we will hear about today, that seem to be in

violation of existing Federal regulations, where the Department of

Transportation has allowed local transit authorities to compete unfairly with existing private mass transit service providers.

3

Our witnesses today include the Department of Transportation’s

responsible Assistant Secretary, leading think tanks experts, and

three adversely affected small business operators of mass transit

services. Congress wants and Americans deserve a reliable and

cost-effective transportation system and one that does not harm existing small business operators or transportation services.

I want to welcome our witnesses here today. They include the

Department of Transportation Assistant Secretary for Transportation Policy, Mr. Emil Frankel; the president of Amador Stage

Lines, Sacramento, CA, Mr. William Allen; the chairman of the

Board and CEO of E Noa Corp., Honolulu, HI, Mr. Katsumi Tanaka; the president of Community Bus Services, Inc., of Youngstown, OH, Mr. Terrence V. Thomas; the vice president of Reason

Foundation and executive director, Reason Public Policy Institute,

Dr. Adrian Moore; the Herbert & Joyce Morgan senior research fellow at the Heritage Foundation, Dr. Ronald Utt; and, Dr. Max

Sawicky, who is an economist at the Economic Policy Institute.

[The prepared statement of Hon. Doug Ose follows:]

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Mr. OSE. I want to welcome my friend from Virginia to the committee and offer him the chance to offer an opening statement if

he so chooses.

Mr. SCHROCK. Nothing.

Mr. OSE. As I said earlier on, that as a matter of course in this

committee we swear all of our witnesses in. So, Mr. Frankel, if you

would please rise.

[Witness sworn.]

Mr. OSE. Let the record show that the witness answered in the

affirmative.

Mr. Frankel, we have received your written testimony; and, trust

me, I have read it, including all of the information about the various financing programs that the Department has under way. I

want to recognize you for 5 minutes for the purpose of summarizing your testimony. I have a heavy gavel on the time, so I just forewarn you.

STATEMENT OF EMIL FRANKEL, ASSISTANT SECRETARY FOR

TRANSPORTATION POLICY, U.S. DEPARTMENT OF TRANSPORTATION

Mr. FRANKEL. Thank you, sir.

Mr. Chairman, Congressmen, first of all, I request that longer

written statement be made part of the record; and I am pleased to

be here on behalf of the Secretary and the Department to discuss

private participation in transportation.

As you have noted, this hearing is especially timely in light of

the pending reauthorization of the surface transportation programs. Obviously, few things have as great an impact on economic

development, growth patterns and quality of life as transportation;

and improved facilities in the transportation sector lead to greater

productivity in attracting new businesses and improved accessibility. A healthy transportation sector is essential to President Bush’s

efforts to keep America on track for a more prosperous future.

One way to ensure a vibrant transportation sector is to encourage private participation in the public sector, and I am pleased that

you are holding these hearings to look at that issue.

The Department is committed to providing a greater role to the

private sector in transportation services and, importantly, in infrastructure investment. I think our commitment to that is indicated

by the proposals contained in the administration’s SAFETEA proposal to reauthorize TEA–21 and the surface transportation programs.

Improving the transportation system of one of the fastest growing economies in the industrialized world obviously presents significant challenges. Because, as robust as our networks are and our

economy is, as you pointed out, they are aging, the transportation

infrastructure is aging and is increasingly being operated at or

above capacity. We need to seek a wide range of investment alternatives in order to deal with capacity and improvement issues, because congestion represents a significant and growing risk to our

economy.

SAFETEA lays the foundation for reforming the way Americans

invest in and use our transportation system. The administration

seeks to give States new tools to manage congestion, to raise addiVerDate 11-MAY-2000 14:32 Dec 14, 2004 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 D:\DOCS\96634.TXT HGOVREF1 PsN: HGOVREF1
11

tional revenue from users, to attract private capital to highway and

mass transit infrastructure, and to leverage existing resources

more efficiently.

The need for investment capital for transportation is the driving

force behind the push for innovative finance. As I have said, we

need new sources of investment capital for our transportation system, and we have proposed a series of innovative financing initiatives. Specifically, by trying to foster public-private partnerships;

drawing on the public’s willingness to pay direct user charges for

transportation benefits through tolling and value pricing, which is

absolutely critical to leveraging private investment; and also,

leveraging that private investment through private activity bonds;

enabling additional transportation facilities to be developed more

quickly and at less cost; and, more flexible financing options

through amendments to the TIFIA and State Infrastructure Bank

programs. We obviously can’t limit ourselves to one or two of these

financing mechanisms but need all of them.

Toll facility financing and construction can be a viable resource

alternative, and these enable the creation of public-private partnerships, because the private sector needs to find source revenue

streams to give it a return on its investment and to service its private debt.

Promoting innovation is not new to the Department or to the

Federal Highway Administration. For decades, the Federal Highway Administration in particular has encouraged increased private

sector participation in project planning, design, construction, maintenance and operation of highways and bridges; and, we continue

to do that.

I would like to talk a bit about the innercity bus industry, where

also the administration has made, in this proposal, the SAFETEA

proposal, important provisions. The private sector obviously plays

a key role in operating the essential elements of the Nation’s transportation system; and, private carriers provide an important, if

often overlooked, link in the intermodal chain of personal movements, that is, through innercity or through over-the-road bus services.

The administration’s SAFETEA legislation recognizes this potential and supports several initiatives to strengthen the bus industry’s role in the national transportation network, including a $85

million capital grant program for innercity bus intermodal facilities, making intermodal service information improvements an eligible grant expense.

SAFETEA would also require that innercity buses have reasonable and appropriate access to other publicly funded intermodal facilities. I must say that we are disappointed that the House of Representatives, in its bill to reauthorize T-LU, has not recognized or

acknowledged and taken any of these steps with regard to

strengthening the private over-the-road or innercity bus industry.

The history of public transportation in the United States is obviously a history of private sector involvement in the movement of

people; and, in the 1960’s, Congress recognized the continued

health our urban areas required increased Federal involvement

with mass transit to play a critical role.

Mr. OSE. Mr. Frankel, your time has expired.

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Mr. FRANKEL. Thank you, sir.

Mr. OSE. That is an excellent summary.

[The prepared statement of Mr. Frankel follows:]

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Mr. OSE. I recognize my friend from Massachusetts, if he chooses, for the purpose of an opening statement.

Mr. TIERNEY. I am going to pass on the opening statement, and

we can get right to the questions. Thank you, though.

Mr. OSE. My friend from Ohio, which is a large State, for the

purpose of an opening statement.

Mr. TIBERI. No, thank you.

Mr. OSE. We are going to go straight to questions.

Mr. Frankel, I am curious about something. I want to clarify

something. I saw in your testimony the comments about intercity

bus service and then also transit and private sector; and I concluded implicitly, I hope correctly, but I stand to be corrected if otherwise, one is between cities and one is within a city. Transit is

considered—I mean, that is the nomenclature for bus service within a city?

Mr. FRANKEL. Essentially, that is the case, Mr. Chairman. Yes.

That is why it is sometimes referred to—or more often, I guess—

as over-the-road buses. That is the particular focus on services between metropolitan areas. Although, in fact, many—as you well

know, and it is a subject here, in many cases the same companies

will sometimes, under contract, provide services within a metropolitan area or urbanized area.

Mr. OSE. They may have dual wings of the business doing intercity and transit services?

Mr. FRANKEL. Correct. Our proposals are really directed at the

private sector provision of what I will call innercity or

intrametropolitan area of services.

Mr. OSE. Now, the Transit Administration works with local public transit providers?

Mr. FRANKEL. That is primarily the case. That is right. Although,

as you well know, one of its important programs is rural, the rural

bus program, in which in virtually all cases, if not all, those services are provided under contract, usually by private companies.

FTA is the administer of the grants, grants made through States,

through State departments of transportation, largely, for rural bus

services. Your description is basically the case. That is certainly

the way that we think of FTA, to a large degree.

Mr. OSE. That is why I chose the word local rather than rural

or urban.

Within these arrangements between FTA and the local public

service provider, FTA is asked to make grants along the course of

business, is that correct?

Mr. FRANKEL. Of course this is true for the Department, but FTA

is a grantmaking agency; and its powers, as you know, derive from

the welfare clause of the Constitution, not, as we pointed out in my

written statement, not from the commerce clause. It is essentially

not a regulatory agency, unlike, for example, NHTSA, the National

Highway Traffic Safety Administration, which is essentially a regulatory agency versus a grantmaking agency like FTA.

Mr. OSE. I have page 5 where that you talk about the welfare

clause. For those grants, your testimony states: FTA’s ability to

exert influence over the transit industry is limited to setting terms

and conditions over the use of Federal grant funds.

21

Now when you set terms and conditions, to what extent do you

set terms and conditions? What are the parameters of the terms

and conditions on the grants that you otherwise make?

Mr. FRANKEL. Well, Mr. Chairman, I think probably in terms of

providing you the detail that you might require, I would rather

supply that subsequently in writing. I am not the Administrator of

FTA, and I can say only in general terms, it is exercising oversight,

obviously, and making sure that the grants are carried out consistent with national purposes and the statutory purposes.

[The information referred to follows:]

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Mr. OSE. If a local service provider comes forward and says to

the FTA, we are applying for a grant of X amount of dollars to acquire a maintenance facility, you would judge that under the circumstances at that time?

Mr. FRANKEL. Well, first of all, the grants are largely—again,

some exception with the rural program, obviously—but the grants

to which you are referring, to more urbanized areas, are strictly

capital grants. They are not for operations.

They are no longer in the business, as you well know, of providing operating subsidies. And the conditions really relate—the development of these capital programs, as is true of a State transportation agency, are consistent through planning processes, the planning requirements of how T–21 is extended going through an MPO

process, the development of TIPS and State TIPS——

Mr. OSE. All of these are capital assets?

Mr. FRANKEL. The acquisition of capital assets. These become

programs subject to local planning processes and priorities and

then are funded and, in many cases, are funded through formula

programs. Not entirely. FTA, unlike the highway program, is not

entirely by any means a formula program, but there are elements

of that in which the local agencies in cooperation, if you will, with

the MPOs develop their own priorities of how these capital grants

can be used, these capital funds can be used.

Mr. OSE. My time has expired.

Mr. TIERNEY. Thank you, Mr. Frankel, for your testimony here

today and for joining us.

Some people would think that local transit systems are, in fact,

local, that the local community would be the one to decide whether

or not they are going to use a private carrier or a public carrier.

I am getting the inference from your testimony that the administration—I will say ‘‘you’’ except I think you are representing the

administration’s position on this—somehow thinks that is a decision that shouldn’t be left to the local community, that the community should be forced to use private companies instead of public

companies. Am I correct in where you are going on that?

Mr. FRANKEL. No, I wouldn’t say that, Congressman. I think,

frankly, your initial characterization is generally what our view is,

particularly strongly; and I think this permeates our SAFETEA

proposal, that decisions are State and local decisions to be made

particularly in terms of operations. There are provisions in the law

to which the chairman has made reference which emphasize an important role for the private sector, which we do try to recognize;

and, we do try to strike a balance in terms of creating options and

alternatives for State and local authorities and agencies to utilize

private resources and private capital.

Mr. TIERNEY. I have a little trouble buying that, because I look

at the administration’s reauthorization proposal, and I think they

go a little bit further than that. It seems to me what they try to

do is allow the Department of Transportation to withhold certification of a transit program, if the program doesn’t, in the Federal

agency’s opinion, allow sufficiently for private operators to compete.

We are putting the Federal opinion of whether or not there was

the right amount, in their subjective opinion, to compete or not, as

opposed to the local people. I am disturbed by that. I am wondering

24

how an administration that tells us how much they like the local

communities and all decisions are local could get to the point where

they have that sort of, I think, heavy-handed language in there, or

at least language that allows for interfering on a subjective basis.

Can you reconcile that for me?

Mr. FRANKEL. Well, again, Congressman, I think this permeates

the law and has for some time. There is a balance to be struck. I

think the balance, to a significant degree, has to be struck on a

case-by-case basis. As I pointed out and as you recognized, the

power of FTA, unlike other agencies, is really conditioning and exercising oversight in grants—capital grants that it makes, in ensuring that they used in a manner consistent with the whole statutory

framework.

That is something that we try to do. Decisions are made one way

or the other; and, you know, there can be controversial decisions.

But, essentially, that is exercising—that has been true certainly before our proposal. Our proposal——

Mr. TIERNEY. This is new language. Your proposal injects something entirely new into the process here. This isn’t the proposal

where the administration says, well, we are going to leave it to the

local community. It says that we are going to have the Department

of Transportation actually make a subjective decision as to whether

or not this sufficiently allowed private competition and then withhold certification if the Federal level doesn’t think that is the case.

Mr. FRANKEL. Respectfully, Congressman, I don’t think that is

something we are proposing or something you are proposing.

Mr. TIERNEY. Let me put it this way. It specifically repeals Section 5305(e)(3), which, you know, is a pretty clear point. Then, it

adds to that language. So, I mean, how do you tell me that you

don’t think it is something new, something that breaks from the

past?

Mr. FRANKEL. It is trying to create a framework where balance

and decisions can be made consistent with, I think, what the

framework of this law has been for some time. I think the major

initiatives that we have taken deal with trying to promote greater

private investment and private engagement. But largely——

Mr. TIERNEY. You are trying to put your finger on the scale. That

is what troubles me. If it is a local decision, then let’s keep our finger off the scale, and let’s not say we are going to make a Federal

justification for our subjective opinion on that.

How are we going to protect that from happening, Mr. Frankel?

How are we going to ensure that local communities are, in fact allowed to make a local decision? If you put the kind of clause that

the administration wants, how are we going to protect that and

how are we going to say that the local community is not going to

be overruled by some bureaucrat at the Federal level who just subjectively decides, hey, you know, you don’t have enough Federal

people, and this is the ideology that we have, and we want the private guys in there?

Mr. FRANKEL. Well, Congressman, again, I think it is a question

of balance on a case-by-case basis.

Mr. TIERNEY. Where is the balance? You keep using this word

‘‘balance.’’ This isn’t a situation where you say that the Federal Department of Transportation is going to make sure that there is a

25

balance. You are saying that they are going to make sure that

there is going to be certification withheld if they didn’t think there

is enough private angle in there.

Mr. FRANKEL. Again, in my opinion, respectfully, that is consistent with, maybe clarifies, but consistent with what the thrust of

the law has been for some time.

Mr. TIERNEY. Mr. Frankel, I tell you that in 20 odd years of practicing law and looking at things like this, I think you are so off the

mark on that. But you have certainly maintained your line, and I

respect your position that you have to maintain the story. That is

your story and you are sticking with it, as they say. So thank you.

Mr. FRANKEL. Thank you, sir.

Mr. OSE. Mr. Frankel, the 1966 law that established DOT identified six reasons to establish the Department. The second reason

was to facilitate the development, improvement of coordinated

transportation service to be provided by private enterprise to the

maximum extent possible—Section 2(b)1 of Public Law 89–670.

The question is, since January 2001, in highways, mass transit

and rail, since January 2001, what private sector participation

projects including public private partnerships—has the administration initiated or facilitated?

Mr. FRANKEL. Well, let me say, Mr. Chairman, that much of that

really rests, as I referred to, in proposals we have made in

SAFETEA. There are steps that we are trying to take administratively.

One project I would like to mention—I sit in my capacity as Assistant Secretary for Policy on something called the Credit Council,

which is, if you will, a board of directors for the TIFIA program.

One of the projects that—one of the loans, if you will, credit assistance that we approved is for SR–125, which is a private—a franchised private highway, if you will, developed in southern California, with which I am sure you are quite familiar.

Also, we have made proposals, as you know, and Congress has

been receptive so far in this process to proposals we have made to

amend the TIFIA program. We are also looking at opportunities administratively to open up greater innovation in the highway area

on the part of States and allow them to build and utilize mechanisms—existing mechanisms to create public-private partnerships.

Finally, as I mentioned in my testimony, a very important proposal that we have made in our legislation is to open up the opportunities for State decisions about utilization of highway user

charges, to create revenue streams to support private investment.

I can’t resist saying that I think the T-LU, passed by the House,

its provisions for tooling we find as unduly constraining and making it much more difficult for private investment to be made in the

highway sector.

I might say in the rail side, this again is in the nature of the

proposal, really at the heart of the President’s proposal to reform

the provision of innercity passenger rail services, is to—I wouldn’t

say privatize. It has been accused of that. That is not a goal of the

administration, rather to open up the opportunities for competition

in the provision of innercity passenger rail, which could include—

not limited to but certainly include an important role for the private sector.

26

That is important. So far, we haven’t been able to engage the

Congress I think in meaningful discussion as yet about reform of

innercity passenger rail. But, that is one of the most important elements.

In terms of the transit area, I am not as familiar with specific

steps in that area, and I would like to supply you subsequently

with more specific answers in that regard.

Mr. OSE. OK. We would appreciate that.

[The information referred to follows:]

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Mr. OSE. From your answer and summary on that State Route

125, the FTA provided some credit assistance, which I presume to

be some sort of grant.

Mr. FRANKEL. That is the TIFIA program. A TIFIA loan was approved in connection with SR–125.

Mr. OSE. And then the administration’s other initiatives, there is

one dealing with innercity rails and trying to find some means of

making it more efficient, which will be particularly useful along the

Atlantic Seaboard. Then you are going to get back to us with additional ones, both in highways and rail and specifically in the transit area.

Mr. FRANKEL. That is correct.

Let me respectfully, sir, just amend something you said. As a

matter of fact, the President’s proposal on innercity passenger rail

is to open this up for all parts of the country. I think a State that

has done more on its own than almost any other is California, and

I think the playing field needs to be leveled in that regard.

We have made proposals that would allow all—appropriate areas

of the country, regions of the country that want to move and where

innercity passenger rail can fill an important niche in a multimodal

transportation system, to allow them to develop systems which

would receive—be eligible for capital grants from the Federal Government and would allow opportunities which we think can be

done under existing law to enhance competition in the provision of

those services. That is meant to be a national program, not a regional program.

Mr. OSE. Right. I see my time just expired.

The gentleman from Massachusetts.

Mr. TIERNEY. Mr. Chairman, I think Mr. Frankel has been kind

in answering the questions I had to ask.

I would just like to ask for unanimous consent to put on the

record a statement of the Amalgamated Transit Union with respect

to this issue.

Mr. OSE. Without objection.

Mr. TIERNEY. Thank you. Thank you, Mr. Frankel.

Mr. OSE. Mr. Frankel, in 1994 Congress passed amendments to

the 1964 mass transit law that required private sector participation to the maximum extent feasible; and I cite as reference Section

5306(a) and 5307(c) of Public Law 103–272 in making that statement.

In your written testimony, entitled Transit and the Private Sector, you state: FTA’s ability to exert influence over the transit industry is limited to setting terms and conditions over the use of

Federal grant funds. And that is on page 5. In fact, underline that.

My first question is, does the Department of Transportation—

let’s back up. Congress passed this law; the Executive signs it. Congress passes legislation; the Executive signs it. It becomes law. The

agencies then go to rulemaking processes to implement that law.

Now, this law which was passed in 1994, these amendments,

does the Department of Transportation intend to issue implementing rules for Section 5306(a), private enterprise participation, and

5307(c), public participation requirements, as I requested in writing in August 2003?

29

Mr. FRANKEL. Mr. Chairman, rules are not always the means by

which an agency will implement statutes which have been enacted.

As I pointed out and as you acknowledge, FTA is a grantmaking

agency, not a regulatory agency. It does issue rules on occasion, but

it is not principally in the process, in the business, if you will, of

issuing rules.

These laws can and should be enforced through other—oftentimes, other means, guidance to the field and to grantees. Policy

statements, much of which has been——

Mr. OSE. Let me just interrupt there, if I might, Mr. Frankel, because it has been brought to my attention—it was brought to the

Department’s attention by third-party private providers that certain local grantees were not complying with these provisions in a

1994 law; and the feedback I get in sum and substance is, well, you

know, this is—I am summarizing, paraphrasing, putting words in

our mouth. However you wish to make it sound, the feedback from

the agency was: Well, you know, we are not an enforcement agency.

Well, every department and agency of the government—I can go

to different spots—enters into contracts, grants and what have you.

Are you saying that you are unique because these other departments and agencies have enforcement mechanisms? Are you saying

that DOT is unique in this respect?

Mr. FRANKEL. No. First of all, we are specifically I think in this

area talking about FTA. I am not saying—I don’t want to—I can’t

speak to what may or may not have been said. I am pointing out

that the enforcement mechanisms, if you will, the oversight mechanisms exercised by FTA in this regard is through the enforcement

of the grants, ensuring that grants are used in a manner consistent

with the statutory framework; and, unfortunately, that often takes

the more extreme measure of either terminating grants or limiting

or withdrawing some of the grants, as opposed to the more classic

regulatory powers that might be exercised by certain other agencies

as the particular means available to FTA.

It is also further complicated—and without reopening the discussion with Congressman Tierney, it is also complicated by the fact

that these are State or, in this case, local decisions going through

a planning process. And, really, the enforcement mechanisms—

among the enforcement mechanisms available to FTA is the certification of the planning process, to make sure that as capital programs—surface transportation capital programs are developed and

go through the planning process, the MPO process, that FTA and

the Federal Highway Administration certify that the planning process has considered all of the things that need to be considered

under Federal law.

There are a web of enforcement mechanisms, not necessarily the

classic ones that people are more familiar with with certain other

agencies.

Mr. OSE. What happens when a grantee doesn’t comply with the

terms of the grant—the terms and conditions of the grant that the

Secretary has otherwise signed off on? I mean, this sounds great—

I mean, I want some of this kind of thing. How do I get the queue

for this? It is like the agency says, well, sorry we can’t enforce it.

30

Mr. FRANKEL. No, that is not the case. If in fact there has been

a violation, it could take the form of not certifying a plan. That is,

a TIP is developed—or, indeed, the whole planning process could

be—certification for a planning process and MPO could be withdrawn. That has happened a couple of times. Not difficult to sustain politically, I might say, where it has been done, but it has

been done. In the case of a particular grant that the agency, in this

case FTA, could decide that the grant should be terminated or suspended or some portion of it suspended.

That is the particular enforcement mechanism. It doesn’t always

allow for some of the subtleties that are available with some regulatory agencies where they can exercise their power in a different

way.

Mr. OSE. However, the grantee knows the rules of the road, so

to speak, when it applies for the grant. That if it does not comply

with terms and conditions, the grant can be terminated?

Mr. FRANKEL. Well, and/or the planning agencies.

Mr. OSE. My time has expired.

Mr. TIERNEY. It has expired again, Mr. Chairman.

Mr. OSE. I apologize.

Mr. TIERNEY. You are free to continue on if you want. I know you

have your finger only about halfway down the page there.

Mr. OSE. I have multiple pages, though.

Mr. TIERNEY. We can go back and forth over my one point again,

if you want to do that.

Mr. OSE. Are you teaming up on the chairman here?

Mr. TIERNEY. Why not?

Mr. OSE. All right. So back to my question. Pursuant to the 1994

law, which, if my chronology is correct was 10 years ago, what is

the intention of the Department of Transportation as it relates to

implementing rules, putting the law into effect regarding private

enterprise participation in public participation requirements? Are

you or are you not going to undertake a rulemaking?

Mr. FRANKEL. Well, I think I am—it would be more appropriate

for the Administrator of FTA to answer that specific question. That

is where the rulemaking, if you will, would occur. I do want to say

that traditionally what has been done in this area—traditionally,

what has been done in this area, the steps that I have described,

that is a review of the planning process and a continuing oversight

over the grant.

Mr. OSE. Well, on August 6, 2003, I actually sent a letter to the

Administrator Jennifer Dorn, and the feedback I got from counsel

to Ms. Dorn was that Dorn refused to undertake a rulemaking to

effectuate the statutory private sector participation requirements

since there was a legislative proposal that Congress was still considering.

Now what happens if Congress doesn’t take this up? We are

going to sit here in abeyance forever, pending some legislative resolution?

Mr. FRANKEL. Well, I think it is not some—I think what we are

dealing with, obviously, is the pendency of reauthorization legislation. We are operating in a framework—as you know, but for three

extensions, we would have no authorizing legislation for any of

these programs.

31

We are in the stage where we are, hopefully, about to enter into

a period of a multi-year reauthorization and some change in these

programs in which Congress, still in the conference process, will

have an opportunity to look at some of the issues that we are talking about this morning.

I think the feeling—and I can’t speak for Administrator Dorn,

but I think the feeling was that this was a particularly maybe inappropriate time, while Congress itself was looking at these issues,

to issue a rule.

There are other means, as I said, available. There are regular

means available.

Mr. OSE. We passed a law in 1994. We passed a law in 1994. It

passed with support from both sides of the aisle, in both Houses

of the Congress, and administration from the other party had

signed it. Now, are you telling me that, 10 years in, we are waiting

for, I don’t know, for it to rain cats and dogs before we pass a rule

implementing legislation that we passed 10 years ago?

Mr. FRANKEL. Well, I am not saying that. But whether the Administrator and FTA intends on considering a rule is something

that I think it is better for FTA to respond to.

I do want to reiterate what I have said earlier; and that is rulemaking, in my opinion, may not be the appropriate step and the

best means to carry out that statute in a process where FTA, as

a grantmaking agency, essentially has the power to condition

grants and exercise oversight as how these grants are used.

That is a continuing process. It is on a one-by-one basis but also

could take the form of issuing guidance or policy statements to the

field and to grantees.

Mr. OSE. You don’t have any parameters by which a potential

grantee out in the private sector or in the public provider sector

can go to to look at how they might approach FTA for a potential

grant? I mean, it is just pretty nebulous, it sounds to me.

Mr. FRANKEL. Well, I am not sure I am understanding your question exactly.

Mr. OSE. Well, we don’t have rules. I am not aware of any guidance. Congress passed a statute, but we don’t have any rules. I am

not aware of any guidance. If I am out in the public or private sector trying to provide transit, whether it be public or private, I am

siting there kind of grasping at clouds, if you will, to figure out how

to put in an application.

I am aware of the terms and conditions. But, interestingly

enough, you know, I have more than anecdotal information that

says that, when a grantee violates the terms and conditions, the

Department of Transportation says we can’t get into that, because

we don’t have a rule.

I mean this is a circuitous argument. You are going to have to

correct me if I am wrong.

Mr. FRANKEL. I don’t know that was the basis, if you will, of any

decisions that are made on some of the cases that you are particularly concerned with. But the—again, whether rulemaking is the

appropriate way to carry this out—there have been attempts over

the years on the—as I understand it, by the Department to issue

guidance or policies; and, as a matter of fact, under pressure—this

32

is now sometime ago, but under pressure from Congress, the Department had to withdraw those rules.

With all due respect, as Congressman Tierney’s questions indicated, this is not an area in which there are Blacks and Whites;

and I think people have to look at this, if you will, on a case-bycase basis.

It may be appropriate for FTA to consider the issuance of additional guidance or new guidance. But, again, through the planning

process, that is at the heart of this really. These are local decisions,

and looking at the validity or the authenticity of the planning process and through the use of certification or denying certification to

a plan or to the process, it becomes a toll that is available to the

Department and has and continues to be so.

Mr. OSE. Can you tell us how many times you have—what was

your word—revoked a grant? Have you taken any enforcement actions on grantees where the grantees have violated the terms and

conditions of their grant?

Mr. FRANKEL. I think I would—rather than try to guess at that,

Mr. Chairman, I will be happy to supply you that.

Mr. OSE. I got three I would like you to check on specifically.

They will be testified to later.

Mr. FRANKEL. Right.

[The information referred to follows:]

33

34

Mr. OSE. I do just want to say, in 49 CFR, it does vest in the

Office of the Secretary the responsibility for encouraging maximum

private development, maximum private development of transportation services.

Mr. FRANKEL. Right.

Mr. OSE. Frankly, I know what kind of money is involved in buying one of these buses. It is not exactly chump change. You might

want to think about providing certainty to the potential private

providers of transit by adopting a rule or some sort of framework

under which there is certainty. I mean, I have to tell you, that is

just a glaring gap in how this is proceeding. I don’t mean to beat

you over the head on it.

Mr. FRANKEL. No, that is fine.

Mr. OSE. Frankly, it is just not acceptable management. I know

guidance has no legal effect. So does he.

Now in terms of—well, I yield to the gentleman from Massachusetts. Undoubtedly, you have questions.

Mr. TIERNEY. I have no questions. I am just watching you go on

and on. You have dug far enough. We will see where it goes.

Mr. OSE. OK. Mr. Frankel, the common rule that guides governmentwide grants management, provides various remedies for

grantee noncompliance. Those include temporarily withholding

cash payments pending correction of any deficiency, disallowing all

or part of the cost of the action that is not in compliance, wholly

or partly suspending or terminating the current award for the

grantee’s program, withholding future awards—excuse me, withholding further awards for the program, or taking other remedies

that may be legally available. That is in 49 CFR, subsection

18.43(a), on page 148.

Now, going back to 5306(a) and 5307(c), dealing with private sector participation, has DOT enforced anything under either of these

sections in any of those five remedies? I think your testimony was

you would like to respond to that in writing?

Mr. FRANKEL. I would, sir.

[The information referred to follows:]

35

36

Mr. OSE. Now, you also have—within the grants process, there

is a triennial audit that occurs on all of the grants.

Mr. FRANKEL. That is of the planning process. That is correct,

sir. You are right.

Mr. OSE. So every grantee is subject to a triennial audit?

Mr. FRANKEL. That is apparently the case. At least I think what

we are talking here, in the context of FTA.

Mr. OSE. Within the body of your response to the previous question, I would like to know how many of these triennial audits, including deficiency findings of noncompliance with private sector

participation requirements—I would like you to specifically respond

to that question.

Mr. FRANKEL. OK. I would be happy to do that, Mr. Chairman.

[The information referred to follows:]

37

38

Mr. OSE. Then the second is, how many of these noncompliance

findings resulted in an enforcement action?

Now I want to go through a specific situation in Sacramento. I

briefly discussed my investigation of this situation regarding a 25-

year, competitively awarded contract for mass transit service in

Sacramento. I just want to step through this and make sure that

my understanding of the facts is, in fact, your understanding of the

facts.

There was a July 2000, triennial audit in which the Department

of Transportation found a deficiency by the grantee in compliance

with the private sector participation requirements. That is my understanding. Is that correct? This is for Sacramento RT.

Mr. FRANKEL. I am aware of the particular case.

Mr. OSE. If that gentleman would like to testify, he can step forward, rather than whisper in your ear. We can get it straight from

him, if you would rather.

Mr. FRANKEL. I don’t want—I want to try to answer your question as accurately as I can.

My understanding, Mr. Chairman, was that related to the public

notice requirements in terms of the provision of services. There

were additional—as you well know, the transit agency established

new services, and there was a question about public notice of the—

my understanding, is a question of appropriate public notice of

those services.

Mr. OSE. In terms of where the notices were placed and where

they were circulated to?

Mr. FRANKEL. I believe that is the case.

Mr. OSE. We would like to ascertain whether or not that is your

understanding in fact, rather than belief. So we are going to submit

that question to you in writing.

Mr. FRANKEL. Thank you, sir.

Mr. TIERNEY. Clarification. Can you give me the date?

Mr. OSE. It is July 2000.

Mr. TIERNEY. Thank you.

Mr. OSE. Now when the triennial audit determined a deficiency,

did you notify the grantee of this deficiency in August 2000? My

information is that you did.

Mr. FRANKEL. Again, Mr. Chairman, I think these detailed questions really are appropriately directed—I know you have done so in

letter—but appropriately directed to FTA rather than to me. I

think we will supply—obviously, the Department and FTA will

supply you with specific answers to those questions.

I am really not in a position to speak on such matters. I can talk

generally about this particular case in the context of the subject of

this hearing. But, in terms of the specific details, I am not the Administrator directly responsible for that. I think it would be misleading for me to try to answer those specific questions.

Mr. OSE. Does the gentleman right behind you know the answers?

Mr. FRANKEL. I don’t know whether—he is the counsel to FTA,

as you know. But, I think probably the more appropriate step, Mr.

Chairman, would be for us—in terms of the specific questions, as

opposed to kind of putting them in the context of the overall subVerDate 11-MAY-2000 14:32 Dec 14, 2004 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 D:\DOCS\96634.TXT HGOVREF1 PsN: HGOVREF1
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ject of this hearing, for us to prepare a written response in which

we can draw on FTA’s detailed knowledge of these circumstances.

Mr. OSE. OK. Well, let’s just go through the questions and see

what you can recall from previous discussions at the Department.

So, we aren’t able to ascertain whether or not the grantee was

notified in August 2000 of the deficiency finding?

My information tells me that, on October 1, 2000, the Department of Transportation approved $2.4 million in the form of a

grant to this particular agency to purchase new buses.

Mr. FRANKEL. That is my understanding.

Mr. OSE. Did the terms and conditions of that grant preclude the

use of those buses to, if you will, squeeze out a private provider on

any service that they are currently providing?

Mr. FRANKEL. My understanding of this situation is, respectfully,

that was—that is not our perception, let me say, of the circumstances. The circumstances here, as I understand it, were that

the State of California—State of California, not the local transit

district—the State of California had made it—through its general

services agency had made a decision to terminate charter services.

The transit—local transit agency, again going through the process

of developing its operations, developed new services, new scheduled

regular services, not charter services available for the public, and

these buses were utilized. This capital equipment was utilized in

the provision of those services.

Mr. OSE. OK. Under the same code section, which is the 49 CFR,

on page 136, subsection 18.323, and I am—notwithstanding the encouragement in subsection 18.25(a) to earn program income, the

grantee or subgrantees must not use equipment acquired with

grant funds to provide services for a fee to compete unfairly with

private companies that provide equivalent services, unless specifically permitted or contemplated by Federal statute.

Was the service for which the State of California, through the

Department of General services, using these $2.4 million worth of

buses, was that specifically permitted or contemplated by Federal

statute?

Mr. FRANKEL. I hope this is responsive to your question, Mr.

Chairman. But I think it is fair to say that the decision—in administering the grant the decision was—that the circumstances in Sacramento in this case did not fit the circumstances you described or

the law as you described it. These were not services in competition.

The local transit agency was not developing services in competition

with what had been charter contractual services with the State of

California.

I understand and respect the fact that you have a different view.

But, I’m saying that the agency in this case, FTA, in administering

the grant reached the conclusion that there had not been a violation of this law, of this regulation or requirement.

Mr. OSE. Well, if I can just share—actually, I see my time is up.

Mr. TIERNEY. I am ready to go.

Mr. OSE. Well, then I will yield to the gentleman from Massachusetts.

Mr. TIERNEY. Mr. Frankel, as I understand the sequence of

events on this—and perhaps you can help me here—is that the DeVerDate 11-MAY-2000 14:32 Dec 14, 2004 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 D:\DOCS\96634.TXT HGOVREF1 PsN: HGOVREF1
40

partment of General Services terminated the contract with

Amador.

Mr. FRANKEL. They either terminated it or had even given notice

that they were going to terminate it. I am not exactly sure of timing.

Mr. TIERNEY. But that happened?

Mr. FRANKEL. Correct.

If I can, Mr. Congressman—I am sorry. I believe there was the

expiration of a contract and indication that the contract would not

be extended further.

Mr. TIERNEY. OK. And, following that, they had contracted to

purchase fare medium from SACRT?

Mr. FRANKEL. That is my understanding.

Mr. TIERNEY. It wanted more frequent and more comprehensive

service?

Mr. FRANKEL. Open to the public. Like any scheduled service,

with intermediate stops and conceivably routes somewhat different

from what the contractual services had been.

Mr. TIERNEY. Exactly. And, in fact, the SACRT isn’t a charter

service, is it?

Mr. FRANKEL. The decision by FTA in administering the grant

was this did not—was not in competition with the earlier charter

service.

Mr. TIERNEY. Because the charter service has a closed clientele,

which is what Amador had, and SACRT is open to all the public,

and the other group that Amador had was within that larger

group?

Mr. FRANKEL. Correct.

Mr. TIERNEY. It is not even applicable on that basis. We really

are discussing apples and oranges here, charter versus noncharter,

when we talk about the type of service and the legal basis here.

Am I correct?

Mr. FRANKEL. I think, without necessarily referring to apples

and oranges, as I said, the FTA’s decision, as I understand it, was

that this service provided by the Sacramento transit agency was

not in competition with the—was different from, not in competition

with the earlier charter service, which had not been extended by

a different agency, that is, the State of California’s General Services Agency.

Mr. TIERNEY. I think some of the statutes that Mr. Ose is referring to really talk or speak to the formation of transit authorities

after bus operators go bankrupt?

Mr. FRANKEL. Right. That is the whole basis of FTA. Much of our

local transit programs, as we all know——

Mr. TIERNEY. That is not, in fact, what occurred here in that situation? That is not applicable either.

Was Amador ever denied the avenue of appeal that the FTA does

provide?

Mr. FRANKEL. No, my understanding is that there was a process

and that they have gone through. I don’t know myself whether that

process is completed or their opportunities for litigation or appeal,

but there has been a process, and they have availed themselves of

that process.

41

Mr. TIERNEY. I just don’t want to beat this to death, but SACRT

can’t be competing with Amador if Amador had already been notified that they were being terminated?

Mr. FRANKEL. That apparently was—I assume——

Mr. TIERNEY. The termination that was made.

Mr. FRANKEL. I assume that was one of the bases of FTA’s decision or view that there was not a violation of any law.

Mr. TIERNEY. I think the determination was clearly made that

SACRT currently does not provide services that meet the definition

of charter service.

Mr. FRANKEL. That is again my understanding of the basis of

FTA’s actions here, or its response to these circumstances.

Mr. TIERNEY. Thank you.

Mr. OSE. I thank the gentleman. I think you were trying to help

me. It is my understanding that—and we will get into this with the

next panel—but the service that Amador was providing did not

have a closed clientele, that you could walk up and get on; that

the—there was no charge whether you were envisioned as part of

that clientele by the Department of General Services or not. So, in

fact, it was not a charter service, it was something else. It was an

intracity transit service, and interestingly enough, as it relates to

my friend’s comment about provisions of this law applying now to

the bankruptcy of a local transit agency, if I understood his point

correctly, the requirements for maximum feasible private sector

participation embedded in the law that originally set up the Department of Transportation, not some subsequent requirement.

I would like to go on with my understanding of the chronology

of events here. I want to go back to the $2.4 million for purchase

of new buses. I will readily admit that I advocated for that to the

FTA, but I did not understand that those buses were going to be

used to, in effect, replace the transit service that Amador was providing otherwise.

In July 2001, the local grantee, the Sacramento RT, adopted a

new standard operating procedure, including the promise of notification and specific publications of general circulation regarding

changes to the contract and the like, to ensure no future violation

of private sector participation requirements. It appears to me in

July 2001, the grantees recognized that they were subject to the

private sector participation requirement. Is that your understanding also?

Mr. FRANKEL. I would assume that to be the case. I don’t want

to say. Having not been involved in it, I can’t speak specifically, but

I assume that to be the case. The law is the law. Everybody involved in this area understands what the requirements are.

Mr. OSE. I might quibble over that given the testimony we are

going to get from the second panel.

On March 6, 2003, I am told that the private sector provider in

this case, Amador, California Bus Association filed an emergency

protest with FTA; is that your understanding?

Mr. FRANKEL. I can’t speak to the dates, Mr. Chairman. I don’t

know the specifics.

Mr. OSE. On March 13th, I asked the Department of Transportation to expedite its review of this emergency protest. And on

March 18th, I’m told that the Department of Transportation’s reVerDate 11-MAY-2000 14:32 Dec 14, 2004 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 D:\DOCS\96634.TXT HGOVREF1 PsN: HGOVREF1
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gional office directed the grantee, Sacramento RT, to stay its proposed takeover of the transit service from Amador stating, ‘‘FTA

further requests that SACRT hold any action on the subject contract or service in abeyance pending the outcome of our review of

SACRT’s response.’’

Is that your understanding?

Mr. FRANKEL. Without getting into the specifics, I believe it was

directed to—again, through the enforcement of the grant, whether

the grant had been utilized in a manner consistent with the requirements. That is the grant to require the buses and not to compete with the private sector. Obviously, FTA wanted to take the

time to be able to make a thoughtful decision about that.

Mr. OSE. We are able to confirm that occurred on March 18th;

is that your testimony?

Mr. FRANKEL. I can’t speak to the specific dates. I am not the Administrator.

Mr. OSE. We will send you another letter.

On March 25th, I’m told that the grantee, Sacramento RT, effectively said, big deal, to the FTA, and they acted to award the contract. Is that your understanding, that contract to replace Amador

was agreed to by Sacramento RT on March 25th?

Mr. FRANKEL. Again, I will have to confirm the specific facts

that—to which you’re referring.

Mr. OSE. On August 5, 2003, without having any specific documentation of compliance with the July 2001 standard operating

procedure, the Department of Transportation issued a decision on

the March 6, 2003, emergency protest finding that the grantee met,

‘‘minimum compliance.’’ And the quotation I cite is, ‘‘RT has met

with the minimum statutory requirements for public notice and

comment in section 5307, and that while it appears that RT could

have done more to explore the use of private sector providers in

this situation, RT has met the minimum requirements of section

5306.’’ I have a copy of the decision here.

How do you determine someone has met the minimum requirements if you don’t have a rule in place to define that?

Mr. FRANKEL. Well, I suppose—people can differ about that. As

an individual, I would say that is quite possible. There is a law

here. There are a set of requirements driven by the statute, and

we have been talking about exactly that, exactly. As I said, they

are striking the right balance here, and I think FTA is in a position

in terms of enforcing its grants and assuring grants are used in a

manner consistent with the law to be able to make a decision on

a case-by-case basis.

I don’t know necessarily, with all due respect, Mr. Chairman,

that a rule or guidance, additional guidance, might be appropriate

and useful in these circumstances, but I can’t see any reason why

an agency cannot make a decision based on facts presented to it as

to whether or not the law has been complied with. I think that is

what FTA did. I understand that you might have a different view

and conceivably might have reached a different decision. This was

directed to the public notice requirements, as your quote indicates.

Mr. OSE. I am trying to understand the logic. In July 2001, the

grantees promised to adopt new notification procedures to ensure

no future violation of the private sector participation requirements.

43

If the process at that time had been satisfactory, why did they have

to adopt new ones? If they had to adopt new ones because the process wasn’t satisfactory, how can RT then be found in compliance

with, ‘‘the minimum requirements?’’ There seems to be a disconnect

here.

Mr. FRANKEL. I understand what you are saying, Mr. Chairman,

and I am not in a position to speak to that. Obviously there are

remedies available to the parties here if they feel there has been

an abuse of discretion. But, the agency acted on the basis of the

information and the facts it had that there had not been a violation

of the terms of the grant.

Mr. OSE. My time has expired. The gentleman from Massachusetts.

Mr. TIERNEY. I don’t want to interfere with your progression on

that. I just think the point I would make here is that there is a

process, and that to my knowledge, at least, and, Mr. Frankel, you

confirmed that, that Amador is going through that process and

availing themselves of it. If you don’t like the answer, I guess, it

is not nearly—if we are going to try to change the law because they

don’t like the answer they are getting, I think perhaps the Transportation Committee might be the place to go.

It seems clear to me that Amador, the company, had an avenue

to go. I think there are serious issues here that—where a determination could be made that Amador had a closed situation, and

RT has a different situation. I think that the sequence of events

are pretty clear that Amador was terminated, and SACRT was contracted. So I can see where the agency made that decision. I think,

if the facts break out some other way, then the process will let us

know how it happens, and people can avail themselves of it. If we

want to change the statute, then certainly they would go to the

proper avenue and proper committee and try and work on that

basis.

Mr. Frankel, let me just ask you very broadly is there anything

about the process in this particular case that you think has been

abused or somebody has not had the opportunity to avail themselves of?

Mr. FRANKEL. Not to my knowledge, Congressman. I am not the

direct official responsible for the administration of these laws, but,

to the extent that I am aware of it, there is nothing that appears

to indicate that FTA has not exercised its discretion and judgment

to the best extent that it possibly can, recognizing that people—

whenever judgment is exercised in the administration of laws, that

people will have different views.

Mr. TIERNEY. I’ll yield back.

Mr. OSE. I thank the gentleman.

You know, this isn’t about Amador or Ohio or Hawaii. This is actually about the use of Federal dollars, because the net effect of

this process of the minimum compliance, if you will—those aren’t

my words, but the Federal taxpayer ended up paying $277,000

more per year for service that they had been receiving from a private provider who had virtually no complaints filed with the Department from open clientele, and who had for any number of years

successfully met the terms of the contract. This is about Federal

money.

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Mr. TIERNEY. Will the gentleman yield?

Mr. OSE. Yes.

Mr. TIERNEY. Are you saying they were arbitrarily taken off the

contract?

Mr. OSE. I am saying that someone figured out how to change

the contract without putting it into a publication of adequate general circulation. They got caught in this July 2000 triennial audit

and were advised that they needed to change their process. At that

point, subsequent to that point, they did it again, and the grantor

in this case, the Federal Government, FTA, is basically turning a

blind eye to the expenditure of $277,000 more annually.

Mr. TIERNEY. Are you telling me basically you just want the facts

reinterpreted? You don’t agree with the FTA’s review of this situation?

Mr. OSE. Actually I don’t care who provides the service. I just

want my $277,000 back.

Mr. TIERNEY. What I am trying to get at here, I don’t live in

California.

Mr. OSE. You would be welcome to move there. We need more

attorneys.

Mr. TIERNEY. I bet. I mean, what you are saying, though, is that

somebody—and who is the one who terminated Amador to begin

with?

Mr. OSE. That is what I am trying to find out. It appears to me

as if SACRT did, and then FTA signed off on that.

Mr. FRANKEL. If I may respectfully take some issue with a couple

of the comments you have made, Mr. Chairman. First of all, the

decision about the contract, the initial decision about the contract

with the private company was a decision by the State of California,

by an agency of the State of California, not by the local transit

agency.

Second, it is my understanding since FTA, outside of the Rural

Transit Program, is not in the business any longer of making—operating grants subsidizing operations, that the $277,000 a year to

which you are referring is not Federal money. I am not saying that

it is not taxpayer money, and your point, as a public official, may

be perfectly appropriate, but those are not Federal funds. What the

Federal funds were used for, which concerns you, and I appreciate

that—what the Federal funds were used for was for the capital acquisition of the buses that were used in the service.

Mr. OSE. $2.4 million.

Mr. FRANKEL. I don’t know exactly what the——

Mr. OSE. If you want to talk about 2.4 million, the larger the

number, the better. I would like to recover that, too.

Mr. FRANKEL. Whatever it is, it is. There were the capital grants

which were made for buses for the transit agency which were used

in this service, which was, again, in the determination of FTA, a

new service. The transit agency didn’t make the decision to terminate a contract and then use Federal money to buy buses and provide the same service. That is not the perception and judgment of

FTA.

Mr. OSE. Except the $2.4 million was obtained from FTA sometime prior to the Department of General Services’s decision to terminate or to reopen the contract; am I not correct on that?

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Mr. FRANKEL. I would have to verify that, but that is likely to

be the case.

Mr. OSE. How is it that the local grantee can now use assets acquired by funding of FTA to provide a service for which there is

a private provider who can provide that same service regardless of

whether it is for more or less?

Mr. FRANKEL. The decision by the agency was that it was not the

same service.

Mr. OSE. Which agency?

Mr. FRANKEL. FTA, in administering the grant and exercising

oversight of the grant.

I appreciate you have a different view, and I respect that, but the

agency’s—at the heart of the agency’s decision, and certainly an

important element of it, is it was not the same service, but different service. It was public service as opposed to a contractual

charter service with an agency of the State of California.

Mr. OSE. Mr. Frankel, I have the advantage of going home every

weekend. I know exactly the service that was being provided, because I could walk up without identification and get on the bus. It

was not a charter. I was not precluded from being a rider, if you

will. Nobody asked me for ID. I didn’t have to pay. I could just go

to the parking lot where I knew the bus was going to be, get out

of my car, walk over and get on the bus.

Mr. FRANKEL. I am not an expert on this, but I think what distinguishes—certainly as far as what I think—what distinguishes

charter services at least in this these circumstances, it was point

to point. It was not the kind of scheduled route, if you will, with

intermediate stops and maybe a somewhat different group, which

is my understanding is the transit agency was providing, albeit

still providing the basic service of parking lot to downtown points

of employment.

Mr. OSE. We are going to have testimony from somebody later

that will flesh that out, because I happen to think the circumstances upon close examination are significantly different from

your understanding.

The gentleman from Massachusetts.

Mr. TIERNEY. We had $2.4 million that Mr. Ose was able to extract from the Federal Government here to provide equipment that

should have gone probably to Massachusetts, no doubt.

Mr. OSE. I will be happy to give it to you.

Mr. TIERNEY. We could have used it. And, that was for RT to run

its routes. Subsequently, some sufficient time later, Amador is notified that they are being terminated, and they are notified by the

State and not by RT, right?

Mr. FRANKEL. That is the case. I can’t confirm the dates and the

exact sequence.

Mr. OSE. I will stipulate that is my understanding also.

Mr. TIERNEY. So that helps me. First, you have RT up and going

with buses that they got from Federal money, and they are doing

their thing, and Amador gets terminated. Then the State is the one

who contracted with the RT?

Mr. FRANKEL. No. There is no contract. RT is providing service.

Mr. TIERNEY. Just expanded its routes and provides service.

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Mr. FRANKEL. It is operations. And that is a local decision in

which FTA does not get engaged.

Mr. TIERNEY. The local decision said there’s a need, there’s some

people that could use a ride, and RT just expanded their routes.

Mr. FRANKEL. I presume the transit agencies in your congressional district will make decisions about where it is going to provide service.

Mr. TIERNEY. They are now doing that, and Amador feels chagrined by this whole thing, and that they’re not being treated properly or whatever. And then, they have an appeal process which

they have availed themselves of.

Mr. FRANKEL. It is my understanding that they have gone

through a process, and they still have remedies, I presume, available to them.

Mr. TIERNEY. Which I presume they raised the issue of whether

or not they were a closed service or charter or whatever, and that

is one of the issues that will be determined in that process.

Mr. FRANKEL. I can’t speak to the specific issue. The specific

issue that was raised with FTA is whether the appropriate procedures had been followed as far as public notice in connection with

the capital grant for the acquisition of the buses which were subsequently utilized in routes that were frankly not obviously inconsistent with the routes that had been provided on a charter basis by

the private contractor.

Mr. TIERNEY. Let me do this again. The issue is nothing to do

with what happened on the termination of Amador or with the subsequent absorption of those clientele. From there, they went back

and decided to get some technical point of a notice. I am telling you

how it sounds from here.

Mr. FRANKEL. Bear with me for just a minute. Let me be accurate about this. With respect to the acquisition of the buses, the

public notice was initially deemed to be inadequate and was remedied in the view of the agency administering the grant. In the

case of the service, the extension of the service, the public notice

given by the transit agency was deemed to be adequate. I presume

both of those were raised, but I don’t know that for a fact, in connection with the appeal.

Mr. TIERNEY. The first notice was where they were going to get

the Federal money to buy the buses, and they said originally that

was inadequate, so they made it adequate, and they got the money.

At some point, they were deemed adequate, and they got the

money.

Mr. FRANKEL. That is my understanding.

Mr. TIERNEY. Later, when they decided to change their routes to

expand their services that now encompasses where Amador used to

be, there was another notice, and somebody has challenged that,

but the FTA has decided they think it was sufficient minimally or

otherwise, that it was sufficient.

Mr. FRANKEL. Again, that is my understanding.

Mr. TIERNEY. Aggrieved parties have a process that they can go

through to have that issue litigated in some sense?

Mr. FRANKEL. They have availed themselves, as far as I know,

of appeals to FTA. And under administrative law procedures, one

can always contest whether an agency has abused its discretion,

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which is really kind of at the heart of this inquiry in many of these

questions whether there has been an abuse of discretion on the

part of FTA in administering these grants.

Mr. TIERNEY. Let’s go back and say suppose that in the process

someone says the notice of the new routes for, you know, the RT

or whatever, it was insufficient, so you can’t do your new routes.

That just leaves Amador without doing the routes, and leaves RT

without doing the routes, and leaves these people walking, right?

Mr. FRANKEL. I presume that would be the case. They were separate, but there were parallel decisions. There was a decision by the

State of California not to renew the contract with the private contractor—private company.

Mr. TIERNEY. I guess my question that you can’t answer, is there

some conspiracy theory here that the State was in cahoots with

somebody and decided to go after Amador, thinking that once we

knock off Amador, somehow this other service will be expanded? Is

that the crux of the argument here?

Mr. OSE. My only concern is the $277,000.

Mr. TIERNEY. Yeah, but, you know, you have the situation, it

seems, to have gone along. Amador got knocked off, which is totally

separate from the issue of notice and then provision of services by

RT.

Mr. OSE. If the gentleman will yield.

Mr. TIERNEY. Sure.

Mr. OSE. My concern here is the process was not properly compliant, and the result was that the Department of General Services

ends up asking for an extra $277,000 from us to provide a transit

service for which there had been no complaints or inadequacy.

Mr. TIERNEY. Reclaiming my time. They are not asking for

$277,000 from us. It is not our problem. They are getting that from

the State. Second, there is an appeal. These people are making the

arguments in the appropriate place, so what are we doing here?

Mr. OSE. Actually examining the manner in which the Federal

agencies——

Mr. TIERNEY. I think it is a little inappropriate for us to be jumping in the middle of the process as opposed to waiting to see how

it played out and then deciding whether or not this needed to be

done. Either party could still prevail, if I understand. We are jumping in and trying to put our foot on the pedal.

Mr. OSE. I am not sure that either party can prevail at this

point. I would defer to Mr. Frankel to clarify that, but I believe this

contract has been executed and in place.

Mr. TIERNEY. There is no contract.

Mr. OSE. The contract between the Department of General Services and SACRT for the service being provided, that is in place.

Mr. TIERNEY. I am trying to clarify. He’s indicated there are no

services that they are looking for.

Mr. FRANKEL. If you will allow me to correct this, my understanding is the terms are different. There was a contract between

the General Services Administration and the private company

Amador. That contract was not extended. A local transit agency is

supplying services which fill that market, if I could put it in those

terms.

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There is a subsidy to which you made reference. There may, in

fact, be a contract, I don’t know, between the State and the local

transit district to pay their money as an operating subsidy. But,

again, not to split hairs, it is a different contract from the contract

that existed between the State and the private contractor. I know

in my State, the State department of transportation—I can’t speak

about California—the State department of transportation provides

operating subsidies to local transit districts who are losing money.

I presume, if it is not exactly that in California, it is probably

something similar to that. It is a different kind of arrangement between the State and the transit district from what existed between

the State and Amador to provide a specific service from point to

point for its employees.

Mr. TIERNEY. The State subsidizes RT for its general services, for

the entire service it provides. If they do anything at all, that would

be the nature of that.

Mr. FRANKEL. It is typically the case.

Mr. TIERNEY. Let’s use the case of Massachusetts, and they are

trying to change that and take away from the subsidies. I’m sure

that some States have taken them off the subsidies, and some have

them on there, but it is generally for their entire operation and not

for any specific aspect of it.

Mr. FRANKEL. Certainly the case in my State. I don’t know the

circumstances. It is possible that there may be a specific contract

between the State and the regional—excuse me, the local transit

agency that this service would be subsidized, but I don’t know

about that. Generally these are in the nature of operating subsidies. The Federal Government, as I said, except for rural services

and some other limited services, does not provide operating subsidies to local transit agencies.

Mr. TIERNEY. With respect to the particular claimants or individuals on this Amador, is there still a process of which they are

availing themselves? Is that ongoing, or where is that, do you

know?

Mr. FRANKEL. I don’t know the answer to that, Congressman.

Again, we’ll try to supply that to you.

Mr. TIERNEY. I ask that, and in deference to the chairman, I

want to know where we are coming in this situation. Is it not yet

done, and maybe we ought to hold back a little bit.

Mr. OSE. I think we are going to find out from the next panel

because the principals are going to be testifying. I just want to

make sure we are all clear on the process here. The Department

of General Services, on the anniversary date of its existing contract

with then service provider Amador, readvertised, put out a request

for proposals to provide a transit service for the intracity movement of an open clientele; in other words, you could walk up and

get on. You could still walk up and get on this transit service. That

part hasn’t changed.

The Department of General Services executed that contract, and

subsequent to the execution of that contract entered into an agreement with SACRT to use buses that had been acquired, procured,

using an FTA grant; am I correct on that understanding?

Mr. FRANKEL. My understanding, Mr. Chairman, is that the

service being provided by the Sacramento Transit Agency is not the

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same as—it may be the same in the sense of serving similar customers, but it is distinguishable, certainly in a legal context, from

the service that had been provided by Amador. It is not considered

by FTA to be charter services as the prior contract with the private

company had been considered hence, in the view, the determination

of FTA that it was not in competition with a private company.

Mr. OSE. Can you, for the record, share with us the characteristics of the existing contract that distinguish it from the previous

contract in terms of the conclusion you guys reached that the previous contract was a charter and the existing one is not? Would you

share those characteristics with us for the record?

Mr. FRANKEL. I don’t want to do that here. We certainly will supply that, and I assume your question assumed that we will do so

subsequently.

[The information referred to follows:]

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Mr. OSE. Now, given the history that was evidenced in the triennial audit of July 2000, what is the Department of Transportation doing to ensure ongoing compliance with the July 2001 new

standard operating procedure that this grantee adopted?

Mr. FRANKEL. I would have to refer at least in general terms, Mr.

Chairman, to the—to my initial remarks, and that there is a regular process of review and certification of the planning process and

continuing oversight over this, like any other grantee agency, that

they are acting within the terms of law. And specifics beyond that

we will have to supply to you.

[The information referred to follows:]

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Mr. OSE. Now, one of the responses we got back from legal counsel was that the Department of Transportation does not intervene

in, ‘‘operational decisions.’’ What I did is I went to 49 CFR and

looked for the phrase ‘‘operational decisions,’’ and I didn’t find it.

Did I miss it, that the compliance with the Federal grant—if the

noncompliance is a function of operational decisions that there is

no recourse?

Mr. FRANKEL. I think I would answer that in a little different

way, which is that it is the case that FTA does not engage in exercising oversight over—generally speaking, over decisions made

about such issues such as routes, fares and so forth.

Mr. OSE. Let me go the second step. If I go back from 49 CFR

to the legislation that was passed and signed, is there some provision in there whereby, ‘‘operating decisions’’ are outside the compliance review process which you otherwise exercise? In other words,

if I submit a grant request, and you or FTA approves it and provides the funds, and I use those funds to operate a transit system,

is that an operating decision that leaves the use of those assets acquired by virtue of an FTA grant that may push a private provider

out of the market—is that operating decision not subject to compliance requirements?

Mr. FRANKEL. I don’t want to try to engage in a legal discussion

here, because I am not expert on transit law, but, it is the case,

the pattern of this agency, which is not regulatory. It makes capital

grants to local transit authorities, and it does not engage in the

process, and I wouldn’t think, with all due respect, that the Congress of the United States would want to engage in the process of

looking over the shoulder and having to approve decisions about

what fares should be charged, what compensation should be paid,

what routes should be developed in response to the local community.

I might say, if you will bear with me, that one of the principles

we tried to capture in the proposal, the safety proposals, for reauthorization is to really try to strengthen State and local discretion.

And, we hope that, as this law emerges, this reauthorization

emerges from Congress, that there will be continued respect for

State and local discretion I know that both of you have been strong

supporters of throughout your careers.

Mr. OSE. Well, we are in a bit of a dilemma here. Mr. Frankel,

we have a number of other questions that, due to the exigencies of

time, we are going to submit to you in writing. They follow along

pretty significantly my train of questioning so far.

Mr. FRANKEL. I suspect our answers may follow along the same

basis.

Mr. OSE. Mr. Tierney and I have been called for a vote. We are

going to go ahead and excuse this panel, and then we are going to

take a recess and go vote and come back.

Mr. Frankel, I thank you for your attendance. I happen to have

strong opinions on this. Hopefully you can defend your position.

Mr. FRANKEL. Thank you, sir. And I appreciate the opportunity

to be here.

[Recess.]

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Mr. OSE. We are back. Our second panel is comprised of six witnesses, individually. They are—our first witness is the president of

Amador Stage Lines of Sacramento, CA, Mr. William Allen.

Also joining us is the chairman of the Board and CEO of E Noa

Corp. from Honolulu, HI, Mr. Katsumi Tanaka. We also have

Youngstown, OH, the president of Community Bus Services, Mr.

Terrence Thomas. Joining us from the Reason Foundation is the

vice president for the Reason Foundation, the executive director of

the Reason Public Policy Institute, Dr. Adrian Moore. We have

from—joining us from the Heritage Foundation, the Herbert and

Joyce Morgan senior research fellow, Dr. Ronald Utt.

Sixth but not least, we are joined today by an economist from the

Economic Policy Institute, Dr. Max Sawicky. Welcome to our witnesses.

Gentlemen, as you saw in our first panel, it is the custom of this

committee to swear in all of its witnesses. If you would all rise and

raise your right hands.

[Witnesses sworn.]

Mr. OSE. Let the record show that the witnesses all answered in

the affirmative. OK. Our practice here is that we recognize the witnesses for 5-minute periods to summarize their written submittals.

Mr. Allen, you are recognized for 5 minutes.

STATEMENTS OF WILLIAM R. ALLEN, PRESIDENT, AMADOR

STAGE LINES, SACRAMENTO, CA; KATSUMI TANAKA, CHAIRMAN OF THE BOARD AND CEO, E NOA CORP., HONOLULU, HI;

TERRENCE V. THOMAS, PRESIDENT, COMMUNITY BUS SERVICES, INC., YOUNGSTOWN, OH; DR. ADRIAN MOORE, VICE

PRESIDENT, REASON FOUNDATION AND EXECUTIVE DIRECTOR, REASON PUBLIC POLICY INSTITUTE; DR. RONALD D.

UTT, HERBERT AND JOYCE MORGAN SENIOR RESEARCH

FELLOW, THE HERITAGE FOUNDATION; AND DR. MAX B.

SAWICKY, ECONOMIST, ECONOMIC POLICY INSTITUTE

Mr. ALLEN. Thank you. My name is William Allen. I am President of Amador Stage Lines, one of the largest private bus operators in Sacramento County. I am here today to outline FTA’s failure to enforce Federal requirements on a grantee, Sacramento Regional Transit.

As a result, RT began operation of a local parking shuttle that

had been competitively contracted through various private carriers

since the late 1970’s. Amador has operated its service from 1993

to 2003. FTA abetted the transfer of over $2.4 million from taxpayers for the purchase of buses that would ultimately be used to

take business away from taxpaying private operators like ourselves.

This transfer of funds happened even though RT failed to properly notify interested parties, as required by Federal notification

and consultant statutes.

What is even more incredible to me is that RT reduced service

to half the frequency of the private operator, but still lost over

$277,000 annually just to provide the service that in the past had

been provided by tax-generating private operators at a profit. In

part, due to poor decisions like this, RT is now facing a systemwide

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rate hike in the attempt to increase its dreadful 21 percent revenue

return through its fare box.

In 1998, 1999, RT entered into secret negotiations with the State

and received an exclusive agreement to operate the local bus contract. Actions taken by RT, starting in 1998, 1999 to the start date

of April 7, 2003, violated Federal statutes, regulations and a signed

grant agreement with the FTA conditioning use of these funds.

In 2001, Amador had in good faith extended the contract to the

State with no knowledge of the aforementioned secret negotiations.

It wasn’t until December 2002 that some of the riders began voicing their displeasure to our drivers about the impending change of

carriers. This was the first time that our company had any idea

that RT was intent on taking over this service.

On January 27, 2003, myself, numerous riders and the California

Bus Association attended the RT board meeting to voice our protest

to the service. The RT board ignored the public comments and authorized the takeover. On March 6, 2003, CBA filed an emergency

protest with the FTA’s Washington office requesting relief from the

pending nationalization of the State shuttle routes. On March 13,

2003, Chairman Ose wrote Administrator Dorn requesting an FTA

review of the CBA protest filed on March 6th.

His letter specifically referred to CBAs request to suspend the

contract’s termination until the FTA had completed an investigation. On March 18, 2003, the FTA notified RT that it was requesting that they hold any action on the subject contract or service in

abeyance pending the outcome of FTA’s review.

The FTA’s letter of March 18th makes it clear that the FTA had

first recognized its statutory responsibilities. On March 24, 2003,

the RT board at the urging of its general manager completely ignored the FTA’s written instructions to cease and desist and approved the final April 7th takeover plan.

After being made aware of the RT’s decision on March 24th, the

FTA never admonished RT for its brash behavior. Moreover, FTA’s

lack of response encouraged RT to continue without fear of consequences. Ultimately, FTA sided with RT’s argument. This seemed

odd since the August 2, 2002, triennial audit financed by the FTA

had cited RT with violation of the private sector statutes on notification and consultation during the same time period as this case.

The FTA could never demonstrate by independent investigation

or by evidence from our RT how RT met each statutory obligation

as requested by Chairman Ose’s letter of August 6th.

In what appears to be a cry for rulemaking after further followup

requests by Chairman Ose, the FTA states that they had no jurisdiction over statutory compliance by grantees for operational decisions. This came even after the FTA felt they had enough jurisdiction on March 18th to issue a cease and desist letter to RT.

FTA’s record of failure is allowing a grant to RT for $2.4 million

for equipment, when the intent of the grant was to buy equipment

that would displace private operations. This is in violation of various codes which state in part that assistance programs must not

use equipment acquired with grant funds to provide services for a

fee to compete unfairly with private companies that provide equivalency.

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FTA grantees must comply with rigorous planning and private

enterprise requirements. A congressionally mandated audit found

that RT had failed the entire public participation process. The

FTA’s failing to encourage private participation prevented unfair

and unlawful Federal subsided competition.

Amador employees have been harmed by the failure of the FTA.

Approximately 25 drivers, mechanics and cleaning personnel were

left without jobs due to the FTA’s inaction and inability to enforce

their regulations. Amador urgently requests FTA engage in meaningful rulemaking as requested by Chairman Ose.

The FTA has failed to meet the standard of enforcement to the

detriment of the taxpayers and riders across the country. It is time

for this practice to stop.

Thank you very much.

[The prepared statement of Mr. Allen follows:]

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Mr. OSE. I thank the gentleman. Our next witness is Mr.

Katsumi Tanaka, who is the chairman of the Board and CEO of the

E Noa Corp., a transit provider in Honolulu, HI. Welcome, sir. You

are recognized for 5 minutes.

Mr. TANAKA. I am pleased to be addressing this body which gives

an opportunity for which I have thirsted over the course of many

years. In 38 hours or so, back in Honolulu, HI, the county of Honolulu will apply for $20 million circumventing FTA scrutiny in order

to run a service that we have been running for over 38 years.

Let me demonstrate my point. Back in Waikiki, we have 95 percent of the tourists. This is a fixed route for which we run trollies.

At this very hour the county of Honolulu, instead of serving local

residents, is about to serve tourists.

Let me demonstrate further. This pamphlet is in the Japanese

language, not in the English language. In the front page, at the

preface, is the mayor of Honolulu, Jeremy Harris, who says to the

Japanese people, using Federal dollars and local taxes, you will

enjoy economic tours around the Island for $2.

Obviously, operations like us who depend totally on revenue from

fares without subsidy will be wiped out. Our peril back in Hawaii

is that the private sector today is about to be assaulted by the government, Federal and county, constantly courting tourists instead

of local residents.

Moreover, the most popular destination on the Island of Oahu is

called Hanauma Bay. About 8 years ago, in the name of ecology,

Haunama Bay was closed to balance ecology as well as the visitors’

desire to visit it.

Once Haunama Bay, which was the most coveted of business for

the private sector, the private sector has been ostracized. The only

buses that are allowed into Haunama Bay today are the city buses.

As a result, many parts of Oahu, local residents ask for many

buses, more services, more frequency, to which the Mayor of Honolulu will say, we have to serve areas where there are more customers. Where the customers are is in Waikiki, where the customers thirst for low fares, where the private sector depends entirely on its livelihood. That is the very purpose for which the

cunty of Honolulu is asking for $20 million. I hope that FTA and

others will put a stop to Honolulu County’s operation of tourists,

while neglecting local residents.

We are a small business. Moreover, the buses, the city bus is run

by the Teamsters. The average hourly wage of the Teamsters is

about 48 percent higher than private sector. Moreover, the Teamsters are provided, of course at taxpayers expense, full benefits,

medical, pension funds. Today the private sector in Hawaii is losing

drivers to the city bus.

We are not capable of redressing our grievances because of the

powerful combination of Federal funds, county funds and the

State—county of Honolulu. The very same regime that operates

tour operations also operates the police, and there is systematic

harassment of our drivers with neglect of the city buses. This is

truly a phenomenon that I never expected to take place in the

United States. This is truly a matter for which we need your succor

immediately, not future deliberations.

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Again, I repeat, within 38 hours or so the county of Honolulu may be granted $20 million, and this is a statement from Jennifer

Dorn. We have learned from experience that this exemption, meaning grants of $25 million or so, encourages project sponsors to artificially define projects into smaller segments in order to avoid being

subject to FTA assessment.

That is exactly the point, the county of Honolulu that started with asking for more than $2 billion for the entire Island of Oahu,

arguing the case that the residents of Oahu deserve better public

transportation. Instead, the magnified program has shrunk into

Waikiki only. I repeat in Waikiki, 95 percent of the tourists live in

Waikiki.

So today the very same regime asking for $20 million has aggrandized its appetite to constantly court tourists as a source of

revenue at the general neglect of local residents. Thank you very

much. We need help immediately in the form of FTA not certifying

whatever the allegations are the county of Honolulu makes.

[The prepared statement of Mr. Tanaka follows:]

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Mr. OSE. Thank you, Mr. Tanaka. Do you want to introduce Ms.

Dorn’s statement into the record?

Mr. TANAKA. Yes.

[The information referred to follows:]

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Mr. OSE. Without objection so ordered. Mr. Thomas, you are recognized for 5 minutes. Welcome, sir.

Mr. THOMAS. Thank you, sir. My name is Terry Thomas. I am

president of Community Bus Services in Youngstown, OH. CBS

provides contract bus services for senior citizens and persons with

disabilities, and has been in business since 1933, and we now operate over 100 vehicles.

Like the other bus companies testifying today, we have come to

realize that the private investment we have made in public transit

is viewed as an undesirable impediment by many public transportation agencies, including the FTA.

CBS’s most recently awarded public transit service contract is

with the city of Niles, OH, in Trumble County. After a 10-year-long

struggle to bring public transit to the largest populated county in

the United States, Mayor Ralph Infante of Niles, OH, successfully

secured an FTA grant to operate public demand response transit

service.

In September 2003, my company was awarded the competitively

procured contract to operate the service. If this was all there was

to the story, it would be viewed as a positive example of competitive contracting. However, because of the actions of WRTA and the

Chicago Regional Office of the FTA, much needed service was needlessly withheld from the people of Trumble County for 10 long

years. The WRTA, for several decades, was the only public transit

system in the Youngstown-Warren Area.

Yet, while receiving FTA formula funding for decades, based in

large part on Trumble County’s population, WRTA consistently refused to extend service to Trumble without being paid additional

for the cost of the service.

The longstanding frustration eventually led Trumble and the city

of Niles to create its own system. Niles solicited bus service proposals from qualified providers. WRTA never submitted a proposal in

response to Niles’ solicitation. Instead, WRTA immediately protested the award of any contract resulting from the effort.

The approach by WRTA was to try to thwart the award of any

contract to operate public transit service to anyone other than

itself, thus guaranteeing WRTA exclusivity and a monopoly in providing public transit services in the two-county area on a noncompetitive basis.

FTA’s Chicago Regional Office supported WRTA in this effort,

ruling that WRTA was at an unfair competitive disadvantage in

December 2002. The city of Niles appealed the FTA Chicago Regional Office finding, and it was subsequently reversed in May

2003 when reviewed by the FTA General Counsel’s office in Washington, DC.

Niles only then was able to move forward and award a contract,

albeit not until September 2003. Let me emphasize that it was not

until the FTA General Counsel’s office stepped in from Washington,

DC, to reverse the decision of the FTA Chicago Regional Office and

its local grantee transit property, the WRTA, that Niles was able

to proceed with this bus service delivery.

Although Niles eventually prevailed, 10 years is a long time to

wait for a decision. In a separate Ohio example, a local private bus

company, Advanced Coach, filed an FTA complaint against the

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Southeast Area Transit, called SEAT, an FTA grantee in southeastern Ohio.

The complaint involved SEAT’s unfairly competing against private bus companies by operating bus service for a fee to third party

entities utilizing equipment and facilities acquired with Federal

grants. Some of these contracts involve peak hour shuttles to local

employers that would otherwise be operated by private bus companies without FTA funding.

FTA has stepped back from encouraging the use of private bus

operators, as required by the Federal Transit Act, by abandoning

the fully allocated cost doctrine. This regulation was supported and

framed under a contract for the FTA by the consulting firm of Booz

Allen, which required public federally subsidized transit agencies

to compare true costs of operations, include fare allocations of administrative, maintenance and related costs as opposed to mere

operational and marginal costs. It is no surprise that the public

transit agencies pressed until the FTA relented and abandoned the

analytic fully allocated cost requirement.

I have attached Circular 7005–1 issued in December 1986 that

describes the fully allocated cost requirements. Utilizing bus operators as an element of a community transportation program makes

good fiscal sense and is operationally practical.

I ask that FTA engage in a rulemaking, as Chairman Ose has

requested, that will establish meaningful thresholds that meet the

meaning of FTA’s own words, and that its grantees meet rigorous

planning and private enterprise requirements.

Given that under FTA private sector provisions there exist no

private right of action for judicial review in the courts, an arm’slength enforcement responsibility should be given either to the

DOT Secretary’s office or become subjected to negotiated rulemaking, where the private sector has a position to sign off on new

arm’s-length enforcement rules.

Otherwise, by continuing the current course of action, private

bus operators will soon be forced out of business altogether.

In my short time before you today, I want to leave you with the

thought that many of the frustrations which have been encountered by private bus operators in the Federal transit program could

be resolved with statutory language directing FTA to make rules

that protect private bus operators that offer more uniformity and

arm’s-length enforcement.

Thank you so much, Mr. Chairman and Mr. Tierney.

[The prepared statement of Mr. Thomas follows:]

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Mr. OSE. We appreciate your testimony. Our next witness is the

vice president of the Reason Foundation, Dr. Adrian Moore. Sir, we

received your testimony. It is lengthy. You are recognized for 5

minutes to summarize.

Dr. MOORE. Thank you, Mr. Chairman. You know, the stories we

have just heard about anti-competitive behavior by public transit

agencies has a long history. I wrote a book a few years ago published by the Brookings Institution that documented a great many,

sort of a historical pattern. It is the nature of public transit agencies that they try to rub out any competition that they might face

from the private sector.

In the context of Federal grantmaking, the State and local transportation projects that receive Federal grants have a different accountability structure than ones that are funded locally. You can

see this where you live, when you look at projects that are funded,

say, by a local sales tax versus ones that get Federal grants. You

hear about the ones that are funded with State and local funds.

The Department of Transportation or the local transit agency feels

compelled to make sure that people know how this money is being

spent.

Projects funded with Federal grants you generally never hear

about. There are things that are done quietly on the side by these

agencies. They are only accountable to the FTA or the DOT. It a

different accountability structure. At the same time, the kind of

free money aspect of these grants creates strong incentives to use

the dollars internally rather than make use of private sector participation, not necessarily weighing cost effectiveness and speed of

production and so forth, and I think all of that is pretty much common sense.

That is why these provisions that the chairman read earlier in

the hearing are in the law. There is a recognition that there are

some incentive problems here, and we need to have it in the law

that private sector participation needs to be weighed.

I think where FTA and DOT are missing the bus is that—you

can’t have a hearing without at least one pun—where they are

missing the bus is they are not making these grants on a performance basis. We understand that we want State and local governments to make these decisions on their own. These are State and

local services. But, the fact is, if you are going to get Federal

money to do something, being accountable for the use of that

money makes sense.

I am not talking about micromanaging those things. But, if it is

within the law and within good management practices for the DOT

to ask these agencies to report back what are the projects they are

using the money for, how were they executed, and are they meeting

the goals that they stated they were going to meet in applying for

the funds in the first place?

By not following through in that fashion, by not making full use

of the private sector, we are missing a lot of value. There is a lot

of displaced private funding that could be brought to the transportation projects.

Again, the chairman made a good summary of the transportation

funding needs that we face in this country. There is a lot of private

money that could go to provide transportation services if they were

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allowed to do so and they weren’t pushed out of the market. This

goes from toll-funded roads to private transit services within cities.

When you think about transit services within cities, since that is

a lot of what we are focused on here, there is a lot of biases in the

way things are funded away from doing competitive operations of

these systems once you have purchased the capital with a Federal

grant. But, it is interesting to see that in the United States and

Europe, where you have contracted out operation of bus services,

you have made use of private sector participation, you are looking

at an average of 35 percent cost savings. I think some of the examples have highlighted those kind of savings.

It is also very interesting to see how much the costs of publicly

operated systems plummet when part of the system is operated by

a private contractor or when they do face direct competition from

a private bus service. The cost differentials become really obvious.

It makes the public agency very uncomfortable.

Surveys performed by the Transportation Research Board of

transit agencies who have contracted out operations find that 80

percent of them would say that they would gladly do this again if

they had a chance to do it over again. They are very satisfied with

private sector participation. These are not cheerleaders, these are

not private companies, these are public officials, public employees,

who are just trying to get the job done.

To boil this down to recommendations, I think, at this level I

think the DOT needs to make these grants on a performance basis,

set out clear criteria. It is already in the law. They can fold that

into the contract criteria in a fairly straightforward fashion. I think

they believe that it is sort of implicit and it is embedded in the

local planning process, and, if you have ever been participated in

an MIS, you have probably seen that is not the case. MISs are very

political processes, they are not technical processes.

Embedding some of this in the grant requirements makes sense.

Obviously the transportation funding bill, even if the one that is

currently up is not in the debate stage any more, it is going to

come around again. There are a lot of things embedded in the

transportation funding bill that are problematic or raise barriers to

private sector participation. I think we need to continue to tackle

those.

Thank you very much.

[The prepared statement of Dr. Moore follows:]

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Mr. OSE. Thank you, Dr. Moore. Our next witness is the Herbert

and Joyce Morgan senior research fellow at the Heritage Foundation, Dr. Ronald Utt. Sir, we have your testimony. It is very informative. We have read it. You are recognized for 5 minutes to

summarize.

Mr. UTT. Thank you, Mr. Chairman. My name is Ron Utt. I am

a research fellow at the—senior researcher at the Heritage Foundation, where I conduct research on transportation, housing, privatization, and public-private partnerships for infrastructure investment.

It is an honor and privilege to appear before the subcommittee

today to discuss opportunities for the public sector to work cooperatively with the private sector to harness the resources, talents and

creativity of the competitive marketplace to improve transportation.

Let me also add here that the views I express in this testimony

are my own and should not be construed as representing any official position of the Heritage Foundation.

Until recently, in the United States, most surface transportation

relied almost exclusively upon government spending and user fees

to expand capacity, maintain infrastructure and cover operating

costs. Much of the public revenue dedicated to those systems was

derived from Federal and State fuel taxes and local property taxes,

and as long as vehicle-miles traveled continued to rise, and fuel tax

rates could be increased every couple of years, growth and dedicated revenues was adequate to meet the needs.

Around 2000, 2001 growth in vehicle-miles slowed, and many

voters throughout the country made it clear they did not want

State and Federal fuel taxes raised.

At the same time, many States saw their budget deficits widen,

and money was often moved from deferrable transportation spending to other programs. As resources for service transportation fell

or stagnated, a money shortage also created the willingness on the

part of some public officials and private investors to take a serious

look at greater private sector participation in surface transportation projects.

Although the United States is no stranger to innovative private

sector solutions for transportation, it lags behind Europe and Asia

in the scope of implementation, largely because these other countries confronted serious budget limitations decades before we did

and thus were forced to begin thinking creatively in the 1980’s.

Beginning with privatization of many of Japan’s passenger rail

lines in the 1980’s, one country after another began to increase its

reliance on private sector partners to help control costs, increase financial resources. The London bus system is now contracted out

entirely to private operators, as is much of Copenhagen’s and

Stockholm’s.

Although many countries in Europe and Asia are ahead of us in

creating innovative arrangements, we have the advantage of being

able to learn from their successes and also from their failures. With

the likelihood that future public revenues for transportation will

continue to be limited, partnerships with the private sector are certain to increase, especially at the State level where a number of

major projects are already under serious consideration.

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An interesting example of some of the opportunities being pursued now are those that are emerging in Virginia. Virginia has enacted one of the most accommodative public-private partnership

laws in the country to encourage qualified private sector enterprises to propose to the State Transportation Department partnership opportunities for investment in new road and transit capacity.

Originally enacted in 1988 to permit the construction of a specific

toll road in Loudon County, the law was subsequently amended in

1995 to allow any qualified partnership to be proposed for eligible

transportation projects throughout the State. In response to the

wide scope the law allowed, a private company proposed to use a

partnership arrangement to fund and build the Pocahontas Parkway in Richmond.

That was completed and opened in 2002. But before that, in

1995, another proposal was received from a private company to

take over the maintenance duties on a portion of Virginia’s interstate highways. That contract was granted to the proposer, and is

still in effect today. And in fact they were so successful that about

a year and a half ago the District of Columbia picked up the same

contractor to do the maintenance and repair work on its share of

the interstate highways running through town.

More recently, largely a consequence of limitations on future and

Federal highway funding, a number of new partnership proposals

have been presented to Virginia DOT. Over the past 15 months,

DOT has received five separate proposals to add capacity on three

congested interstate segments. And recently a sixth proposal is

being developed for the proposed rail line to connect Dulles Airport

with the existing Metro system. Overall, these projects could attract new investment to Virginia in excess of $10 billion.

This is about 10 times more than what Virginia gets from the

Federal Highway Trust Fund each year. So we are talking about

significant pools of money. $6 billion for two competing proposals

on Interstate 81, anywhere from a half a billion to a billion dollars

of competing proposals to build a toll express HOT lane on 95, extending as far down as Fredricksburg, and a proposal to do toll express lanes, HOT lanes on the Virginia side of the Beltway.

These are significant projects which will vastly, if they go

through, vastly increase the resources available for transportation

projects in Virginia at very little claim on the public treasury, allowing what revenues they have from gas taxes and other sources

to be used on projects that cannot be sustained with private sector

interests or self-sustained on tolls and other forms of fees.

Virginia is not alone. Georgia adopted the Virginia law in 2003,

and they already have two competing proposals on their project.

I think we are out of time, so let me wrap it up with that. Thank

you, sir.

[The prepared statement of Mr. Utt follows:]

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Mr. OSE. Thank you, Dr. Utt. Our sixth witness, comes to us

from the Economic Policy Institute, where he serves as an economist. That would be Dr. Max Sawicky.

Sir, we received your testimony. You are welcome to summarize

in 5 minutes.

Mr. SAWICKY. Thank you, Mr. Chairman. I would like to thank

the committee for the chance to present my views. You have my

statement. I will spare you the reading of it or most parts thereof.

There is an old joke that involves a man, a woman who isn’t his

wife, and a clothes closet. It ends with the line: Everybody has to

be some place. It is true, everybody has to be some place.

I am not sure we have to be here. We might better be regaling

the city fathers and mothers of Sacramento about how to run their

bus system. I am little puzzled by that.

I want to make four points. No. 1, I am not a lawyer. No. 2,

buses are complicated. No. 3, research does not always make us

smarter. And, No. 4, let Sacramento be Sacramento.

A lot of the discussion here has been about legal arrangements

going to what the rights are of State and local governments in

terms of contracting. I am not a lawyer so I can’t evaluate them.

There is rhetoric and even legislation to the effect that there is

some inherent right of private sector operators to do public work.

Now, again, although I am very dubious as to the Constitutionality

of that, I am not a lawyer. What I can say with more confidence

is from an economic standpoint there is no justification for that.

The public interest is having work done most efficiently, not necessarily by private operators. In fact, if it could be done privately,

it doesn’t mean it should be done privately from the standpoint of

efficiency. There was legislation called Freedom from Government

in Competition, which seemed to embody that principle, but fortunately the actual passage of it watered down the application of that

significantly. So, that is point one.

Point two, buses are complicated. I would argue that the transportation function goes well beyond rolling a bus from Point A to

Point B and picking up and dropping off people in between. There

are other factors besides timeliness. There is courtesy, safety, comfort, environmental implications, the proper breadth of service, the

extent to which you want to maintain unprofitable—routes that are

unprofitable in and of themselves, and fitting all of that into a regional transportation system, which is really the public problem, I

think is even more complicated.

I would argue that a narrow view of this kind of work is really

inadequate.

No. 3, research does not always make you smarter. Literature on

the cost savings, which seems to be the thing that is touted most

often as the case for contracting always being better, or almost always, is actually very diverse.

There is a Transportation Research Board study. I will just quote

one sentence that is also in my testimony. The committee recognized from the outset that a comprehensive review of past studies

on contracting would in all probability have generated more questions than answers. My colleagues know about studies showing

that contracting saves money. I can cite studies showing that is not

always necessarily the case.

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For instance, a study from the University of California at Berkeley said the effects of contracting on costs are examined for the

years between 1989 and 1993. The findings show that bus services

under contract are sometimes but not always less costly than directly operated services. We conclude the cost efficiencies can be

achieved in many different ways, depending on local conditions,

and contracting should not be assumed to be the most appropriate

strategy in every situation. So research does not always tell you

simply what to do.

In light of that complexity, that brings me to my last point. From

a Federalist standpoint, again, the basis for us trying to determine

here, or through Federal law or through rules, how Sacramento or

any other local jurisdiction should conduct a fairly complicated decision whether or not to contract out, how much, where, how, when.

I think the U.S. Congress, much less us here in Washington, are

not well situated to make that decision. It is really more for local

government.

There is a Federal interest in oversight of Federal dollars. But,

of course, the question is where you draw the line. What is the reliable or the feasible extent of intrusion or management? I think

that in light of the complexity of this kind of decision, even something like buses, it is not—the Federal Government is not well situated, is not better situated certainly than the people in Sacramento, CA, and in the States to make that decision.

Thank you very much.

[The prepared statement of Mr. Sawicky follows:]

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Mr. OSE. Thank the gentleman for his testimony. OK. As in the

previous panel, we will entertain questions both from Mr. Tierney

and myself.

This is a question for all of you. We will just move across the

panel from left to right. The Department of Transportation, to one

degree or another, seeks to facilitate competitive contracting for

building new infrastructure, for maintaining existing infrastructure, and for operating existing services.

Do you think that has been successfully implemented or not, and,

if you think it has or has not, would you give us some feedback as

to how we might improve? Mr. Allen.

Mr. ALLEN. Well, I can’t see in our particular case in the Sacramento area how FTA has helped the infrastructure. RT has some

really internal problems as far as operating. There was a big article

in the paper just the other day about their see-through buses because they don’t have very many riders. That comes back to the 21

percent return on their fare box.

They need to, I think, go out and find a way to do better service

at less cost. So as far as the infrastructure, I am not sure what the

FTA has done to help that. I don’t know.

Mr. OSE. Mr. Tanaka.

Mr. TANAKA. In the case of Oahu, we are blessed by millions of

dollars put by the tourists. As a result, therefore, we have plenty

of private companies with equipment, vehicles, purchased on our

own without Federal funds. Therefore, bringing private sector into

carrying local residents, as well as tourists, certainly will result in

greater savings, including those counties and States that need such

funding more than Hawaii.

However, the playbook phrase in Hawaii is: it wouldn’t cost us

anything so long as we get Federal funding. So any Federal funding is greatly enjoyed by the State of Hawaii. With respect to

ground transportation, yes, we have numerous excess capacity by

private companies because the county of Honolulu has invaded into

our territory. As a result, many private companies have idle buses.

For Hawaii, and especially the Island of Oahu, we are in a very,

very appropriate situation where we ask that the Federal Government and others enforce the existing laws. They will work; they are

not enforced.

Mr. OSE. Mr. Thomas.

Mr. THOMAS. I have two comments. The answer is the FTA has

not sought to include private involvement. The examples I have,

No. 1, are in Cleveland, OH, where I operated a community

circulator, a public transit service. A nice little circulator route. It

was a pilot project for a few years back in late 1980’s.

Once it was determined that there would be successful ridership,

the RTA then concluded in its planning that they should expand

it systemwide. They went from two circulators to about 30, and

they sought competitive proposals. Then they threw them all out.

Years later, when I got to talk to the financial people on the inside of the RTA, it was the disparity, as Dr. Moore mentioned, the

disparity between the cost of service that humiliated the transit

property. They couldn’t stand the fact that we were charging $35

to $40 an hour, including the cost of the bus, compared with $70

to $80 an hour excluding the cost of the bus for the service.

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That changed the entire focus of my company, because I thought

for sure we had it made. We were going to grow our service. Instead, we left the Cleveland market. Then, separately in my testimony, I talked about a much smaller example in Youngstown and

then in Niles, OH, where it was another public entity that wanted

to perform service in their own area that the current public transit

grantee tried to prevent, and actually the mayor had to go through

the appeals process at FTA. If the General Counsel in D.C. at the

FTA’s top legal office didn’t intervene, that service still wouldn’t be

performed.

It seems like every time we try to get involved, at least in Ohio,

it gets shut down. There is some contracting for public transit services in Ohio. It is very limited and very clear that it is undesirable.

Mr. OSE. Dr. Moore.

Dr. MOORE. I would reiterate the answer. The straight up answer

to your question is no, the FTA has not sought. They see themselves as a grantmaking organization. As long as the requirements—their job is to give the money to these people, as long as

they dot the Is and cross the Ts, basically asking for the money,

they give them the money. That is obviously their role. They don’t

see their role as in any way shaping how these projects are done.

As to how they can improve that, I think there are two main

areas. First of all, it is perfectly reasonable for them to have criteria that these grants are not used to put a private operation out

of business. That should be fairly easy to determine and enforce

and should be a simple requirement of making a grant.

A little bit more complex, but just as important in a broader context, is broader public-private sector participation in these things

could be induced by FTA, or not induced, allowed I guess by FTA

if they—if they had criteria, performance criteria, as I mentioned

in my testimony, saying what is it you are going to accomplish?

How many people are you going to serve? How much service are

they going to get?

If private sector participation can help an agency to provide

more, than it would get used. If it doesn’t, and in many cases it

may not, then it wouldn’t get used. But, it would be an outcome

based way of getting private sector participation folded into the decisionmaking which right now is generally not on the table.

Mr. OSE. Dr. Utt.

Mr. UTT. On a broader issue, on sort of the broader question you

asked, since 1955, the Federal Government has been issuing edicts

and Executive orders extolling the virtues of private market, encouraging bureaucracies to work more closely with them, and noting that it is a great source of money and cooperation and creativity. It is the purpose of our administration to change the way we

do things. From now on, we will work more closely with the private

sector.

There has been little effective action as a consequence of these

edicts. They make everybody feel good, but nothing really much

changes in the operation of those programs. On the issue of transportation, I am not sure that new edicts, new regulations, new intentions would make much of a difference on the kind of infrastructure we already have in existence, which brings me to the nature

of the infrastructure.

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The Federal Highway Program that we are dealing with today

was created in the mid-1950’s for a single, well-defined purpose.

That was to build the interstate highway system. That was their

only job, a border to border, coast to coast, connecting all of the

major cities in the country. That was largely completed in the early

1980’s, and it never adopted another objective that was quite as

clear as that.

At the same time, the transportation problems we have today, as

I think have been illustrated by everybody, are increasingly local

and regional in nature. But, you have a national program here in

Washington that is sort of trying to figure out how we do this on

a local level, on different bus systems, and I think that what has

come out of this is they are just not particularly well equipped to

do that.

I suggest that the real issue is to review the Federal program we

have, say has it outlived its usefulness, and are we better simply

turning it back to the States, which is something we have advocated.

Mr. OSE. Dr. Sawicky.

Mr. SAWICKY. Well, I have been writing about federalism for

about 20 years now. A theme that I think always comes up is the

difficulties from the Federal Government of closely regulating what

State and local governments do, either with money or without

money. Both parties, all kinds of programs, there is a continual interest in Washington to try to do good and to do good through other

people who have different motives, interests, possibly well motivated, possibly otherwise.

There is a chronic problem, I think, expecting the Federal Government to get very deeply involved in how any local entity is contracting now, or doing anything else for that matter. We might note

at the same time that there are huge difficulties in Federal contracting, which I think Congress and the executive branch have yet

to get a good handle on.

I think—to imagine that the Federal Government could clean up

or regulate or significantly improve what State and local governments do in that realm, alongside a longstanding lack of success in

greatly advancing the way Federal contracting is done is really

problematic. So my vibe here is against over-reaching. Now, there

is a case for money for Federal aid, even without too much oversight, which, you know, we can go into if you like.

I don’t think that the lack of ability to closely regulate precludes

any kind of Federal aid, contrary to Dr. Utt.

Mr. OSE. The gentleman from Massachusetts.

Mr. TIERNEY. I would like, Dr. Sawicky, for you to go into that

a little further, on the last train of thought that you had, the benefit or possibility of giving Federal money, but having the oversight

come from someplace else, which is where I suspect you were going.

Mr. SAWICKY. People are concerned, rightly so, with Federal aid

being used inappropriately or in some kind of malfeasance at the

local level. Well, once Federal aid is in the State and local coffers,

it is no different from any dollar in principle. They have no interest

in using a Federal dollar any differently than they would use their

own money. We expect State and local political processes and the

politics to regulate that.

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Now, from a tax standpoint, which I also work on, there is advantage in some level of centralized finance of local operations.

Local taxes have negative economic incentives. People have an incentive to run away from the tax to a neighboring jurisdiction or

State. The Federal Government has a greater capacity to tax the

economy as a whole. So there is—it is cheaper for the Federal Government to collect taxes than State and local governments. There

is a case for some Federal leverage of State and local finances, even

apart from any significant oversight.

There are also other motivations for Federal aid. There are considerations for economic development, for equalizing fiscal capacity

across State and local jurisdictions. So there are a variety of justifications for Federal dollars absent a great amount of oversight

in the use of those dollars when they are going to the State and

local governments.

Mr. TIERNEY. I appreciate your comments. I don’t want to get

into a debate with you. I would have some problems about the

money supplanting State money and local resources and their failure to use the money for the intended purpose.

But, I wanted to really hear what you had to say, and I appreciate that.

Mr. Allen, you made some comments during your testimony that

you thought there were secret negotiations with the State. Do you

have some empirical evidence that you would care to share with us

about just who had those negotiations and when they occurred?

Mr. ALLEN. Yes, I would. We were in constant contact with General Services throughout the last year and a half, because our contract initially was in 1996 and went through 2001. It was a 5-year

contract. This contract had been competitively bid for 25 years. We

were just the last one in the mix.

I want to make clear that this is not an Amador issue, this is

an industry issue.

Mr. TIERNEY. Thank you for that. But, in my limited time, my

real question is, what was the secret negotiation and who were the

parties involved in it?

Mr. ALLEN. OK. It was General Services and Regional Transit

and their planning department.

Mr. TIERNEY. Do you have names you want to name here and

dates that this happened?

Mr. ALLEN. Names? Oh, boy. I don’t have the names off—I can

get you the names if you would like.

Mr. TIERNEY. Do you know specifically who was involved in that?

Mr. ALLEN. Well——

Mr. TIERNEY. My point is, were you surmising this or do you

have some hard evidence?

Mr. ALLEN. I know that we were talking to them every day about

an extension or were they going to put it out to bid, because the

time was running out. It took about 9 months to 12 months to get

the vehicles. I was in constant contact with them, saying your time

is getting short. What are you going to do?

They just said that this, you know, we are working on putting

the bid package together. We are getting all of our ‘‘I’’s dotted and

‘‘T’’s crossed. They were stringing us out basically. In the meanVerDate 11-MAY-2000 14:32 Dec 14, 2004 Jkt 000000 PO 00000 Frm 00154 Fmt 6633 Sfmt 6633 D:\DOCS\96634.TXT HGOVREF1 PsN: HGOVREF1
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time, from the information we have received through investigation,

they had this other plan already in the works.

Mr. TIERNEY. I guess that is what I am looking for. What investigation? What other information have you got to convince us that

there was this other track of negotiations going on in secret?

Mr. ALLEN. There were the meetings between ourselves and the

California Bus Association and——

Mr. TIERNEY. That was not General Services——

Mr. ALLEN. No, after the fact. With General Services to ask them

how this all went step by step by step. It was—actually it took

three meetings at one point for them to finally acknowledge that

there were meetings. So, I mean it was like pulling teeth because

it was secret.

Mr. TIERNEY. I suspect—it is somewhat unfortunate that we

don’t have other people here to sort of put this whole picture together, because I appreciate that you have a perspective on that,

and I would expect that you would.

But I would certainly like to hear what the State was doing and

thinking and saying during that period of time as well as the RT

people, whatever. The chairman tells me that we are going to have

other hearings at some point in time. I would rather have seen it

all together so we can have a little interplay here and get to the

bottom of this.

But, you know, if you would submit to the committee, if you have

hard evidence, empirical evidence that there were individuals and

entities involved in secret negotiations improperly during the

course of this situation, I would hope that you would submit that

to us in writing.

Mr. ALLEN. I can do that.

Mr. TIERNEY. Thank you.

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Mr. OSE. Mr. Allen, I want to make sure—I keep trying to get

the chronology correct. When the contract under which your company offered the transit service, if I understand correctly, and from

my experience anyone who parked in a certain area or along the

path of the service itself could effectively just walk on the buses,

there was no charge?

Mr. ALLEN. This whole service was basically a union negotiated

benefit for the State workers. So, as you would note, Mr. Chairman, the parking lots were underneath the freeways, they were remote from downtown. It was about a mile, a mile and a half route

from the parking lots to downtown center. I believe they paid $20 a month when we first started for this

parking spot plus transportation.

Mr. OSE. Who is they?

Mr. ALLEN. The State employees.

Mr. OSE. The State Employees Union or the State of California?

Mr. ALLEN. The State employees paid the State of California. It

was probably a deduction out of their payroll.

Mr. OSE. Much like we have at the Federal level then with the

transit benefit for State employees, priced at $20 a month, they

could have a deduction from their pay?

Mr. ALLEN. That is right. They would get parking, very reasonable parking, plus transportation in. And the idea was to keep

the—Sacramento has a smog problem. So it was to keep the people

from the city core with the cars.

Basically, they had their name, their name badge, their State

card. They would show the card, and, if they didn’t have a card,

they paid a dollar. Now, anybody could pay a dollar. We asked

them, you know, how do we know if they are a State employee versus a non-State employee. Because some of these State employees

parked in the street versus parking in the parking lot to pay the

$20.

They would park in the street and walk in with their card. So,

in any event, they said just take a dollar from whoever doesn’t

have a card. We don’t care if they are Joe Public or they are State

workers, it doesn’t matter to us.

That is what we did. We had a fare box in the front of the bus.

They paid a dollar if they didn’t have their card. It was open to the

public. We had—you know, we had stops along the way. We

stopped actually at the regional transit stops. This was a service

that—General Service gave us the maps. We had published schedules that went out to—all of the employees had schedules. They

had—there were scheduled times. There was like 16 buses at the

top end at one time working off of three different parking lots. It

was regular mass transit service.

Mr. OSE. OK. Well, first of all, I need to admit that I owe you

a dollar. I snuck onto your transit without paying.

All right. Someone parking underneath the freeways, they would

walk over and show their State employee ID, or they would park

in the street and get on showing their State employee ID. If they

didn’t have their State employee ID, they paid a dollar for the

movement from the parking lot to the State office buildings that

are in the core?

Mr. ALLEN. That is correct.

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Mr. OSE. Now, you had 16 buses. How many stops along the

way?

Mr. ALLEN. There were, from the parking lots inbound, there was

probably not too many until you got to the city core. You would get

right down to the east end. That would be the first stop. Then they

would work their way down through the main part of town. On the

way out would be more of the stops, because there were more State

buildings to pick up at. Probably 8 to 10 stops.

Mr. OSE. But, the entire route was in the downtown core? Started at the freeway parking lots, looped in, and looped back out?

Mr. ALLEN. Right. And, they came in—no stops until the buildings. They hit all of the buildings, and no stops once they left the

buildings.

Mr. OSE. Now, my understanding or my experience has been

that, in addition to the transit service you were operating under

this contract, RT was running buses up-down J Street and L Street

and also north and south on 16th and 19th and the like.

So you are running a transit service, and RT is running a service

at the same time?

Mr. ALLEN. We were, and we were actually using their bus stops.

Mr. OSE. You had permission, by virtue of a negotiation, to use

RT’s bus stops as a mutual collection point?

Mr. ALLEN. Yes.

Mr. OSE. Were they designated bus stops?

Mr. ALLEN. They were RT bus stops. They didn’t say State employees bus stop.

Mr. OSE. Like any RT bus stop along the path?

Mr. ALLEN. There were designated RT bus stops at various

points. We didn’t hit every one of their bus stops, but we hit the

ones that the State asked us to stop at.

Mr. OSE. My time has expired. The gentleman from Massachusetts.

Mr. TIERNEY. Well, I just want to cover one point, and maybe I

am putting too fine a point on it. But, you had folks that had a

card and they could get on your bus. You had folks who were without a card, and you got a dollar, so that was a penalty for having

a card, I take it. But, you let people get on even if you weren’t sure

that they were employees. I guess, it sounds to me like morally a

decision was made not to go through the cost or hassle of enforcing

the provision, but rather just to take the occasional stray that got

on there and let them ride for a buck, as opposed to go through a

big, long, convoluted process of trying to keep other people off. It

doesn’t sound to me like there is some conscious decision to open

up to the public and notice that everybody could ride these things.

Mr. ALLEN. There could have been partially what you said. But,

realistically, we were starting and stopping at a parking lot, remote

parking lot.

Mr. TIERNEY. It is unlikely that you were going to get people

going there just to take your bus, unless they were working in part

of that group?

Mr. ALLEN. The schedule that we operated is identical to what

RT is running today.

Mr. TIERNEY. Well, I appreciate that added comment, although

it wasn’t even part of my question remotely. But, the idea is that

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you were stopping there to pick up those employees, for the most

part. That was your deal. You weren’t there because you had a contract to pick up people that had negotiated that right or privilege

or whatever it was——

Mr. ALLEN. Right. It is right.

Mr. TIERNEY. You wouldn’t have been there without that deal?

Mr. ALLEN. There was free parking out there on the street if

somebody caught wind of our service.

Mr. TIERNEY. I don’t need to hear that. I am trying to narrow

my points. You were there because you had negotiated an agreement to be there to pick up those employees. You would not have

been there but for that?

Mr. ALLEN. Exactly. The same as RT today.

Mr. OSE. I think——

Mr. TIERNEY. That is fine.

Mr. OSE. I think the answer is yes.

Mr. TIERNEY. Right. I just would like to have the answers to my

questions without the argument part of it. I understand where you

are coming from. You have had ample time to present your case.

This was really just looking for that answer.

Mr. OSE. Would the gentleman yield?

Mr. TIERNEY. In a second. You were there because someone gave

you a contract to go to that spot and pick those people up. You

weren’t there as some independent person who just decided to stop

there on your own?

Mr. ALLEN. That is correct.

Mr. TIERNEY. Thank you. Go ahead. I want to yield if you——

Mr. OSE. No, I was going to help.

Mr. TIERNEY. Thank you. Dr. Sawicky, as an economist, when

you will look at the argument that some used about using private

transit operators because they are more cost effective, do you think

that is necessarily accurate? I think you answered that, that you

see it going both ways.

How do you measure costs in situations? Is it just dollars and

cents? What other factors are involved?

Mr. SAWICKY. Well, there are other factors. But, even in a narrow

sense of cost one of the reasons that—results of studies seem to

conflict is that people are using different cost models. The idea that

has already been mentioned of fully allocated costs, where some

proportion of overhead or fixed cost is added on to the—what you

can call the marginal cost, or the cost of running the service.

So when you compare public and private, in that model, broadly

speaking, not always, the private sector looks better in terms of

simply narrow cost. Now, the problem people may gloss over there

is that this idea of fully allocated cost is based on an unobservable

sequence of events or an assumption; namely, that over the long

run the government agency will be able to restructure itself economically and efficiently to narrow down its operations and costs

proportionate to any change in its workload.

It is as if you cut the Transportation Department’s budget 10

percent, you could cut the Secretary of Transportation’s salary by

10 percent. In practice that is not necessarily what will happen for

a variety of reasons. The alternative cost model, which—where the

public sector tends to do better and often comes out ahead, is just

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comparing marginal costs or what might be called the costs that

can be escaped if you contract.

If I am a public agency, I contract out. There are some costs that

I will retain associated with the service, even though I am contracting. There is some oversight cost. There is still some supervisory

components. The question from the standpoint of savings of the

public sector, in the short run, when you look at the marginal cost

or the escapable cost, the public sector tends to do better. So,

again, the complexity of this begs for the decision to be made closest to where the deal is going to go down, not here.

Mr. TIERNEY. I assume part of that is determining that certain

routes get served, whether or not they are profitable?

Mr. SAWICKY. Well, that, again, the public service has more

than—typically more than multiple objectives. Politicians are ambitious. They want to do a lot of good things. So when they propose

a service or a program they have typically more than one goal for

the program. And in the case of a transportation system, one of the

thorny issues is the incorporation of routes that in and of themselves if you contracted them out would not be profitable and,

therefore, would not exist.

This is sort of the same problem with the post office. It costs

more to deliver a letter to somebody way out in the country than

in the city. Do we charge that person in the country proportionate

to that cost, or do we have this idea of universal service? Now, a

local jurisdiction or a State has to face that question and may come

out one way or the other.

But, to compare some isolated narrow view of a particular piece

of a service to the usual array of public objectives in a program is

really an apples to oranges comparison. In that exercise, once again

it may be the public sector that looks more costly glossing over

some of those external things that people, at least some people expect to result from the service being provided.

Mr. TIERNEY. Can I have one last question? What happens if it

is privately contracted out and the private contractor goes bankrupt?

Mr. SAWICKY. Well, another difficulty with contracting is that, if

you convert from public to private, and the public sector loses capital equipment, expertise and experience, there are some additional

transition costs to taking it back in if that becomes necessary.

In fact, there have been cases where for one reason or another

a private contract goes belly up. The public sector is faced with the

job of taking that work in and rebuilding a capacity that it may

have lost. There is a transaction cost there. For that reason, one

of the leading advocates of contracting, Emanuel Savas, recommends that, when you have contracting, at the very least there

always should be some reserve public sector capacity that is maintained, kept up and running in the event that there needs to be

a reversion.

The other thing you can do is require performance bonds in the

event of a real problem with the private operators. There is something that keeps the public sector whole in this exercise if it has

to take the work back. There is risk involved. But, I am not one

that says never try to contract. I am not one that is against competition. I think the way this is ordinarily viewed tends to simplify

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the matter, and again there is a federalism, pretty good federalism

argument for separating who is running whose contract.

Mr. TIERNEY. Thank you.

Mr. OSE. Well, Mr. Allen, I want to go back to this. I am trying

to just make sure I get on the record the state of play at the time

you had the contract. You are running a shuttle from the remote

parking lots to the core, picking up people who either have a State

ID card or a dollar at parking lot oriented stops.

You have, according to your testimony, the schedule you were

running at the time you had the contract is identical to RT’s today?

Mr. ALLEN. It is essentially identical. What they have done to

make it a little different looking on a map, is they have added—

there is a center core on their map of service that we did not do

that is unrelated to this problem. It was service they already had.

If you laid the two maps down together of what they show now, because they put a third one in there. If you take the third one out,

the two are identical. The two that we had originally were identical.

Mr. OSE. Are the buses that are doing the shuttle today, from the

remote parking lots to the—I think you said 8 or 10 stops, are they

also being utilized to run this piece that has been added, or is that

a different route?

You have a north-south route and an east-west route, and the

north-south stops at a point where you can get off that bus and get

on the east-west route?

Mr. ALLEN. Yes.

Mr. OSE. OK. Now, did the—I mean, your shuttle service, you

were operating what I will call the north-south route, going from

the parking lots to the core?

Mr. ALLEN. Exactly.

Mr. OSE. Now, on that schedule, you testified that you had at

peak up to 16 buses operating on an 8 or 10-minute intermittent

stop basis?

Mr. ALLEN. They were actually—we were on 5-minute headways.

Mr. OSE. Do you know whether or not, as compared to where this

new east-west component now is part of this plan, did you have a

stop at that location where RT currently stops its bus to connect

the east-west component?

Mr. ALLEN. Yes.

Mr. OSE. OK. Now, do you have anything you can submit to the

committee that would memorialize what your schedule was and

what your contact was that you had to the shuttle?

Mr. ALLEN. Yes.

Mr. OSE. OK. We are going to ask you to do that.

Mr. ALLEN. OK.

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Mr. OSE. What I want to do is then go to RT and ask them for

a copy of theirs. I am sorry to belabor the point. But, I just want

to make sure that we get it right. You have buses running northsouth. You have 8 or 10 stops along the way. You are being paid

under contract with the Department of General Services somewhere around a million bucks a year.

Mr. ALLEN. About a million-two.

Mr. OSE. That service runs from the parking lots into the core.

It makes stops along the way at various State buildings or other

existing RT stops for which you have permission to use. Then, it

runs back to the parking lots on a circular route?

Mr. ALLEN. That is right.

Mr. OSE. How is that different from what RT is doing today?

Mr. ALLEN. I frankly don’t see any difference in what they are

doing today. The only difference that I see is that the stops that

they do—they have put some stops intermediate between actually

the buildings and the parking lots, which I think is more for charade, because we have had people with their money hanging out to

try to get on and they drive right by.

We don’t think those are necessarily legitimate stops. They show

as stops. But, basically, the function is the same. It goes to the

parking lot. It goes to State buildings. It makes a circle, then it

goes back to the parking lot.

Mr. OSE. Do they have more stops on their route then you had

on yours?

Mr. ALLEN. Only the ones I just mentioned. There is one stop

halfway between the parking lot and the buildings. But nobody

could ever get on that.

Mr. OSE. Mr. Allen, I appreciate your—a review of the contract

service that you provided.

Mr. Tanaka, DOT has not yet issued its implementing rules from

the 1994 private sector participation requirements. Having been in

business before I came here, it would seem to me that the certainty

that would come with those rules would be a positive influence on

what I might or might not be able to accomplish.

What is your view of that? Would you prefer having rules, or do

you prefer—which is a specific word defined in law, or do you prefer guidance?

Mr. TANAKA. We prefer law over guidance. Moreover, I wanted

to emphasize in these discussions, our law or our lifeline happens

to be tourists, a significant component of which include foreigners,

such as the Japanese. We are talking about using Federal funds as

well as county taxes for which foreigners do not pay, and, yet, the

county of Honolulu, once again, is about to use Federal funds to replace us.

Mr. OSE. Before you put that down, the money that was used to

prepare that poster, where did the money come from that was used

to prepare that poster?

Mr. TANAKA. Either from me or one of the lenders from which

I borrow.

Mr. OSE. So this is your piece?

Mr. TANAKA. Yes.

Mr. OSE. Now, you also had a piece that had a statement from

the mayor?

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Mr. TANAKA. Yes.

Mr. OSE. Now, where did the money come from to prepare that

piece?

Mr. TANAKA. This is either the Federal funds, but most likely

local taxes.

Mr. OSE. Would you like to submit both pieces for the record?

Mr. TANAKA. Yes.

[The information referred to follows, the remaining information

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Mr. OSE. So that we will end up with possession of both?

Mr. TANAKA. Yes. But, to be accurate, the county of Honolulu created what is called Oahu Transit Service, described as, quote, instrumentality of the county of Honolulu to run public transportation. That entity, OTS, has a board of directors totally subjected

to the mayor, and therefore I take it as an agent of the county of

Honolulu, but that OTS using its logo, The Bus, contracted with a

private Japanese printer for which the private Japanese printer

pays royalties.

Mr. OSE. The question for us is whether or not the Federal funds

are being used to frankly reduce private service providers from

having an opportunity.

Mr. TANAKA. Definitely. Yes, that is our case.

Mr. OSE. You would prefer the certainty of a defined due process

rule?

Mr. TANAKA. Yes.

Mr. OSE. Now, Mr. Thomas, from your perspective as an operator

do you prefer the certainty of a rule or the flexibility of guidance?

Mr. THOMAS. Well, given the fact that we cannot go to court, you

know there is no private right of action for us, there is no remedy

at law here. We have to have an arm’s-length, third party law

statutory——

Mr. OSE. We have a statute.

Mr. THOMAS. But, it is not—and in my one testimony about the

10-year effort, it took 10 years and a ridiculously lengthy process

on appeal to get the decision that was evident. We need clarification on that process. And we need it—it has to be a better law than

it is today——

Mr. OSE. What you need is something that defines the rules?

Mr. THOMAS. In the law unfortunately.

Mr. OSE. Dr. Moore, your experience, rule or guidance?

Dr. MOORE. I might argue—a rule would bring—answer your

setup, Mr. Chairman, of the certainty for the private sector, I

think. Embedded in a rulemaking they could meet the goals that

I have talked about.

Really to do better grantmaking, guidance would probably help

them do better grantmaking. A rule would help them obey the law

better. So, you know, assuming you made a reasonably good rule

that would embed a lot of guidance in it, in terms of how they

make their grants, you might wind up—that is a little bit of a

mixed answer. There is more than one problem we are trying to

solve, I guess.

I can make a guess of a rule is a better solution in one case and

guidance is better in another. But, I think the question of justice

here would be better served by a rule.

Mr. OSE. Dr. Utt.

Mr. UTT. I would like to go more toward performance based contracting, allocation grantmaking, where there are a series of goals

that are supposed to be met, by any additional funds grants received by any community. That would make it difficult to do things

that would otherwise seem to be a waste of money, in the sense

that people who are already being severed by private sector money,

public sector money comes in and simply displaces that, ultimately

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no net new service to the community at an increase in Federal allocation.

It would seem to me that we would start with general goals of

this money is for the purpose of enhancing the mobility of the particular community that gets it, the people of it. You can slice that

differently. But, the question is—another way of looking at it, was

everybody in the Honolulu transit market sufficiently served so

that we could then begin to use additional money to displace service that was already being provided at no public expense?

I think what we need to do is simply have a criteria in which

we try to use good judgment in terms of what things are there. One

of it is to not try to make distinctions between public or private,

but rather does this money enhance the mobility of the community?

Will it be of general value to the broad transit users or potential

users of the community rather than trying to regulate things that

often have unintended consequences?

Mr. OSE. I am thinking about Dr. Utt’s comment. I want to come

back to that.

Dr. Sawicky.

Mr. SAWICKY. I won’t beat to death the point I have been making, that there is some limited scope that ought to be observed here

for Federal involvement in local decisions. I would say if the demand was to steer money to contractors rather than to public agencies, obviously law would work better than something less than

law.

But, again, from the standpoint of looking at the way the Federal

Government has tried to regulate or influence State and local government behavior over a long period, there is—there are limits of

that even when there are laws. I think that needs to be kept in

mind. As far as the justice of it, I don’t see a mandate in any particular direction as just at all. In Washington we have an Air and

Space Museum which caters to tourists. It is not air and space

brought to you by McDonnell-Douglas. So the government, State,

local or Federal has a perfect right to monopolize any type of business it chooses to from a legal standpoint as far as I know, and

from an economic standpoint, there could be cases where that is

beneficial to the taxpayers. Again, I think my biases on this are

pretty obvious.

Mr. OSE. Almost libertarian in nature, which is fine by me. Alright.

Now we are going to go from the right to the left this time. Given

that FTA makes grants, and different grantees receive grants, how

does the Department of Transportation or FTA go about enforcing

the terms and conditions of those grants with—we have seen one

example where at best you can say the grant morphed from one

purpose to another and, at least from my perspective, the FTA

washed its hands of it.

But, how do you enforce the terms and conditions of the grant?

Dr. Sawicky.

Mr. SAWICKY. With great difficulty. I have done research on—

specifically on Federal grants-in-aid in the most simple dimension,

which is the effect of spending at the other end. The majority of

grants and aid have no effect on spending at the other end. They

replace local money.

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It is very important—it is important to design a grant in a way

that has that effect, if that is what you want. Typically in the political process, that is kept to a minimum. You have more apparent

types of influence on State and local governments than actually

pan out in the end. I think it is just a very difficult exercise.

I can’t speak to the administrative law dimensions of it at all,

because I have no background there. But, from my view of it, looking at the economics of it, it is just very hard—grants are a very

blunt instrument. To try to get too far into how they are used takes

a lot of effort and is difficult to do.

Mr. OSE. From the spending side, your point is the money is fungible?

Mr. SAWICKY. Right.

Mr. OSE. Dr. Utt, how do you enforce the spending?

Mr. UTT. By talking about terms and conditions, that is in fact

very valuable. But it is—also turns it into a process driven approach to public policy rather than a goal oriented approach to public policy.

In the ideal world these things have a certain purpose, and we

entrust local DOTs and local MTAs and so on and so on to sort of

fulfill the will of whatever the Federal purpose is. I am not sure

that in FTA grants we have a lot of conditions and a lot of processes and a lot of paperwork.

But, I am not sure that any of these grants require anything of

value to happen at the end, other than that buses are bought—the

appropriate contract is applied to all of the workers, and they sort

of do what they claim they are going to do and buy the buses. But,

whether there is any enhancement or advancement of mobility in

the community is often something that nobody has any particular

interest in, nor do we look at different modes.

I mean, we simply say this much is for transit, whether it is

needed or not, or whether there is a better alternative someplace

else, which goes back to the sort of clear goals of enhancing mobility for people and leaving as much discretion as possible to the people that we entrust to spend and allocate this money and, if goals

aren’t met, then have some recourse there.

Mr. OSE. What kind of recourse?

Mr. UTT. Maybe go back to a process oriented program, more

Federal control. I don’t know. I think an interesting case is the No

Child Left Behind, which is one of the first Federal programs in

which you give money, and you give people more discretion with

that, but you expect in the end that the children would read better,

do math better than they did before. If you don’t achieve those

goals, then there are presumably some penalties associated with it.

If you can do that with something as controversial and difficult

as education, I think you can certainly do that with some things

that are easily quantifiable like how many passengers did you pick

up and how much of the community did you serve?

Mr. OSE. Now, Mr. Sawicky, let me just return to you. If a grant

is made and the grantee does not comply with the terms and conditions of the grant and the grantor does not enforce the terms and

conditions of the grant, what are you going to get?

Mr. SAWICKY. The grantee is going to do what they want with

the money.

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Mr. OSE. Are you going to get more of it or less of it?

Mr. SAWICKY. Well, chances are the grantee will do what they

would have preferred to do in absence of the grant, but for relatively minor effect on their overall resources.

Mr. OSE. Dr. Utt, are you an economist also?

Mr. UTT. Yes.

Mr. OSE. If you have an incentive to do something and a disincentive to do another and you don’t enforce the incentive, what

do you get?

Mr. UTT. Well, you need some sort of enforcement at the end.

But, I think what we are talking about is enforcement of goals so

that people don’t engage in counterproductive activities with the

money that they get. That has to be—somehow those kind of performance standards have to somehow be included in whatever regulations, guidelines or criteria you adopt.

As I said, most Federal programs with the exception of parts of

the Federal education program are devoid of any performance responsibilities. As long as you hire the people you are supposed to

hire, as long as you do quarterly reports, as long as you don’t steal

the money, nobody really cares at the end of the day whether children get educated better or not or educated at all.

That is the way that many programs have operated. I think what

we need to do is start using that as the model, and for things that

are easily quantifiable subject to widely accepted engineering

standards that we begin to say, hey, let’s start doing it here.

In that case it would be very difficult for people to start willfully

wasting money because there would be some obvious way to measure their failure to achieve goals. Then, at some point, various punishments would be devised or withdrawals of money or fines or

something like that.

Mr. OSE. Dr. Moore, how do you enforce these things.

Dr. MOORE. Well, I would like in two places. The mechanism, the

mechanism is to have as Dr. Utt pointed out some objectives and

have some quantifiable information come back to say that those objectives are being met. The OMB has been working for the last couple of years trying to figure out how to measure the performance

of Federal grantmaking programs. I don’t know how much they

have to discuss on the DOT grants, but I know, you know, everything from research grants to service grants, how do you measure

whether you’re getting what you’re allegedly giving the grants for.

The other place to look would be the vast array of private foundations that are out there that give out grants to nonprofits like

mine, and some of them just give money to people they like. Some

of them are very performance driven, and, if you can’t prove that

you did everything you swore you were going to do with that money

in terms of accomplishing things, you don’t get any more money

from them.

So there, you know the models are out there. This isn’t rocket

science. It’s just fairly new to most Federal bureaucracies to try to

do grants this way.

Mr. OSE. Mr. Thomas, on your private experience, if you contract

to have something done, and the contracting party doesn’t do it,

and you don’t enforce the provisions, what happens?

Mr. THOMAS. Ultimately, I would go to court.

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Mr. OSE. Do you get more of the aberrant behavior or less?

Mr. THOMAS. Well, it depends on how it comes out; but if I win,

I get less.

Mr. OSE. If nobody’s enforcing it, you’re guaranteed to get more?

Mr. THOMAS. That’s right.

Mr. OSE. Would it be your conclusion that absent some means of

enforcing terms and conditions, that you will not only have for instance this kind of behavior in Sacramento or Ohio or Hawaii,

you’ll have it in every single location?

Mr. THOMAS. Yes, it is.

Mr. OSE. Why?

Mr. THOMAS. Because it’s too easy to get away with doing what

you want to do.

Mr. OSE. OK. Mr. Tanaka, how do we enforce this stuff?

Mr. TANAKA. Yes, before answering directly, I wanted to answer

the question that you formulated, which is the grantee is encumbered by conditions and terms, but the grantor doesn’t enforce and

then the grantor does not follow the law. The end result is Honolulu. In other words, I remember one of these economists mentioned how the ground transportation got federally funded. The

word was welfare. From welfare, I deduce that essential services

that are necessary in the ordinary life of residents, means welfare,

and for welfare, Federal and local governments provide even if governments lost money. Moreover, welfare does not include tour operations.

The problem in Hawaii is, once again, using Federal funds and

local taxes and now, at this very hour, the applicants, that is to say

the county of Honolulu is applying for $20 million, not for Oahu as

an island, but in Waikiki, 2 miles, 2 squares miles. So that even

today, the most-frequently run bus is called No. 22, which is called

attractions and beaches.

So the tour 22 rotates from Waikiki hotels to Hanama Bay and

Sealight path and returns. On the way from Waikiki, surfeit with

tourists, the buses will stop where local residents are waiting, but

they will be denied the service because these buses have no vacancy. Our problem is very, very acute. Once again, I want to remind, in about 36 hours, 38 hours, the FTA may grant $20 million

to provide frontal attack on private businesses. This goes to the

very survival of tour operations. I fundamentally believe that none

of these programs ever was intended to run tour operations.

Mr. OSE. You think it’s mission creep?

Mr. TANAKA. Yes.

Mr. OSE. All right. Mr. Allen, how do we enforce the terms and

conditions?

Mr. ALLEN. Well, I think we have to remember that these public

operators are predators. They are not our friends. That is just because there has been no enforcement. I think you need to—if someone were found to be in violation, like regional transit is in this

case, in our case, we believe they should be prohibited for a number of years from getting any future grants. They should have their

purse strings cut because that’s the only way you’re going to wake

these guys up. They’re not going to—you know if there’s no rules,

they’re not going to listen. They are going to continue or ask them

for the money back. I don’t know if that’s practical, but you know

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somehow you’ve got to get their attention on this. Don’t take everything for face value. When they make an application, I mean they

made an application back with this case in 1999, I believe it was.

Mr. OSE. My first year. Came right through my office.

Mr. ALLEN. OK. Anyway, in 1999—I’m not holding that against

you now. In 1999 they made this application.

Mr. OSE. Call it what it is.

Mr. ALLEN. Nobody knew these buses were going to be used to

put private enterprise out of that particular part of their business.

If that were the case, I don’t think you would have gone along with

that. I know you wouldn’t have gone along with that. So, I mean,

they do things you know kind of below the periscope because they

are, again they’re predators. So I think it is very important that

they are very specific on what their needs are. And before, in the

case of buses for example, you need to know what they are going

for, where are these buses going to be used for. If they’re going to

be used to go down, you know, down Watt Avenue in our particular

town, that’s great. That’s a public service. If they’re going to be

going, you know competing with private industry, I think that’s a

big mistake.

Mr. OSE. I want to ask the operators in particular, when you look

at the current code sections, and you read them, or your counsels

read them, do public transit operators, if they are in a situation

where there is a private operators, are they able to use capital assets acquired by virtue of these grants to compete with you? In

other words, can they use Federal money to buy buses to compete

with you where you’re already providing a service, is it your understanding that they may or may not do that?

Mr. ALLEN. I would think, from the reading of the direct reading

of regulations they would not be able to.

Mr. OSE. Mr. Tanaka.

Mr. TANAKA. The answer is we believe that we should not be

wiped out by Federal funds and local taxes. Moreover, back in Honolulu, this phrase, maximum extent feasible is interpreted as we

just have to try. But from our point of view, we just have to pretend. We just allege we have complied with these laws and then

FTA says oh, that’s a local decision, that must be correct. But, the

Honolulu case was in violation of three fundamental rules. No. 1,

did not exert itself to maximum extent feasible I believe to avoid

negative financial impact upon existing providers of transportation.

No. 2, Honolulu did not, to the maximum extent feasible include

private sector participation in the planning.

In fact, if anything, we have been excluded. And No. 3, county

of Honolulu did not exercise maximum extent feasible to make a

genuine finding and then apply for certification that the services is

essential, unless what is essential is tour operation. We are talking

about not Hawaii, we are not talking about Oahu. We are talking

about Waikiki, a dominant sector within Oahu, where virtually all

tourists reside. That is the very geographic area and the only geographic area that the county of Honolulu is applying for $20 million.

Mr. OSE. OK. Mr. Thomas.

Mr. THOMAS. In the SEAT example, the—it is very evident that

the subsidized vehicles are out there competing with the private

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sector. Actually, there is a nonprofit agency right in my operating

area that provides contract service with subsidized vehicles that I

am shut out of because of the artificial rate that they are able to

provide. They get the buses for free. So, it’s happening not only in

Ohio, but it’s happening everywhere. I can go into many examples

of this. Is it clear in the statute that’s a violation? It’s crystal clear

if you choose to read it. I mean, it’s crystal clear that you are not

supposed to use those against the private operators.

Mr. OSE. I want to touch on this appeal process too. Now, each

of the three of you have had to actually go through appeals. Each

of the three of you can probably give a much more refined analysis

of how it works positively or negatively. We are just going to go

through this. We are going to start with Mr. Tanaka. You filed an

appeal for the decision of the local transit operator.

Mr. TANAKA. Well, I don’t know what it meant by appeal. But we

have expended hundreds of thousands of dollars to lawyers who

have told me the following: No. 1, with respect to public transportation issues, we litigate on the basis of environmental statements,

No. 1. No. 2, our ‘‘appeal’’ has been based on reading the law, interpreting them and then registering our complaints to FTA. The end

result of which is FTA will say that’s a local decision.

Mr. OSE. Was it your testimony that said that the local transit

operator had dismissed all the other alternatives and accepted

their own House driven one.

Mr. TANAKA. He never examined other alternatives. As I said

earlier, a song in Hawaii that’s sung most frequently is it wouldn’t

cost us anything because it’s Federal funding. Then, apply for Federal funding and, instead of deploying the Federal funding for local

residents who hunger for more transportation, deploy in Waikiki.

Mr. OSE. Mr. Thomas, your appeal process took, if I recall, more

than—almost a year. What did it cost you?

Mr. THOMAS. Well, it cost—the city of Niles had to retain technical counsel, and it cost them $38,000 to fight that. That was the

1-year appeal. But it was a 10-year problem. The county actually,

the 9 years prior to the city getting involved, the county went

through the same process and I funded that, and the cost of that

was in the $200,000 range. But, once the city of Niles became a

grantee, an eligible grantee, they filed their own appeal, had their

own counsel and it cost them $38,000, and that was the 1-year

process.

Mr. OSE. Are you aware of other private transportation providers

who have gone through their appeal process?

Mr. THOMAS. I certainly am.

Mr. OSE. What has been, anecdotally—well, let me flip it around.

If we sent you a letter asking you to cite chapter and verse, would

you be able to share with us——

Mr. THOMAS. Well, one glaring example is the Flint, MI case.

Mr. OSE. If we sent you a letter, you’d be able to respond?

Mr. THOMAS. Yes.

Mr. OSE. Now, do you have anything you’d like to share with us

anecdotally about Flint, MI?

Mr. THOMAS. Thank you. Flint, MI was a case that the Federal

grantee wiped out the local private operator and started running

service that eventually not only did the operator lose his business

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and all of his money, but he had to appeal to the other operators

in the country, who might be sympathetic to his cause, so it ended

up costing literally hundreds of thousands of dollars for the group

to get it to the point where we realized at that point in time that

if there was no private right of action here, if there was no remedy

through the courts, there were only two remedies left.

That was a Supreme Court decision and that was to fund a Supreme Court suit, or separately to do what we are doing today,

take it to the Hill and get this rule specified. That’s why I bring

up the Flint decision. But, there are several other decisions like

that across the country.

Mr. OSE. Mr. Allen, are you aware of other complaints protests

or appeals in the California area?

Mr. ALLEN. Oh, yes. There is the one down in Palm Springs with

Sun Line which was a major case that I know that the California

Bus Association worked on quite extensively.

Mr. OSE. OK. So if we sent you a letter, much like we are contemplating sending Mr. Thomas, you’d be able to give us chapter

and verse.

Mr. ALLEN. Yes.

Mr. OSE. All right. First of all, I want to thank you all for coming

today. I appreciate the testimony. Mr. Allen, don’t forget your dollar here.

Mr. ALLEN. I’ll take it. I need it.

Mr. OSE. It’s clear to me that we have a problem here with great

respect to Dr. Sawicky, we make lots of decisions up here on this

Hill about how to use Federal money, and when it’s not used in the

manner in which a grantee submits its application, I have every

right, and I think my voters have every expectation that I will

weigh in to make sure that it is complied with.

I am severely disappointed at the apparent attitude and the actions to date in terms of enforcing the terms and conditions for

which capital assets acquired by use of Federal money are being

utilized frankly in what appears to be a systematic effort to push

private providers out. You might not have—you might have the

best service, you might not. But, for the taxpayers in, for instance,

Mr. Tierney’s district to be asked to give money to people in Mr.

Tiberi’s district for the purpose of putting Mr. Thomas out of business is just simply—it simply needs to be reviewed. It needs to be

reviewed thoroughly.

I thank all six of you for coming. Dr. Utt, I hope you make your

meeting. I think we have you out of here in time. Again, thank you

all for coming. This hearing’s adjourned.

[Whereupon, at 2:10 p.m., the subcommittee was adjourned.]

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