Runaway Spending: Private Contractors Increase the Cost of School Student Transportation Services in Pennsylvania
This study examines the cost of transportation services for Pennsylvania’s school districts, focusing especially on the impact on costs of contracting out. Using data from the Pennsylvania Department of Education from 1986 to 2008, the study statistically analyzes total costs, the costs to the state, and the costs to local school districts. On average 72% of transportation services were contracted out by Pennsylvania school districts in 2008, up from 62% in 1986.
In analyzing school district transportation costs, we control for the impact on costs of school district enrollment, fuel costs, spending for transportation of special education students, and the wealth and income of the school district. We find that:
- Contracting out significantly increases total costs. For example, if the “typical” district (with enrollment and other variables equal to the average for all districts) shifts from contracting out none of its transportation services to contracting out for all of its services, costs increase an estimated $223,861 (in 2008 dollars).
- Contracting out also increases costs to the state, in part because the state reimburses contracted transportation services at a higher rate than district self-provided services. In the typical district, increasing contracting out from zero to 100% increases costs to the state by $231,903.
- For local school districts, there is no statistically significant difference (at the 5% level) between what they pay for transportation services when they contract out versus when they self-provide transportation—in effect, the more generous state reimbursement of contracting out compensates for the increase in total costs.
In addition to the state’s more generous reimbursement for contracted transportation services, decisions to contract out are also driven in some cases by the lump sum that districts receive up front for selling their bus fleet. Contractors also reportedly “low ball” their prices when bidding for new contracts—i.e., promise lower costs than actually result. Analysis of a sub-sample of 29 districts that privatized transportation services between 1992 and 2001 reveals that these districts experienced a 26% increase in total transportation costs in the five years after contracting out compared to a 6% increase in the five years before contracting out. Most of the jump in costs took place in the first year after privatization. Despite higher costs, districts may not revert to self-provided services because the state’s more generous reimbursement of contractor services absorbs the increase. In addition, once districts sell their bus fleet, reverting back to self-provided services is impeded by the up-front cost of repurchasing a fleet. Lastly, school officials may be reluctant to publicize the increase in costs due to privatization.
Contracting out substantially increases state spending on transportation services. We estimate that if all districts switched to the self-supply of transportation services, total spending on student transportation services would fall by $78.3 million dollars with all of the cost savings accruing to the state.
Why does contracting out cost more than self-providing transportation services? While this requires further study, the general answer is that private contractors do not provide efficiencies sufficient to compensate for increases in costs associated with contracting out. These increases include contractor profits, the higher salaries of private contractors at the managerial and executive level, and the cost to school districts of monitoring contractors. Contracting can also be expensive because of lack of competition within the private industry in some areas. In addition, once a contract is in place, switching contractors or in-sourcing services may be disruptive, create managerial headaches, or impose financial transition costs. These transition costs give current contractors leverage when charging for unanticipated additional services or bargaining over contract renewal terms. These reasons that privatization costs more than self-providing services are not unique to the school bus transportation industry but arise with a wide range of privatized services.
A quote in response to a Joint State Government Commission survey provides an illustration of how private contracting can raise costs (the full quote is in the conclusion to this report):1
“...we purchased 3 mini-buses (1 with a wheelchair lift) and 4 minivans. Before...we were contracting 21 minivans that were transporting the same amount of students. We have saved over $200,000 per year in expenses by running a more efficient bus fleet.... [We] believe we can add to savings in areas such as extra-curricular transportation and field trip transportation. ”
At a time when the state is scouring the entire budget for cost savings, in-sourcing school transportation services represents a significant saving opportunity. To move in this direction, the state should lower the subsidy for contracted services to the subsidy for self-provided transportation services. Savings could be used to reverse some of the recent cuts to the state’s basic education subsidy. The state should also provide technical assistance to districts to re-evaluate their transportation services, and low-interest loans to assist with the purchase of new school buses. The Pennsylvania Association of School Board Officials (PASBO) could provide the technical assistance, supporting contracting in when it would lead to large savings, promoting the spread of best transportation practices when districts self-provide, and providing districts that continue to contract out with the expertise to bargain better contract terms. Through PASBO or a stand-alone entity, the commonwealth could also create its own non-profit transportation services provider that submits bids in response to district requests for proposals. This innovative option would directly address the lack of competition in the industry and also overcome the challenge with purchasing new buses, since the commonwealth bus company would have its own buses.