Public Transit: Transit Agencies' Use of Contracting to Provide Service
Published: 2013-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Some transit agencies have found that they can save money by contracting out some or all of their services with private providers, while others have found it more beneficial to use their own staff to provide services. The Moving Ahead for Progress in the 21st Century Act mandated that GAO review issues related to transit contracting. In this report, GAO identified: (1) the extent that public transit agencies contract operations and reasons why agencies decide to do so, (2) methods used to select and oversee contracted services, and (3) potential benefits, challenges, and disadvantages of contracting out public transit operations and other services.
GAO conducted a web-based survey of 637 transit agencies that submit reports to the Department of Transportation (DOT) and obtained 463 responses for a 73 percent response rate. The survey and results can be found at GAO-13-824SP . In addition, GAO interviewed federal officials, representatives from industry organizations, and national union officials. GAO also interviewed officials from 10 transit agencies, chosen based on a variety of characteristics, including geographic diversity, population served, use of contracting, and modes operated. At each transit location, GAO interviewed private transit providers, citizens' advisory groups, and local unions. The results of the survey and interviews are not generalizeable to all transit agencies. GAO also reviewed relevant studies and literature on transit contracting.
GAO is not making recommendations in this report. DOT and Department of Labor reviewed a draft of this report and had no comments.
section_title: What GAO Found
paragraphs: Contracting is a prevalent means of providing transit services. About 61 percent of the 463 transit agencies responding to GAO's survey reported they contract out some or all operations and services, while the rest reported that they do not contract out at all. According to GAO's survey, paratransit (services for the disabled), demand response (also known as dial-a-ride), and commuter rail service are most often contracted out, and fixed-route bus, heavy rail, and light rail service are most often operated by the transit agency. Operations are most frequently contracted out, followed by maintenance services. Transit agencies most consistently cite reducing costs as a factor influencing their decision to contract. Contracting can reduce costs because contractors' workforces are more flexible, with more employees working in part-time positions, and lower insurance costs, among other things. Transit agencies also frequently cited starting new service, improving efficiency, and allowing for more flexible service as reasons for contracting. State laws are generally not a reason for contracting, according to GAO's survey. Transit agencies that do not contract most often cited one of these three reasons: desire to maintain control over operations, no reason to change from the transit agency's providing service, or contracting was determined not to be cost effective.
Transit agencies GAO surveyed use various methods to select contractors and oversee contractor performance. To select contractors, most agencies used competition with a request for proposals. For oversight, transit agencies most commonly used periodic reports or meetings, on-site inspections, performance metrics, and real time monitoring, according to GAO's survey and interviews. About 84 percent of surveyed transit agencies that contract out services reported having a specific oversight unit. Of the nine transit agencies GAO interviewed that use contracting, seven used transit agency staff for monitoring, while two used contractors to perform this function. Seven of these agencies used performance metrics to establish incentives and/or penalties in contracts.
Transit agencies and contractors cited benefits and challenges to contracting, while labor unions primarily noted disadvantages--most notably, reduced wages and benefits and a potential decline in safety and service, among other issues. Specifically, transit agencies GAO interviewed and the literature cited benefits to contracting, which vary based on the individual needs and circumstances of transit agencies. For example, transit agencies that use contractors view contracting as advantageous when starting or expanding services in order to avoid start-up costs--such as the large capital cost of acquiring new vehicles and hiring new staff. Contractors reported they could improve transit agencies' operational efficiency by providing the latest technologies, such as routing systems and lower costs by providing more affordable insurance on vehicles. Transit agencies also cited some challenges to contracting, such as the agency's loss of direct control over operations. Officials from national and local unions GAO spoke with said that while contracting may provide some short-term cost savings to transit agencies, in their view the savings are almost entirely from lower wages and benefits paid by the private companies to employees.

section_title: Letter
paragraphs: Millions of passengers use transit services on a daily basis in the United  States, and many of the local transit agencies that provide these services  receive federal funding. To meet the needs of these passengers in a  challenging economy, transit agencies need to use federal and other  resources wisely, while also ensuring quality and safe service. Some  transit agencies have found that they can save money by contracting out  some or all of their services with private contractors, while others have  found it more beneficial to use their own staff to provide services.
The Moving Ahead for Progress in the 21st Century Act (MAP-21)  mandated that GAO report on a number of issues related to transit  contracting to the House Committee on Transportation and Infrastructure  and the Senate Committee on Banking, Housing, and Urban Affairs. In  this report, we identify (1) the extent that transit agencies contract public  transit operations and services and reasons for doing so, (2) methods  transit agencies use to select and oversee contracted services, and (3)  potential benefits, challenges, and disadvantages of contracting out public  transit operations and other services.
To determine the extent transit agencies contract public transit operations  and other services, the factors they consider when deciding to contract,  and the methods used to select contractors, we surveyed all 637 transit  agencies that reported to the Federal Transit Administration’s (FTA)  National Transit Database in 2011 and that operate fixed-route bus;  demand response; the Americans with Disabilities Act of 1990 (ADA)  paratransit; and/or heavy, light, or commuter rail service. We received  responses from 463 transit agencies for a response rate of 73 percent.  Estimates and responses to survey questions in this report refer only to  the views of the respondents. The survey was a census and we did not  try to extrapolate the findings to the agencies that chose not to respond.  For further information on our survey, see appendix I. We also  interviewed FTA officials responsible for maintaining the National Transit  Database to gather information about the type of information collected  about transit contracting. To provide additional insight on the reasons  transit agencies decide to contract, methods they use to select and  oversee contracted services, and potential benefits, challenges, and  disadvantages of contracting out public transit operations and other  services, we interviewed officials from 10 transit agencies. We  judgmentally selected these transit agencies to provide a range of  geographic locations, populations served, transit modes, agency sizes,  and contracting practices. At each location, we interviewed private transit  contractors, citizens’ advisory groups, and local unions. The interviews  from these locations are not generalizable to all transit agencies. In  addition, we interviewed officials from the American Public Transportation  Association, Community Transportation Association of America, and  national labor unions representing operators and maintenance workers,  as well as Federal Railroad Administration officials regarding their  oversight role for commuter rail services. We also performed a literature  review of transit contracting studies and articles. Further details on our  scope and methodology can be found in appendix I.
We conducted this performance audit from October 2012 to September  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Transit agencies provide transportation services in a variety of ways. For  purposes of this report, we used the following descriptions of  transportation modes:
Fixed-route bus service: rubber-tired passenger vehicles operate on  fixed routes and schedules over roadways. Diesel, gasoline, battery,  or alternative fuel engines power vehicles. This category also includes  bus rapid transit, commuter bus, and trolley bus.
ADA paratransit: vehicles operate in response to calls or requests  from passengers. It uses buses, vans, or taxis to provide  complementary ADA paratransit service for individuals with disabilities  who are unable to use a fixed-route system. These services are associated with or attributed to ADA compliance requirements.
Demand response (also referred to as dial-a-ride): vehicles  operate in response to calls or requests from passengers. Demand  response uses small buses, vans, or taxis to provide transportation  service that is not on a fixed route or schedule. For example,  transportation may be provided for individuals whose access may be  limited, or whose disability or health condition prevents them from  using the regular fixed-route bus service. For purposes of this report,  we have defined these services as unrelated to ADA requirements.
Commuter rail: vehicles operate along electric or diesel-propelled  railways and provide train service for local, short distance trips  between a central city and adjacent suburbs.
Heavy rail: vehicles operate on electric railways with high-volume  traffic capacity. This mode has separated rights-of-way, sophisticated  signaling, high platform loading and high-speed rapid-acceleration rail  cars operating singly or in multi-car trains on fixed rails.
Light rail: vehicles operate on electric railways with light-volume  traffic capacity. The mode may have either shared or exclusive rights- of-way, low or high platform loading, or single or double car trains.
The transit contracting industry in the United States is characterized by a  few large providers that operate nationwide, some mid-size regional  providers, and numerous small, local providers that primarily operate bus,  demand response, and ADA paratransit service. Transit agencies can  contract out various aspects of their operations with contractors, such as  operating the service, vehicles, maintenance, security, and administrative  services. Contracting arrangements can range from the transit agency’s  contracting out all aspects of its operations, as is the case for a delegated  management contract, to contracting out only one component of  operations, such as maintenance.
The federal government has a limited role in overseeing transit  contracting. FTA tracks transit agencies’ contracting practices through  reports submitted by transit agencies to the National Transit Database.  Additionally, FTA oversees transit contracting, along with other aspects of  transit agencies’ operations, through procurement reviews and triennial  reviews that focus on whether transit agencies have followed federal  regulations and have appropriate systems in place for contracting, among  other things. The Federal Railroad Administration oversees commuter rail  operations but does not conduct any reviews of contracting practices. The  Department of Labor is responsible for issuing what is commonly referred  to as “Section 13(c)” certifications, which certify that fair and equitable  labor protection arrangements are in place for employees who may be  affected by certain grants of federal financial assistance. When existing  transit service is contracted out, Section 13(c) protections may be  triggered, including assurances of employment and priority of  reemployment. According to officials at the Department of Labor, after a  search of their records and to the best of their knowledge, there has  never been an instance where a transit agency has been unable to  contract out public transit operations and other services because doing so  would jeopardize Section 13(c) certification from the Department of Labor.
section_title: Contracting Is a Prevalent Means of Providing Transit Services
subsections: section_title: Extent of Contracting
paragraphs: Contracting is a prevalent means of providing transit services, with about  61 percent of the 463 transit agencies that responded to our survey  reporting they contract out some aspect of their operations. By size of  agency, 52 percent of small agencies, 69 percent of medium agencies,  and 92 percent of large agencies had at least one service that they  contracted out.
According to our survey, among the agencies providing such services,  paratransit, demand response, and commuter rail are more likely to be  contracted out, and fixed-route bus, heavy rail, and light rail are most  often operated by the transit agency. Among the approximately 61  percent of surveyed agencies that reported contracting, more agencies  reported contracting for ADA paratransit than for any other service.  Results from our survey shows that of 359 respondents that provide ADA  paratransit services, 204, or 57 percent, contract out this service. Seven  of the 10 transit agencies we interviewed also contract out ADA  paratransit services. (See fig. 1.)
Interviewees report that contracting ADA paratransit occurs for various  reasons, including the following:
ADA paratransit requires specialized training and equipment that can  be difficult to provide because agencies may lack staff, expertise, or  resources needed to train workers, according to a transit agency  official we interviewed.
Contracting for this service can be more cost effective than providing  the service in-house. According to an industry group we spoke with,  ADA paratransit operations are very expensive and for agencies,  contracting this service is viewed as a way to potentially save money.
Contracting ADA paratransit allows agencies to remove themselves  from the day-to-day operations and reduces the risk and liability  associated with operational responsibility, according to another transit  agency official we interviewed.
We found the extent that surveyed transit agencies contract varies by  type of service, but among transit agencies that contract out, operations  are most often contracted across all modes, followed by maintenance  services. (See table 1.)
As shown in table 1, in each of the modes, less than half of the agencies  that contract out include vehicles in their contracts. In our interviews with  transit agencies and contractors, officials told us that transit agencies  generally provide their own vehicles for several reasons:
Owning vehicles gives the agency more flexibility to terminate a  contract if needed, because it can be very difficult for an agency to  quickly find another contractor with vehicles to provide continuous  service.
Purchasing and owning vehicles used in the transit service can attract  bidders who would otherwise be hesitant to buy expensive vehicles   without the assurance that they would be used beyond the initial  length of the contract.
Owning the vehicles gives the agency more control in making  decisions about vehicle replacement or major repairs, such as  replacing engines or transmissions. This can lower costs because the  contractor may anticipate and budget for these costs in a contract  without knowing for certain if they will be needed, in order to minimize  their own risk.
section_title: Reasons for Contracting Decisions
paragraphs: According to our survey, the factors that transit agencies considered  when deciding to contract a particular mode of service vary based on the  mode and by needs of individual transit agencies. (See table 2.)
For fixed-route bus, demand response, and paratransit service, the  factors that were considered most often were reducing costs and  improving efficiency.
For commuter rail, the factors that were considered most often were  starting new service and improving efficiency.
For heavy and light rail, the factors that were considered most often  were starting new service and being directed to contract by the Board  of Directors.
Our literature review indicated these factors vary because needs and  costs vary by mode, as well as the individual needs of transit agencies.  Thus, for one transit agency, the cost of procuring vehicles and building  facilities and expertise needed to operate the service may be a  paramount concern, whereas it may be less of a concern for others. For  example, commuter, heavy, and light rail services have high start-up  costs because of the infrastructure and vehicles needed to operate the  service, and, as supported by our survey results, starting new service is a  primary factor in their decision to contract out for service. For fixed-route  bus, demand response, and paratransit services, the start up costs are  typically much lower. As a result, transit agencies may place more  importance on reducing costs or providing more efficient service when  making the decision to contract out for service.
Reducing costs. Although the factors that affect the decision to contract  vary across modes, reducing costs is consistently taken into account,  according to our survey, interviews, and literature review. The previous  table shows that among our survey respondents that contract out,  reducing cost was the most often cited factor. This finding was supported  by our interviews with transit agency officials and the literature, which  indicated that wage rates are lower for contracted drivers and operators,  in part because:
Contractors can “reset” wage rates to the market rate by hiring new  operators at entry-level wage rates, according to some contractors we  interviewed.
Contractors may not always provide pensions and other benefits for  contract workers.
Contractors may have lower health insurance rates for their  employees because of the large number of employees under their  coverage.
As we will describe later in this report, unions have concerns regarding  the lower wages and benefits for contract workers.
Some agencies, such as the Washington Metropolitan Area Transit  Authority (Washington, D.C.) and the Metropolitan Rail Authority (Metra)  (Chicago, Illinois), have found it more cost effective to contract out a  portion of their services. Officials from the Washington Metropolitan Area  Transit Authority told us that it is more cost effective for contractors to  provide ADA paratransit service because of their reduced labor costs.
Officials at Metra said they would not achieve cost savings by directly  operating two of their commuter rail services currently contracted out to  the Burlington Northern/Santa Fe and Union Pacific Railroads. Officials  stated that first, the freight railroads own the track and they would not be  able to negotiate new track agreements with the railroads that would  produce any more cost savings than what is in their present agreement.  Second, they gain efficiencies from sharing certain overheads such as  management personnel and facilities. If Metra had to create separate  standalone facilities and staffing, this would be more expensive. Third, if  Metra directly operated the service, then both Burlington Northern/Santa  Fe and Union Pacific Railroad employees would be brought under Metra’s  collective bargaining agreements, which pay a higher wage rate than the  freight railroads.
Starting new service. According to survey respondents as well as transit  agency officials and contractors that we interviewed, transit agencies may  contract out in order to avoid high start-up costs, including the cost of new  services, procuring new vehicles, hiring staff, and obtaining facilities. For  example, officials from the Nashville Regional Transportation Authority  (Nashville, Tennessee) told us that they contract their commuter rail  service because they lacked facilities to house or maintain their vehicles.  Also, contracting out services can enable agencies to offer services they  would otherwise not be able to provide—such as service that is located  away from their main service area—because it is not cost effective. For  example, while New Jersey Transit directly operates some of its services  including fixed-route bus service, officials said when they create new  services or expand other services it makes more sense for them to  contract out, particularly in areas that lack a service garage or where  there would be long travel times to where drivers store their vehicles at  the end of the day.
In addition, from our interviews, we found that some transit agencies  contract out when starting new service because they do not have the  capability to perform transit services in-house. For example:
New Orleans Regional Transit Authority (New Orleans, Louisiana)  entered into a 10-year delegated management contract with a  contractor that covers all planning, operations, and maintenance to  quickly restore and rebuild the transit services and infrastructure that  hurricane Katrina destroyed.
Yuma County Intergovernmental Public Transportation Authority  (Yuma, Arizona) contracts out all operations and maintenance for both  its fixed-route bus and ADA paratransit services because it has only  been in existence a short time and has not developed the capability to  perform these services in house.
Improved efficiency and flexibility: According to our survey, improved  efficiency and flexibility are two other primary considerations for  contracting out service. Contractors and transit agency officials that we  interviewed said that in some cases, contractors can operate more  efficiently by having operators split their time between transit during the  peak hours and other services, such as charter services—which are not  typically provided by transit agencies—during other times of the day.  Also, contractors may be able to provide service at a lower cost because  their workforce is more flexible, with a greater number of employees  working in part-time positions, resulting in decreased wage and benefit  costs. According to one contractor we interviewed, offering part-time  employment or flexible schedules may be also preferable for some  employees.
Other factors. Legislative requirements that mandate or limit a transit  agency from using a certain level of contracting, is another reason that  can influence certain agencies’ decisions to contract out service.  However, state laws were not a leading factor in contracting decision- making, according to our survey respondents and seven transit agency   For example, the state of Colorado limits  officials that we interviewed.the amount of contracting used by the Denver Regional Transit District  (Denver, Colorado) to 58 percent. According to agency officials whom we  interviewed, the cap on contracting has not had much impact on the  agency’s contracted services, which are currently about 56 percent of  their bus and ADA paratransit operations. At the federal level, as  described previously, when existing transit service is contracted out,  Section 13(c) protections may be triggered, including assurances of  employment and priority of reemployment. At all nine of the transit  agencies we interviewed that use contracting, transit agency officials said  that provisions of Section 13(c) have not been a deterrent to contracting;  however, some transit agencies that responded to our survey reported  that challenges presented by Section 13(c) are a reason for not  contracting out service.
Agencies that do not contract out any transit services or that contract out  some, but not all aspects of their operations, also do so for reasons that  vary by mode. As shown in table 3, for all modes except commuter rail,  the top three reasons to not contract are that the agency desired to  maintain control over operations, found no reason to change from the  transit agency providing service, or found contracting was not cost  effective. For commuter rail services, cost effectiveness was not among  the primary reasons transit agencies reported for not contracting out  service.
Of the transit agencies that we interviewed, one transit agency does not  contract out for any service and five transit agencies only contract out  some modes, and they cited similar reasons as our survey respondents  for their decisions not to contract out service. One transit agency that we  interviewed that did not contract out any service—Western Maine  Transportation Service (Auburn, Maine)—said that they never considered  contracting. Transit agency officials stated that this was due in part to  difficulty in finding a contractor willing to implement a costly drug and  alcohol program that met FTA standards and also because the cost to  contract out maintenance services would have been more expensive than  directly operating it themselves, according to a comparative analysis  performed by the transit agency of the cost to contract out versus the cost  of operating it themselves. In addition, one transit agency contracted out  service in the past and decided to bring the service back in-house. Dallas  Area Rapid Transit (Dallas, Texas) used to use a contractor for its fixed- route bus service and later decided to provide the service using transit  agency staff because, according to officials, in addition to local economic  conditions and declining sales tax revenues, the contractor was not  meeting service requirements and key performance indicators for  maintenance of transit agency-owned vehicles. More recently, beginning  in fiscal year 2012, the agency decided to keep operation of certain bus  routes in-house after an analysis determined that the agency’s costs to  operate the service were lower than the privately contracted options.
section_title: Transit Agencies Use Many Methods to Select and Oversee Contractors
subsections: section_title: Contractor Selection
paragraphs: According to our survey responses, transit agencies use several methods  to select contractors. (See fig. 2.) The most common method (used by  200 transit agencies that responded to our question) is competition  through a request for proposals, wherein the transit agency solicits offers  for the service to be provided.
Fewer than 50 transit agencies that responded to our survey that use  contracting use each of the following methods: orders under pre-existing contracts,sole source or preferred vendors, exercising a contract option,selection from a list of preferred vendors.
Officials we interviewed at eight of the nine transit agencies that use  contracting said that they had at least three offers in response to their  most recent solicitations for each mode operated, except when obtaining  offers for the operation of their commuter rail services. Officials noted that  it might not be cost effective for other contractors to make an offer on  some commuter rail contracts because of specific circumstances, such as  one contractor owning the tracks.
In selecting a contractor, transit agencies may be required to consider  potential conflicts of interest. Nearly all (99 percent) of the agencies that  we surveyed that use contracting have an ethics policy or standards in  place that prohibit conflicts of interest. Furthermore, nearly all (99  percent) consider federal law, regulations, and guidance prohibiting  conflicts of interest for contractor employees and businesses when  contracting out.
Once the transit agency makes the decision to contract and selects a  contractor, the two parties enter into a contract. Among other things, the  contract specifies compensation, which can be structured in several  ways. It may specify fixed-price compensation, which is based on a set  price. For example, the payment may be a fixed amount per month.  Compensation can also be hourly, so that the contractor pays based on  the number of hours that the service is provided, which can be for the  number of hours when the transit service is collecting fares or from the  time the vehicles leave the facility until they return. Finally, the contractor  can be compensated on a per-trip or per-mile basis, wherein the transit  agency pays based on the number of trips provided or miles travelled.  According to our survey, transit agencies structure compensation in their  contract in various ways, including fixed price, price per revenue service  based on hours or miles, price per vehicle miles or hours, and number of  passenger trips provided. Contracts also specify the terms of service. For  transit agencies that we interviewed, the most common contract term— used by six of the nine transit agencies that use contracting—was a 5- year initial contract period, sometimes including the option to extend into  additional years. With respect to public access to contracts, federal  regulations require transit agencies that enter into contracts using FTA  grants to use their own procurement procedures that reflect applicable  state and local laws and regulations. Of the transit agencies that  responded to our survey that contract out, 92 percent allow public access  to all of their contract documents, 6 percent allow public access to some  of their contract documents, and 1 percent do not allow public access to  any of their documents.
section_title: Contractor Oversight
paragraphs: Transit agencies reported undertaking a variety of activities to assess the  quality of contracted services. Among our survey respondents that  contract out services, the most commonly used methods are periodic  reports or meetings, on-site inspections, the use of performance metrics,  and real time monitoring. (See fig. 3.) About 84 percent of the surveyed  transit agencies that contract out services reported having a specific unit  or department to conduct oversight.
Transit agency officials whom we interviewed described how they use  various methods, arrangements, and metrics they use to oversee  contractor performance. For example:
Officials at all of the nine agencies that use contractors told us that  they oversee contractors’ performance through activities such as  routinely communicating with their contractors, either through periodic  meetings or on as needed basis; inspecting contractors’ facilities or  vehicles; and/or using real-time monitoring devices installed on  vehicles.
Seven of the nine agencies use in-house staff to monitor the  contractor’s performance, while two use third-party contractors to  perform this function. For example, in March 2013, the Washington  Metropolitan Area Transit Authority signed a contract with a company  to oversee the performance of the three transit contractors that  operate its ADA paratransit services. Officials told us that using  contractors to oversee the day-to-day performance of the contractors   frees up in-house staff for more high-level oversight and  management.
Seven of the nine agencies that contract out for some or all of their  transit services use metrics to establish performance incentives  and/or penalties in contracts. For example, the Denver Regional  Transit District uses a set of performance metrics, such as on-time  performance and the number of complaints received from customers  to measure the contractor’s performance for its fixed-route bus  service. The performance metrics are used to determine performance  incentives or penalties. Likewise, officials from the New Orleans  Regional Transit Authority said that they include performance  incentives and penalties in their delegated management contract.  Among the contract’s provisions is a requirement for the contractor to  reduce costs by 25 percent (adjusted for inflation) within 5 years in  order to receive an automatic extension. The contractor said that it  has already met this goal by focusing on safety throughout the  organization, a focus that has reduced claim costs and related  expenditures. Also, the contractor has changed the maintenance  procedures and fleet operations and better managed the inventory of  parts, which have also enhanced cost efficiencies. According to the  contractor, during this 5-year period it has experienced increased  service and ridership levels while meeting its cost-reduction goals.  Conversely, officials from Yuma County Intergovernmental Public  Transportation Authority do not include performance incentives in their  contracts because they expect the contractor to always perform at a  high level of service; however, they do have penalties for certain  violations such as accidents.
section_title: Transit Agencies and Contractors Cite a Mix of Benefits and Challenges of Contracting; Unions Primarily Note Disadvantages
subsections: section_title: Transit Agencies’ Views
paragraphs: Transit agency officials whom we interviewed and the literature we  reviewed cite potential benefits to contracting for transit agencies, which  may vary based on the needs and circumstances of individual transit  agencies.
Contracting can be used to start or expand service. According to our  literature review, transit agencies view contracting as advantageous  when new services need to be established quickly, based on the  assumption that private firms can mobilize faster than a public  agency. Also, we have previously mentioned that starting new  service is a primary consideration for contracting out service,  according to our survey respondents (see table 2). Transit agencies  contract out for new services in order to avoid the high start-up costs,  including the cost of new services, procuring new vehicles, hiring staff,  and obtaining facilities, according to transit agency officials that we  interviewed. In addition, a 2005 study found that transit agencies use  contracting to try out new service, as one agency did to provide new  lines in outlying areas, because managers suspected that those new  lines would have very low ridership and would not be cost effective.  That study indicated that, according to the manager, contracting was  more efficient because the contractor used smaller vehicles and had  lower labor costs than the transit agency.
Contracting can be used to maintain service levels. According to our  survey respondents’ write-in answers on how transit service  contracting has met their expectations, three transit agencies reported  that contracting for certain services has allowed the transit agency to  maintain service that would have been discontinued due to budget  reductions. For example, one transit agency that contracts out its  paratransit service with a ridership of about 52,000 per month  reported that this service would have been cut due to cost constraints  were it not for contracting.
Provides access to contractor’s expertise and resources. Two of the  10 transit agency officials whom we interviewed contract to gain the  expertise and the resources that a contractor can bring to their transit  operation. For example, according to New Orleans Regional Transit  Authority officials, the agency used a contractor because the officials  felt that the contractor had the expertise and experience to lead the  agency back to full recovery after Hurricane Katrina.
Shifts risk of providing service to contractor. According to a 2007  study, when contracting for operation of services requiring buses, the  transit industry has moved toward providing the vehicles and even the  maintenance facility to a contractor. As a result, the contractor  assumes greater financial risk in terms of providing the insurance that  is required for the vehicles. Transit agency officials we spoke with  cited this transfer of risk as a benefit. For example, an official at Yuma  County Intergovernmental Public Transportation Authority told us that  contracting reduced the transit agency’s insurance costs by 45  percent or more. Additionally, according to this official, insurance  costs are typically higher for new transit authorities than for  contractors, because they often do not have the same degree of  experience operating transit services.
In addition to these reported benefits and their associated cost savings,  transit agencies and literature cite the following challenges to contracting  out transit services, which may, in some cases, outweigh the benefits or  cost savings:
Diminishes an agency’s direct control over operations. Based on  studies of contracting, some transit agencies have not accepted  contracting because it does not provide an economic benefit equal to  the risks associated with delegating service control to a contractor.  Specifically, according to this 2008 study, absent a compelling  economic return that includes discounted future savings, in-house  delivery of transit services is preferable because it provides managers  with a direct line of authority to adjust services to meet a community’s  demand for services or deal with unforeseen service events.
Requires a complex request for proposal and contract-monitoring  process. Officials at two transit agencies told us that the contracting  process is complex, long, and arduous. For example, officials from the  Denver Regional Transportation District told us that they start the  contract solicitation process approximately one year prior to the  expiration of the existing contract. The process includes writing the  scope of work, updating requirements (which includes getting input  from various departments within the agency), issuing the request for  proposal, evaluating the responses, negotiating with the selected  contractor, and monitoring any start-up activities, thus costing the  agency time and money. In addition, studies suggest that the costs of  monitoring the contractor’s performance may, in some cases,  outweigh the benefits. In particular, a recent study found that transit  agencies may need to keep in-house staff to evaluate and monitor  contracts, which can reduce efficiency gains and related cost  savings. Another study suggests that the transaction costs that  transit agencies incur when they draw up requests for proposals,  evaluate offers, negotiate contracts, and monitor contracts with private  providers could offset or even exceed cost savings from contracting  transit service operation and management functions.
Requires transit agency to address labor issues. According to one  study, transit agencies that are unionized must consider how  organized labor would react to a contracting decision. This study  suggests that transit agencies face opposition to contracting from  unions representing their employees. While a union may concede to  contracting out new services, it tends to show much stronger  opposition to contracting out existing services, which threatens union  members’ current jobs. However, according to the study, while most  agencies with some in-house service are sensitive to union resistance  to contracting, they may also face financial distress and must find  ways to increase cost efficiency. Under such conditions, agencies  need to maintain a good relationship and open communication with  the union. This situation enables both parties to work together to  simultaneously increase the cost efficiency of the in-house service  while avoiding significant job losses due to contracting. Even when  transit managers are aware of other strategies for increasing cost  efficiency, they need cooperation and concessions from the union to  implement them.
section_title: Contractors’ Views
paragraphs: Contractors we interviewed cited the following benefits to contracting.
Provides cost savings. Contractors told us that they are able to  increase efficiencies while reducing costs to transit agencies. For  example, one contractor told us that his company includes in its  contracts with transit agencies technology for routing and scheduling  that is proprietary and, therefore, not available to transit agencies  outside of a contract. Another contractor told us that its contracts  provide access to specialized routing technology, which transit  agencies would otherwise have to spend a great deal of money to  purchase. Also, according to another contractor, providing the  insurance on the vehicles that it uses can be a significant savings  depending on the size of the transit agency. As previously mentioned  in this report, contracting can also be a way for transit agencies to  potentially lower their health insurance costs. For example,  contractors with large numbers of employees may have lower health  insurance rates and be able to offer lower rates to their employees. As  a result of these and other efficiencies, one contractor told us that if it  were to exclude the cost of capital assets (vehicles and facilities) the  operating costs for the contractor would be significantly lower, usually  in the range of 15 percent to 35 percent. However, expected cost  savings do not always come to fruition. For example, based on  anecdotal evidence from our literature review, one transit agency  brought transit services back in house after it found that its  arrangement with its contractor was too expensive. The contractor  had a 5-year contract that was terminated in less than 3 years.
Provides access to contractor’s expertise and resources. Contractors  also cited the expertise and resources that they can bring to a transit  agency as a benefit to contracting. One contractor we interviewed told  us that it brings specific knowledge and expertise in areas such as  training, and resources, such as customer call centers, and thus  allows the transit agency to focus on its own or management  strengths. Additionally, another contractor told us that contracting  allows a private company to provide resources that the transit agency  does not have. For example, transit agencies might receive access to  expertise for technical issues and labor negotiations, as well as  discounted purchasing rates for fuel, vehicle parts, and other  equipment, because of the large amount purchased by the contractor  to cover several transit agencies’ operations.
Increases labor flexibility. Contractors cited labor flexibility as a benefit  to contracting. For example, according to one contractor, contracting  offers the transit agency more labor flexibility, in that, if additional staff  is needed to perform a particular service the contractor generally has  greater flexibility to quickly bring in the needed staff, because it has  the resources of the entire company, whereas the transit agency may  be limited in that regard. Another contractor said that its company’s  labor agreements are not very restrictive in terms of how the  workforce is deployed or scheduled. For example, the contractor can  cross-train staff, and if a dispatcher is needed to drive or a driver is  needed to perform dispatching functions, its labor agreements  generally allow those things to happen, which increases efficiencies.
The contractors we interviewed cited few challenges to contracting. Three  of the six contractors we spoke to said that the capital investment that is  required for a contract might prevent them from bidding. Also, according  to one contractor, the biggest barrier that exists to contracting is transit  agency funds. Transit agencies are sometimes forced into a contracting  arrangement based on price rather than value because of funding  constraints.
section_title: Union Views
paragraphs: Officials at national and local unions we spoke with said that whereas  contracting may provide some short-term cost savings to transit agencies,  the savings are almost entirely from lower wages and benefits paid by the  private companies to their employees. This statement is consistent with  what we heard from some transit agencies regarding the source of cost  savings associated with contracting. Recent studies we reviewed also  suggest that this is the case. For example, one study of 12 transit  agencies found that cost savings accrue primarily as a result of private  transit labor consistently earning lower wages and fewer benefits  compared to similar public sector employees. Moreover, one local union  official that we spoke with told us that the wages for the transit-agency  bus operators it represents are generally higher than the contractors’ bus  operators’ wages. A new bus driver starts at about $12-13 per hour for  the contractors and $15 per hour for that transit agency, according to that  union official. Additionally, this union official told us that while wages for  contractor employees and transit agency employees tend to be at the  same level at the top of the pay scale, it takes contractor employees  longer to reach the top levels. However, according to national union  officials, commuter rail employees covered under the Railway Labor Act  receive comparable wages and benefits whether employed by transit  agencies or contractors.
The national and local union officials we interviewed stated that  contracting might lead to decreased level of safety, poor service quality,  and hidden costs.
Decreased level of safety. Local union officials we spoke with said  that contracting decreases the level of safety, possibly because, in  their view, contracted employees receive less training than transit  agency employees. For example, one local union official told us that  the local transit agency provides 8 weeks of classroom and on-the- road training whereas the contractors provide 5 weeks of training.  Another local union official told us that the contractor reduced its  training course to 2 weeks from 3 (the amount provided by the transit  agency). In addition, one union official told us that privatized buses  are not as safe as agency buses. For example, the official said that he  had seen private buses on the road with side view mirrors held in  place with duct tape. Two studies published since 2002 discussed the  quality of contracted services, and one noted that contracted service  had higher rates (by 70 percent) of vehicle collisions and the other  reported that service quality may be lower among low cost contracted  operators. However, as previously mentioned in this report, officials  at all of the nine agencies we interviewed that use contractors told us  that they oversee contractors’ performance through various activities,  including inspecting contractors’ facilities or vehicles, and none of the  officials that we interviewed raised concerns about safety.  Additionally, one transit agency told us that officials inspect the  contractors’ buses on a daily basis to determine their condition or  whether preventive maintenance or repairs have been performed. The  agency also reviews performance data related to customer  complaints, on-time performance, accidents, and maintenance, which  it compiles in a monthly performance report.
Poor service quality. Union officials we spoke with generally agreed  that because contractors are profit driven, they may not have  incentives to provide the same level and quality of service as the  transit agencies. According to one union official, the contractor will  only provide the level of effort mandated by the contract, whereas the  agency will go above and beyond to ensure high-quality service.  Recent literature has discussed the quality of contracted services,  with one study finding that contracted service had more vehicle  breakdowns (by 36 percent). Anecdotal evidence from the literature  shows that some contractors are having difficulties in providing quality  service. For example, a contractor took over paratransit operations in  a Florida county in the summer of 2012, and by May 2013, due to  performance failures, such as vehicle breakdowns, accidents,  maintenance requirements, and other problems; the county fined the  contractor $2.2 million. The county has since directed the transit  agency to find a second service provider by November 2013, to help  provide paratransit services. Also, as discussed earlier, one transit  agency that we interviewed ceased using a contractor for its fixed- route bus service because of concerns about service quality, among  other issues. However, one union representative we spoke with  thought that the quality of service may actually be better under a  contractor, because contractors are penalized for not meeting  performance measures, such as on-time performance, as discussed  earlier in this report.
Hidden costs. Union officials cited hidden costs incurred by transit  agencies related to activities such as proposal evaluation and contract  monitoring as a disadvantage to contracting. As previously mentioned  in this report, transaction costs that public agencies incur when they  draw up requests for proposals, evaluate offers, negotiate contracts,  and, monitor contracts with private providers could offset or even  exceed cost savings from contracting transit service operation and  management functions. Moreover, one local union official we spoke  with told us that privatization adds a level of management, which can  create inefficiencies and duplication of effort. For example, he told us  that one transit agency that he represents has two sets of street  supervisors—one for the contractor and another for the transit  agency—each doing the same work. Also, if a private contractor fails  to provide service on a route, the transit agency is ultimately  responsible and must find other means to operate the route.
section_title: Riders’ Views
paragraphs: According to our interviews with five of the six citizens’ advisory groups  that are affiliated with transit agencies, the quality of service was  generally viewed as being comparable whether provided by the transit  agency or a contractor. The Denver Regional Transit District conducted a  customer satisfaction survey and found no measurable difference in  customer satisfaction between in-house and contracted services. In  addition, Dallas Area Rapid Transit citizens’ advisory group said that the  level of service has been good with contracting. Lastly, the advisory board  for Metropolitan Rail Authority told us that the public generally does not  know whether a contractor or the transit agency operates services.
section_title: Concluding Observations
paragraphs: Contracting is not a one-size-fits-all approach for providing transit  services. For some transit agencies, contracting may be the most cost- effective way to provide service, because transit agencies can benefit  from access to certain technologies or reduced labor, fuel, and insurance  costs. For other transit agencies, contracting may be impractical because  of additional costs incurred from the bidding process and contractor  oversight. Given our challenging economy, it is important that transit  agencies are able to make decisions that allow them to use federal funds  in the most efficient manner while also considering factors such as  providing high quality service, regardless of whether these services are  provided by transit agency employees or contractors.
section_title: Agency Comments
paragraphs: We provided a copy of this report to the Department of Transportation  and the Department of Labor for review. The agencies had no comment  on the report.
We are sending copies of this report to interested congressional  committees, the Secretary of the Department of Transportation, and the  Secretary of the Department of Labor. In addition, this report will be  available at no charge on GAO’s web site at http://www.gao.gov.
If you or your staff have any questions or would like to discuss this work,  please contact me at (202) 512-2834 or wised@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. Individuals making key contributions  to this report are listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: To comply with the Moving Ahead for Progress in the 21st Century Act  (MAP-21) mandate we addressed the following questions: (1) What is the  extent that transit agencies contract public transit operations and services  and identify reasons for doing so? (2) What methods do transit agencies  use to select and oversee contracted services? (3) What are the potential  benefits, challenges, and disadvantages of contracting out public transit  operations and other services?
To address our questions, we conducted a web-based survey of all 637  transit agencies that reported to the Federal Transit Administration’s  (FTA) National Transit Database in 2011 and operate fixed-route bus;  demand response; ADA (Americans with Disability Act) paratransit; and  heavy, light, or commuter rail services and asked about their contracting  practices in 2011. We excluded transit agencies that received a reporting  waiver. The survey was conducted from March 4, 2013, to April 23, 2013.  To prepare the questionnaire, we pretested potential questions with  transit agencies of different sizes and that operate all of the modes to  ensure that (1) the questions and possible responses were clear and  thorough, (2) terminology was used correctly, (3) questions did not place  an undue burden on the respondents, (4) the information was feasible to  obtain, and (5) the questionnaire was comprehensive and unbiased. On  the basis of feedback from the four pretests we conducted, we made  changes to the content and format of some survey questions. The results  of our survey can be found at GAO-13-824SP.
To identify transit agencies to survey, we conducted interviews with the  appropriate FTA officials responsible for the National Transit Database to  learn about information collected from transit agencies regarding transit  contracting and obtain contact information. We contacted all of the transit  agencies in advance, by e-mail, to ensure that we had identified the  correct respondents and to request their completion of the questionnaire.  After the survey had been available for 1 week, and again after 2 and 4  weeks, we used e-mail and telephone calls to contact transit agencies  who had not completed their questionnaires. Using these procedures, we  received responses from 463 transit agencies for a response rate of 73  percent. The results of our survey are not generalizeable to all transit  agencies. Estimates and responses to survey questions in this report  refer only to the views of the respondents. The survey was a census  survey, and we did not try to extrapolate the findings to the agencies that  chose not to respond. Because this was not a sample survey, there are  no sampling errors. However, the practical difficulties of conducting any  survey may introduce errors, commonly referred to as nonsampling  errors. For example, difficulties in how a particular question is interpreted,  in the sources of information that are available to respondents, or in how  the data are entered into a database or were analyzed can introduce  unwanted variability into the survey results. We took steps in the  development of the questionnaire, the data collection, and the data  analysis to minimize these nonsampling errors. For instance, a survey  specialist designed the questionnaire in collaboration with GAO staff who  have subject-matter expertise. Further, the draft questionnaire was  pretested with four transit agencies to ensure that the questions were  relevant, clearly stated, and easy to comprehend. When the data were  analyzed, a second, independent analyst checked all computer programs.  Finally, we analyzed nonresponding transit agencies for evidence of bias.  We found that transit agencies that provide heavy rail were less likely to  respond to our survey than other transit agencies.
To obtain in-depth information and contracting experiences from local  jurisdictions, we interviewed transit agencies at ten sites across the  country. (See table 4.) At each location, we attempted to interview private  transit contractors, citizens’ advisory groups, and a local union. We  judgmentally selected these locations based on geographic location,  population served, transit modes, agency sizes, and contracting  practices. The interviews from these locations are not generalizable to all  transit agencies.
We also interviewed the American Public Transportation Association,  Community Transportation Association of America, and national labor  unions representing operators and maintenance workers including the  American Federation of Labor and Congress of Industrial Organizations,  the Amalgamated Transit Union and the Transport Workers Union,  International Brotherhood of Teamsters, and representatives of the  following unions for commuter rail operators and maintenance workers— International Brotherhood of Electrical Workers, Brotherhood of Railroad  Signalmen, National Conference of Firemen & Oilers, Brotherhood of  Maintenance of Way Employees Division, Sheet Metal Air, Rail and  Transportation - Sheet Metal Workers’ International Association,  Transport Workers Union, Transportation Trades Department,  International Association of Machinists, Sheet Metal Air, Rail and  Transportation-United Transportation Union, and the Brotherhood of  Locomotive Engineers and Trainmen. We also interviewed Federal  Railroad Administration officials regarding contracting of commuter  services and Department of Labor officials to understand their role when  transit agencies decide to contract out services.
We also reviewed and synthesized information from our body of work and  relevant literature on contracting out transit services in the United States.  We reviewed citations identified through a search of databases containing  peer-reviewed articles, government reports, and “gray literature,”  including Transport Research International Documentation, Social  SciSearch, and PROQUEST. Publications were limited to the years after  2001. After an initial review of citations, 37 articles were selected for  further review. To collect information on the articles, we developed a data  collection instrument to gather information on the articles’ scope and  purpose, methods, findings and their limitations, and additional areas for  follow-up, including a review of the bibliography to determine the  completeness of our literature search. To apply this data collection  instrument, one analyst reviewed each article and recorded information in  the data collection instrument. A second analyst then reviewed each  completed data collection instrument to verify the accuracy of the  information recorded. We summarized the findings and limitations of the  articles based on the completed data collection instruments, as well as  areas for additional research identified in the articles.
We conducted this performance audit from October 2012 to September  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Teresa Spisak (Assistant  Director), Stephanie Purcell, Carl Barden, Dwayne Curry, Leia Dickerson,  Lorraine Ettaro, Kathy Gilhooly, Cathy Hurley, Stu Kaufman, Alex  Lawrence, and Amy Rosewarne made key contributions to this report.