All Costs Considered III: Further Analysis on the Contracting Out of School Support Services in Oregon

Gordon Lafer, PhD Bob Bussel, PhD Jaxon Love, MBA

Labor Education and Research Center University of Oregon

February 2013

Acknowledgement

The authors wish to thank the Oregon School Employees Association for providing financial assistance for this report.

Table of Contents

Introduction ...... 7

“A Big Impact on Longtime Employees” ...... 9

Assessing Privatization in Central Point ...... 17

Conclusion ...... 55

Appendix: Sources ...... 57

Introduction to “All Costs Considered III: Further Analysis on the Contracting Out of School Support Services in Oregon”

ll Costs Considered III” marks employees working under private an extension of two previous contractors. studies conducted by the Labor “A Education and Research Center Since our previous research in (LERC) that examined the 2004 and 2008, several important transfer of school support services developments have occurred (transportation, custodial, food that have influenced the focus of service) to private operation in the this new study. During its 2009 state of Oregon. In our ongoing session, the Oregon Legislature analysis of contracting out (also passed a law (ORS 279B) known as “privatization”), we requiring that public agencies have been guided by a similar conduct a rigorous cost-benefit set of questions. Does the analysis before they decide to shift from public to private contract out a given service. The management actually deliver law stipulates that budgetary promised or predicted savings savings resulting from this to school districts? What is the administrative transfer cannot  This study is an personal impact of contracting come solely from reduced wages extension of two out on workers who provide and benefits for workers employed previous studies school support services, and by a public entity. In other words, conducted by the Labor what is the social impact on the cost-benefit analysis must Education and Research their communities? How does demonstrate privatization will Center (LERC) that contracting out affect the quality save money and that some portion examined the transfer of of service for students and their of the predicted savings derives school support services families? And how can school from efficiencies other than lower to private operation in compensation for employees. the state of Oregon. The districts perform their due focus of this study is on diligence in weighing the potential student transportation benefits and potential costs that We have chosen to focus this new services, which has accompany decisions to privatize study on student transportation perhaps become the support services? In our previous services, which has perhaps most active arena for studies, we found substantial become the most active arena contracting out within evidence that the proposed savings for contracting out within school school districts. from contracting out often failed districts. In the fall of 2007, to materialize. We also found an important development a personal cost to workers and occurred in the student a social cost to communities transportation world when First that resulted from reduced Group, a United Kingdom- compensation and benefits for based transportation company, 7 acquired Laidlaw International, the largest expect that continuing budget exigencies faced school transit company in North America. by school districts, along with the desire of This purchase made First Group’s United private contractors to expand, may prompt States subsidiary, Cincinnati-based First more districts to consider contracting out Student Inc., the nation’s largest provider transportation and possibly other school of school transportation services. According support services. to a 2011 article in School Bus Fleet, First Student now has over 1,500 contracts with It is this changed context that has led us to school districts in the United States. The focus much of this study on the June 2011 company has continued to acquire other bus decision by the Central Point School District contractors throughout the U.S. and is likely to contract student transportation services to expand its efforts to attract outsourced business from school districts. In Oregon, to First Student. Central Point is the first First Student currently has contracts with 39 Oregon school district that elected to privatize of the state’s 198 school districts. The second a service under the provisions of the new largest provider of student transportation state public contracting law. Given the new services, Pendleton-based Mid-Columbia reporting requirements mandated under the Bus Company, serves 31 Oregon districts, 2009 statute, the Central Point experience and eight other private companies also have offers an important opportunity to examine contracts to provide transportation services whether school bus privatization can generate in Oregon. Since our previous study, six new significant savings from sources other than school districts in Oregon have engaged reduced compensation for school employees. private contractors to provide transportation services. Even with these increases, Oregon As we have done in our previous studies, remains close to the national average for LERC researchers conducted interviews with bus contracting, with nearly two-thirds of its bus drivers previously employed by the school transportation remaining under public Central Point School District to ascertain how rather than private management. 1 the switch to a private contractor had affected their working conditions and standard of School districts’ view of support services living. In addition, we conducted a detailed have also been shaped by broader economic examination of the terms of contracting out developments that have occurred since we in Central Point in order to assess the extent conducted our previous study. The deep to which this contract meets the standards set recession of 2008 has had a powerful impact by state law. We also offer additional analysis on many school districts that already were of bus contracting in the Rainier and Lake struggling with budgetary challenges. Because Oswego school districts to determine the costs of the slow economic recovery and much lower tax revenue, districts throughout and benefits of privatization that may only Oregon have grappled with persistent budget become evident over a longer time period. We shortfalls and have had to make painful conclude by offering some recommendations decisions to reduce school days, eliminate to school districts and communities that or trim student services, freeze or lower may assist them in complying with the compensation for school employees, and requirements of the new public contracting sometimes lay off support staff and teachers. law and exercising appropriate due diligence These circumstances are not likely to improve when they consider both the benefits and in the immediate future. Accordingly, we costs of outsourcing. 8 “A Big Impact on Longtime Employees” The Personal and Social Cost of Contracting Out Transportation Services in Central Point

hen school boards and school 2004 and 2008, LERC researchers districts weigh the possibility of sought to assess and better contracting out support services, understand this perennial concern: W they often acknowledge the how does the outsourcing of potential impact of outsourcing school support services actually on current employees. This subject affect the lives of bus drivers, emerged repeatedly in the spring custodians and food service of 2011 when the Central Point workers displaced by the shift School District (CPSD) decided from public management to to issue a Request for Proposals private administration? To answer (RFP) for private companies this question, we interviewed to take over its transportation school support employees in services. During its deliberations, Oregon whose jobs had been the school board issued a “brief” outsourced. Our interviews that identified the “strengths” and revealed that workers employed “weaknesses” of four different by contractors typically suffered scenarios for providing student noticeable declines in their  Workers employed transportation services. Under the standard of living, including by contractors typically scenario that would completely suffer noticeable declines reduced wages, substandard health shift bus service from the school in their standard of district management to a private and retirement benefits, and living, including reduced the loss or curtailment of other wages, substandard contractor, the brief mentioned benefits that provided workers health and retirement “employee anxiety and disruption benefits, and the loss over outsourcing operations” and their families with a sense of or curtailment of other as a potential “weakness.” After security and well-being. Beyond benefits that provided the CPSD school board voted the personal cost to workers workers and their on June 15, 2011, to contract themselves, we also found that families with a sense of out transportation services to communities incurred a social security and well-being. cost through reduced purchasing Communities also incur First Student, board chair Kerry a social cost through Bradshaw told the Medford power and the loss of other reduced purchasing Mail Tribune that “this was not benefits associated with stable, power and the loss of an easy decision and not one middle-class jobs. These findings other benefits associated board member wanted to do this appeared consistently regardless with stable, middle-class because it has such a big impact of the specific school district, the jobs. on longtime employees.” 2 specific contractor and the specific support service that had shifted to In previous studies published in private administration. 9 Building on this previous work, LERC Wages researchers interviewed CPSD employees in an effort to assess how they had been affected by In its RFP submitted to the school district CPSD’s decision to contract out transportation in the spring of 2011, First Student agreed to services to First Student. During March and “grandfather” incumbent CPSD employees April 2012, we made repeated efforts to who accepted its offer to work under private contact all of the bus drivers who had been management and pay them at their current employed by the district. Working from a list hourly wage. Our surveys confirmed that First provided by the Oregon School Employees Student has largely honored this pledge, with Association (OSEA), we conducted telephone most former CPSD drivers earning the same interviews with 15 of the 34 bus drivers wage they received under the OSEA contract previously employed by CPSD, achieving with the school district. We observed this wage a 44 percent response rate. Although our retention policy in our previous studies and it efforts to obtain a higher response were appears to be a fairly standard practice among hindered by outdated or inaccurate contact contractors to maintain pay rates for former information, our interview completion rate school district employees after assuming was demonstrably higher than that attained in transportation management. Among the our earlier studies. drivers we surveyed, hourly wages ranged from $11.30 (less than one year of seniority) to a maximum of $17.36 for the most senior Of the 15 drivers we interviewed, 12 are employee. However, some drivers who took currently working for First Student, two have jobs with First Student reported wage loss found work with other employers and one due to route changes that reduced their is unemployed. The percentage of workers working hours. The question of subsequent who opted to accept employment with the pay increases also remains uncertain. In its contractor is considerably higher than our RFP, First Student claimed that driver wages findings in earlier studies, perhaps a reflection “will increase [at] the start of the school year of the more limited options available in a according to the revenue contract.” At the local economy struggling to recover from July 30, 2012, CPSD school board meeting, 3 the deep and lingering recession of 2008. First Student indicated it plans to provide pay Exhibiting the longevity characteristic of increases in the next school year but offered support staff employed by school districts, no specifics on exact amounts or how widely our group of respondents had a median seven distributed these increases will be. Without years of service, ranging from a worker with collective bargaining, this determination less than one year to two employees who each remains strictly in the hands of First Student had 27 years of service with CPSD. We asked management. 4 the drivers an extensive set of questions to determine how contracting out has affected The two drivers who found employment their wages, working conditions, and overall elsewhere reported hourly wage losses of 19 standard of living. Although the number of and 28 percent, respectively, in their new respondents is relatively small, the consistency jobs. This testimony affirms findings in our of their answers and observations suggest that earlier research that after jobs are contracted our sample accurately portrays the overall out, support staff members do not find experience of most former CPSD drivers who comparable working conditions elsewhere, elected to work for First Student. at least in the short term. Our respondents 10 also report that new drivers are being hired at was too low, co-pays were too onerous and an hourly rate below what they would have coverage was too limited. When drivers were earned under the union collective bargaining employed by the district, CPSD paid premium agreement. As First Student acknowledged costs up to a capped monthly amount ($1,114 in responding to the CPSD RFP, “new hires under the 2010-11 collective bargaining will be hired at an alternate wage scale based agreement with OSEA) and the employee paid on other local First Student operations.” the balance, depending on the specific plan However, as we will subsequently discuss, and level of coverage. Several drivers described these reduced pay scales for new drivers may their previous medical coverage as “excellent” undercut one of the objectives CPSD outlined and almost all expressed satisfaction with in the RFP: “It is essential to the District that their previous health care arrangements, the Contractor be able to attract and retain which also included dental and vision care. qualified drivers as long as possible.” 5 We have asked First Student about the Several respondents did cite one beneficial current benefits it provides bus drivers in change under private management—they Central Point, but at the time of this writing are now eligible for unemployment benefits we have received no additional or updated during school breaks and the summer months information. As a result, we base our analysis when they are not working. This option was on the most recent documents available: not available to them as public employees a June 11, 2011, email from First Student’s under school district management. director of business development to CPSD’s director of human resources and the health Benefits care coverage options outlined in the Oct. 1, 2011, “benefit schedule” that First Student provided CPSD. Health Insurance

Not one of the drivers we surveyed reported Under First Student’s plans, almost all being enrolled in First Student’s health employees are classified as “part-time” and insurance plan. In our previous studies, we are required to pay the full premium for found that the health insurance benefits much more limited forms of coverage, be it offered employees by private contractors health, dental or vision, placing these vital differed substantially from the benefit services beyond the reach of most workers. packages provided by school districts. For example, under district management and Nonetheless, workers who did not have the OSEA contract, workers paid between alternate options (e.g., coverage under a $4 and $25 for most medications, with an spouse’s health insurance) often chose to out-of-pocket employee maximum of $1,000 purchase contractor-provided insurance in per year. Under First Student’s plan, they spite of acknowledging its limitations. In paid $10-$20 for most medications, with Central Point, however, workers simply found an insurer-paid maximum of $35-$200 per the health insurance inadequate on almost month, depending on the plan chosen, and all counts. They described the plans offered no coverage for non-formulary drugs. The by First Student as “unaffordable,” noting CPSD/OSEA plan contained no deductibles that under the company’s options employee for in-network care, while First Student’s plans contributions were too high, the annual charged $100 individual and $200 family allowable maximum for health care costs deductibles for similar care. Most tellingly, 11 the plans offered under the OSEA contract participate. contained no limit on the lifetime maximum benefit paid by the insurer, whereas the First Leave Time Student plans contained lifetime maximums ranging from $5,000-$25,000 per year. Another striking disparity between contractor Lifetime limits have been disallowed under and school district employment lies in the the Patient Protection and Affordable Care Act area of holiday pay, sick days and personal passed in 2010. However, this wide disparity leave. Given the challenges many workers face underscores the distinct differences between in balancing the demands of work and family the CPSD/OSEA and First Student plans. It life, having time available to spend with one’s suggests why no former CPSD bus drivers family, tend to a sick child or recuperate from employed by First Student, at least among personal illness is vital in relieving personal those we interviewed, chose coverage under stress and enhancing the quality of family the company’s insurance plans. 6 life. The drivers we interviewed noted that they received few of these benefits from First Retirement Student. According to First Student’s benefit package, it only offers employees two paid As was the case with health insurance, none of annual holidays and provides no sick days the former CPSD drivers we interviewed who or personal leave. Under the OSEA collective are now employed by First Student opted to bargaining agreement with CPSD, workers participate in First Student’s retirement plan. received ten paid holidays, ten days of paid Under school district administration and the sick leave (or one day for each month they OSEA contract, workers were covered under were employed) and two additional personal the Oregon Public Employee Retirement days. Workers were also able to accumulate System (PERS). CPSD contributed 6 percent unused sick leave, allowing them greater of each worker’s pay to the retirement flexibility in the event of personal or family accounts of its bus drivers and “picked up” illness. The limited leave time provided under a matching 6 percent contribution from First Student’s benefit package diminishes this the employee. According to the workers we flexibility, placing a greater burden on workers interviewed and “additional benefit package in reconciling the demands of work and information” First Student provided to CPSD family responsibilities. during the RFP process, the company offers a “401K retirement savings plan” that features The lack of paid sick leave raises an additional a “$250 employer match.” Although we concern. According to recent scholarly lack specific data on the retirement funds research, in response to limited or non- accumulated by workers when they were existent sick leave, many workers have employed by the school district, we assume embraced the practice of “presenteeism,” that many, especially among the most senior the tendency to show up for work in spite employees, were able to amass significant of illness. Researchers have documented savings for their retirement. However, the stark numerous adverse effects that accompany difference between a defined benefit plan, presenteeism, including diminished such as PERS, and a defined contribution plan productivity, prolonged recovery time from with such a limited employer match is readily illness and the potential for spreading illness apparent, and it is hardly surprising that none to co-workers or clients. The potential safety of the drivers we interviewed have chosen to and health implications of presenteeism, 12 especially in an occupation that places bus use in conducting inspections. As one driver drivers in daily contact with children, must acknowledged, some of the objections to be considered as real possibilities in a work Zonar may reflect dissatisfaction over having arrangement where no paid sick leave is to adapt to a new way of doing things and he offered. 7 admitted that being more “accountable” for one’s time could result in greater efficiency. Working Conditions However, several respondents indicated that they felt “micro-managed” due to enhanced We asked workers to compare their working computer tracking of their activities and new conditions (attention to safety, access to driver protocols that gave them less “leeway training, availability of resources, tools and time” when they are running late on their supplies and quality of supervision) under routes. Others suggested that the contractor’s school district and First Student management. emphasis on minimizing route time and We offer several caveats in discussing these limiting overtime could compromise safety findings. by making drivers feel pressured to complete their routes within prescribed and more rigid We conducted our interviews seven to time limits. eight months after First Student assumed management of transportation services in Many drivers did note one demonstrable CPSD, and it is quite possible the company change in managerial practice that they found has had insufficient time to implement especially disturbing: their compensation for fully its policies and practices. Many of the training. Previously, when drivers attended workers we spoke to expressed unhappiness trainings for safety and other work-related with the shift to private management and issues, CPSD paid them at their regular this disgruntlement doubtless has influenced hourly wage. Under First Student, even their evaluation of working conditions under “grandfathered” employees are paid at the First Student. With these caveats in mind, minimum wage when they attend such we offer some tentative observations about trainings. Several drivers also noted that issues that emerged during our interviews and they had previously been paid their regular the insights they yield in comparing working wage when they performed other tasks conditions under CPSD and contractor management. besides driving (e.g., extra work around the facility) under CPSD management. These tasks are now paid at the minimum wage Although most drivers we interviewed saw by First Student. With Oregon’s minimum relatively few differences in their working wage currently at $8.95 an hour, this new conditions under First Student, they did express concern over several changes affecting policy means that drivers receive anywhere the conduct of their work. Under CPSD from $2.50-$9.00 less per hour when they management, drivers performed “pre-trip attend trainings or perform non-driver work. inspections” of their busses before both their Many of the drivers we interviewed expressed morning and afternoon runs to make sure concern over these changes, especially the their vehicles were in good working order. lower wages associated with training, which First Student has eliminated the afternoon in their view diminished its importance and pre-trip inspection and employs a new device suggested that cost-cutting assumed priority (“Zonar”) that drivers are now required to over job preparedness. 13 The other notable change in working compensation costs. Behind these numbers, conditions under First Student cited by we discovered distinct personal and social drivers was the sharp rise in turnover among costs associated with the decision to contract new hires. Although First Student has not out. During our interviews, drivers explained provided systematic data on turnover among how their standard of living had changed over new drivers, many respondents described the past eight months and its impact on their turnover as “huge” or “very high,” which families. We also believe that these dramatic they attributed to low starting wages, limited changes in job conditions have broader social benefits and inadequate hours. There is “no implications that warrant consideration. loyalty with such a low starting wage,” one driver pointedly observed. Several drivers noted that while driver turnover had also Personal Cost occurred under CPSD management, it had not been nearly as frequent. Some suggested In the graph shown below, we offer a that because more students lack familiarity quantitative estimate of the cost to former with their drivers, service has become less CPSD drivers now employed by First Student consistent and less secure. These observations based on reduced sick, vacation and personal by current First Student drivers reflect the leave, along with the loss of employer-paid findings of our previous studies that employee premiums for health care. We used $14.47 as turnover tends to increase in districts that an hourly wage for our estimate. $14.47 was contract support services. Indeed, several the hourly wage paid workers with at least drivers told us that they are poised to leave seven years of service under the last collective employment with First Student once better bargaining agreement between CPSD and opportunities become available elsewhere. OSEA, and seven years is the median length The consistent reports of new hire turnover of service among the drivers we interviewed. and discontent among former school district We used six hours as an average work day for employees now working for First Student most bus drivers. suggest that the company’s ability “to attract and retain qualified drivers as long To be sure, the impact of contracting out has as possible,” which the school district had outlined as a “essential” Summary of Employee’s Financial Loss of Paid Leave and Health Benefits objective in its RFP, may Annual 8 remain elusive. Dollar Value Description CPSD Benefit to Employee Implications Health Insurance Premiums up to $1,114 $13,368 per month paid by CPSD As outlined in greater detail in the next section Paid Sick Leave 10 days sick leave $868 of this study, we estimate Paid Holiday Leave 9 paid holidays per year $781 that CPSD has realized a total of $726,000 Personal Days 2 paid personal days $174 in annual savings exclusively through Total Annual Loss Health care and 21 days $15,191 to Employees of leave reduced employee 14 varied from driver to driver. There are drivers of having your own busing is you have loyalty that have obtained health insurance for and longevity. Noting the painful choices themselves and their families through their facing a district with a $5 million budget spouses. Some were able to retire and others shortfall, Gravon acknowledged: “These are report they will do so soon. Nonetheless, we not good things to do in terms of people.” 9 found clear evidence that for most drivers, the Our interviews confirm the superintendent’s loss of school district employment has led to concerns and reflect the findings of our demonstrable deterioration in their personal previous studies showing that school support and familial well-being. employees tend to suffer substantial economic losses and a diminished quality of life One employee who had found employment when their jobs shift from public to private elsewhere estimated suffering a $5 hourly loss operation. in total compensation. Another observed that [some fellow employees] “had to scramble Social Costs to find health care coverage” after the district contracted transportation services. Several The contracting of bus drivers’ jobs in respondents reported foregoing doctor visits CPSD also occurs in a broader social and due to their no longer having affordable health insurance. Workers repeatedly lamented their community context. The CPSD is in Jackson loss of benefits and described low morale County, located in southern Oregon near the among former CPSD drivers now working California border. Virtually all of the drivers for First Student. As one worker concluded, “I employed when transportation was under don’t see a future in terms of retirement and the aegis of CPSD lived in Jackson County benefits.” This worker also saw “no prospect communities, as do most of the drivers we of raises” and asserted that he “could use an interviewed who currently work for First incentive to stay.” And based on the increased Student. Once a regional economy based on turnover they have witnessed among newer the timber industry, Jackson County now drivers, many of our respondents suggested that relies on a more diverse set of occupations CPSD’s ability to ”attract and retain qualified to provide employment, with the highest employees” under private management will percentages of workers employed in education remain an ongoing challenge. and health services (17 percent), retail (16 percent), leisure and hospitality industries (12 Although they did not universally praise percent) and local government (10 percent). CPSD management or the union that once The county consistently struggles to build an represented them, most of the workers we economy that will provide workers, families, interviewed regarded the school district as a and communities with a decent standard of “good employer” and appreciated the role that living, a struggle aggravated by the expiration collective bargaining played in shaping their of legislation providing federal payments for working lives. Indeed, CPSD officials openly reduced timber logging due to environmental acknowledged the potential impact that regulation. Indeed, encountering budget contracting might have on workers’ standard pressures similar to those faced by the CPSD, of living, their morale and the quality of Jackson County commissioners voted in service for the school district. As CPSD 2007 to outsource operation of the county’s superintendent Randy Gravon observed in a libraries to a private company, a move that March 9, 2011, interview, “one of the strengths captured national attention. 10 15 Jackson County’s unemployment rate (10.4 As CPSD board members and the percent in June 2012) and its percentage superintendent repeatedly observed during of residents below the poverty level (14 the RFP process, they acted under budgetary percent according to 2010 census figures) duress and regretted the potential impact are consistently above statewide averages, of their decision on incumbent employees. and according to an April 2011 Oregon Nonetheless, there is a broader social cost Community Foundation study, 19.2 percent that the district has perhaps unwittingly of Jackson County’s residents lack health incurred. As economist and public insurance. Moreover, according to the intellectual Robert Kuttner has observed, “Living Wage Calculator” developed by Amy there has been a pronounced social trend Glasmeier of the Massachusetts Institute of away from “regular jobs with reliable wages, Technology, two of the county’s top three benefits and terms of employment” toward industries (retail and leisure/hospitality) a “casualization” of labor (e.g., temporary employment, contracted employment) pay less than the income required to meet devoid of the understandings and protections basic living expenses (e.g., food, child care, that previously allowed jobs to provide a medical care, transportation and housing). measure of security and stability for workers. This brief economic snapshot of Jackson We repeat an observation from Harvard County underscores the vital importance of professor Christopher Jencks referenced in our retaining jobs that pay wages and provide 2008 study that addresses the phenomenon benefits sufficient to sustain a basic level of described by Kuttner. Noting that private personal and family security. Although various and public entities continually face choices constituencies debate appropriate strategies between “low road” and “high road” for attracting and retaining family-wage or approaches to economic development, Jencks family-sustaining jobs, there is a broad social reflected: “Which road a firm takes depends consensus on their importance to local and on the social context in which managers regional economies, and Jackson County’s operate. They are more likely to take the high commissioners have actively aided efforts to road if they are connected to institutions, 11 promote them. public and private, that promote such alternatives.” 12 It is this context that suggests the broader social implications of the CPSD's decision to Viewed in this context, CPSD’s decision to contract out its transportation services. Under contract out transportation services raises school district operation and a collective important questions about whether it is bargaining agreement, CPSD bus drivers had sound public policy to reinforce low-road jobs that provided them with living wages approaches by downgrading good jobs in a and family-sustaining benefits. These jobs struggling regional economy eager to attract have now been transformed under private and retain them. Based on our interviews with management, lacking the elements (health CPSD bus drivers, we believe these questions insurance, retirement benefits, leave time and deserve careful consideration in the cost- prospects for wage increases) that rewarded benefit analysis that school districts conduct work, encouraged loyalty and longevity, and when they contemplate contracting out created close ties between bus drivers and the support services. community. As one driver described it, “we had a reason to do a good job.” 16 Assessing Privatization School Busing in Central Point

Background and Context the savings would not be derived solely from lower wages and 14 wice over the past decade, benefits for local employees. University of Oregon faculty members associated with the UO The current report focuses on Labor Education and Research the first instance of privatization Center (LERC) have evaluated the to take place under the terms of T cost-effectiveness of contracting the new law: the decision of the out school support services. 13 In Central Point School District those earlier reports, LERC faculty (CPSD) to eliminate its in-house reviewed decisions to privatize the school bus service and contract provision of transportation, food with First Student Inc. to provide and custodial services to Oregon this service. Given the reporting school districts. In each of the requirements mandated by the cases we examined, local district new statute, the CPSD case offers officials promised that contracting- a unique opportunity to examine out would save districts many whether school bus privatization  The current report hundreds of thousands of dollars. can actually generate significant focuses on Central Point Our detailed analysis of contract savings from sources other than School District's decision wage and benefit cuts. to contract out student terms and performance showed transportation to First that the promised level of savings Student Inc., the first was never realized, and in some The discussion that follows instance of privatization cases, the costs of contracting out examines the CPSD decision in to take place under the exceeded the costs of keeping the detail, starting with the procedural terms of a 2009 Oregon services in-house. question of whether the district’s law that requires a cost-benefit analysis complies with rigourous cost-benefit the new state requirements, and analysis before a school In 2009, based partly on the district can contract out evidence uncovered in those then focusing on the substantive any support service. The earlier reports, the Oregon questions of whether CPSD is Central Point case offers Legislature adopted ORS likely to save money through this a unique opportunity 279B.030, which for the first time decision — and, if so, whether to examine whether required that before contracting such savings are based on wage school bus privatization out any support service, school and benefit cutbacks as opposed can actually generate districts must conduct a rigorous to other sources of innovation or significant savings from efficiency. sources other than wage cost-benefit analysis proving the and benefit cuts. district would indeed save money through privatization and that Our analysis suggests that 17 the CPSD has not met the procedural contract, since — having already sold off their requirements for a thorough and transparent fleet of buses — they have little choice but to cost-benefit analysis as prescribed by law. 15 contract with one or another of the private More importantly, we find that a careful service providers. After spending five weeks examination of the record shows that the reviewing the report, district officials did not district’s contract with First Student clearly identify a single fact they deemed incorrect fails to meet the minimum standards required — although they disagreed with the report’s under the new statute. Depending on the policy conclusions. 16 assumptions one uses, CPSD’s privatization of school busing may have resulted in a modest Our analysis suggests that this weakened net gain or net loss for the district. However, negotiating position, along with more lax there is no question that — to the extent oversight over the private operation of school privatization saved the District money — buses, may result in significantly increased these savings were entirely derived from wage costs in the years following an initial contract. and benefit cuts for bus drivers. To be most useful to school boards and state legislators, analyses of the costs and benefits of potential bus privatization must take into Prior to publication, a draft copy of this account these long-term costs. Our review report was provided to CPSD’s financial of the Lake Oswego and Rainier districts’ services manager. The analysis below draws experiences aims at identifying such longer- on multiple data sources and includes term costs so they may be properly accounted. detailed financial analyses of the District’s transportation operation and its contract with Misleading Presentation First Student. The entire report was therefore to the School Board provided to CPSD with the request that District officials identify any facts in the report In June 2011, the Central Point School Board that they believed to be inaccurate. was presented with a cost-benefit analysis designed to help board members decide In addition to the Central Point analysis, whether to retain student transportation this report also provides a follow-up analysis as an in-house function or to privatize of earlier decisions to privatize school the service. To guide the board’s thinking, transportation services in the Rainier and Lake district staff prepared a Board Brief that Oswego school districts. When school districts outlined four options: continue the district’s decide to contract out transportation services, current practice, outsource transportation the cost-benefit analysis is usually based on to First Student, and two options to keep costs incurred during the first contract only. transportation in-house while purchasing However, districts may face more onerous upgraded bus fleets similar to that proposed costs in subsequent years following the first by First Student. Unfortunately, the numbers contract. For instance, districts often benefit presented in this brief did not provide an from a one-time infusion of cash when accurate picture of the costs and benefits of they sell their bus fleets to a contractor; this contracting out. income may be included as a benefit in the initial contract but will not be repeated in CPSD Business Manager Vicki Robinson future years. In addition, school districts told board members that contracting-out are in a weaker bargaining position when would save $380,000 in new bus purchase they prepare to negotiate a second five-year costs. 17 CPSD Human Resource Director Mike 18 Exhibit I: Central Point School District Board Brief (Page 1 of 3)

Board Brief Transportation System: Service Deliver Model Selection

The Board is faced with many difficult issues and decisions. Quality decision-making requires the consideration of several pieces of information. Listed below are five questions, when applied to the issues related to student transportation in Central Point School District, may prove valuable.

Note: Timeliness of decision-making is critical, if a change in delivery model is selected.

1. What is or are the specific issue(s) or concern(s) related to the current model? 2. What are the potential answers or solutions to be considered? 3. Will the potential solutions meet the immediate needs and respond to the stated concerns? 4. Are the potential solutions sustainable (Infrastructure, costs, etc.) 5. Of the potential solutions, which one BEST meets the needs of the District and its students within the dynamics identified above.

Listed below are four scenarios related to transportation service delivery models. As noted before, no magic or ultimate advantage is attributable to any single model given that each will have both strengths and weaknesses.

Scenario #1 Scenario #2 Scenario #3 Scenario #4 Continue to operate Continue to operate Continue to operate Outsource entire system in its current system in its current system in its current Transportation operation configuration format but with a long-term format but with a long-term based on RFP commitment to bus commitment to a reduced requirements replacement bus replacement Approved Budget : Estimated Costs: Estimated Costs: Estimated Costs: $2,386,470 Current Budget Plus annual Current Budget PLUS annual Contractor’s Estimated total cost payment of payment of $490,359**1st costs:$1,734,770 with $375,303 **1st year payment year payment on 5 year plan $146,221 not related to on 10 year plan salaries. Net Expenses: Net Expenses: Net Expenses: Net Expenses: 95.3% “Approved costs” 95.3% “Approved costs” 95.3% “Approved costs” 95.3% “Approved costs” @70% @70% @70% @70% $659,039 $$906,620 $1,019,211 $1,185,369

Strengths Strengths Strengths Strengths Familiarity Fleet is updated significantly Fleet is updated with buses Fleet updated next year and with buses matching current matching the RFP proposal remains updated without Requires no additional action capacities and configuration submitted additional Board action beyond current budget adoption Links state support more District retains employees Provides efficiency and closely to expenditure and total control of safety features not Retains staff and provides operations. implemented in current least amount of employee District retains employees operations at no additional disruption and total control of Minimizes budget spikes due cost, e.g. routing technology, operations. to unplanned vehicle Maintains total control of cameras, additional training purchases operations Minimizes budget spikes due and efficiencies of scale to unplanned vehicle Reduced vehicle District retains the option to Provides ongoing built-in purchases maintenance costs change service delivery service assessments and model in the future Reduced vehicle Better, safer buses with a comparative analysis of maintenance costs smaller carbon footprint and operational efficiency OTHERS? fewer emissions Better, safer buses with a Potential one-time cash smaller carbon footprint and District retains the option to inflow with unlimited uses fewer emissions change service delivery from fleet sale model in the future.

Meunier similarly announced the district the public and were no doubt influential in would enjoy a net savings of $360,000 by the decision to privatize transportation, but contracting with First Student. 18 These figures they were highly misleading. The savings were repeated to the press and members of projected by Robinson and Meunier were 19 Exhibit I: Central Point School District Board Brief (Page 2 of 3)

District retains the option to Maintains total control of Avoids budget spikes due to change service delivery operations unplanned vehicle purchases model in the future. OTHERS? Provides cash flow from Maintains total control of facility lease (limited use) operations Results in reduced liability OTHERS? and PD insurance expenses District retains the option to change service delivery model in the future. Removes employee issues, e.g., recruitment, hiring, testing, retention, PERS, etc. OTHERS? Weakness Weakness Weakness Weakness Susceptibility to budget Requires additional District Requires additional District Preparation costs of spikes for unplanned vehicle funds $112,591 after state funds $402,975 after state Bids/RFPs purchases and/or major support support Does not provide bus repair Requires long-term Provides replacement buses replacement with similar Sustainability of current commitments with a different configuration “new” units model and reduced capacity, Potential costs associated Employee anxiety and possibly requiring additional Ever increasing vehicle with bid/RFP development disruption over outsourcing units maintenance costs for aging operations Possible employee conflicts buses and availability of State bus depreciation over new buses Requires long-term parts resulting in an support is not closely commitments estimated 5% additional Potential negative associated in time with annual expense perceptions related to expenditures Possible challenges and making bus purchases while legal costs Buses with higher emissions Requires long-term laying off staff requiring significant retrofit or commitments Establishes some limits on replacement Possible layoffs resulting local control based on Potential costs associated form increased vehicle contract Older buses do not include with bid/RFP development reliability additional safety components Limits District’s ability to Possible employee conflicts now required Implications of future return to self-op, possibly over new buses changes in PERS irrevocable commitment If future sale is considered, requirements Potential negative the value of the fleet Limited use of existing funds perceptions related to decreases each year. In five Does not address any issues derived from bus making bus purchases while years the fleet is estimated to or questions related to depreciation laying off staff be worth 40% of it's current current service, efficiency, Requires ongoing service value operation and culture of Possible layoffs resulting review schedules and transportation department. from increased vehicle Implications of future procedures reliability changes in PERS Unknown impact of future Unknown impact of future requirements changes in state support Implications of future changes in state support changes in PERS Does not address any issues OTHERS? requirements or questions related to OTHERS? current service, efficiency, Does not address any issues operation and culture of or questions related to transportation department. current service, efficiency, operation and culture of Unknown impact of future transportation department. changes in state support Unknown impact of future OTHERS? changes in state support OTHERS?

based on a comparison between the cost of by the company. 19 Unfortunately, however, contracting with First Student versus keeping this calculation contains several significant bus service in-house, while committing to problems that result in overestimating the purchase a fleet similar to that proposed benefits of privatization. 20 Exhibit I: Central Point School District Board Brief (Page 3 of 3)

Scenario #1 Scenario #2 Total Transportation Total Transportation Expenditure $2,386,470 Expenditure $2,761,773 Estimated Approved Costs $2,274,306 Estimated Approved Costs $2,649,609 Imbursement rate @ 70% $1,592,014 Imbursement rate @ 70% $1,854,726 $682,292 Non Approved Costs @ 4.7% $112,164 Non-approved costs @ 4.7% $112,164

Net Dist Expense $906,620 Net Dist Expense $1,019,211

Scenario #3 Scenario #4

Total Transportation Contractor Expenditure $2,876,829 Estimate $1,734,770 Estimated Approved Costs $2,576,606 Imbursement rate @ 70% $1,803,624 Estimated Approved Costs $1,653,236 Imbursement rate @ 70% $1,157,265 Non-approved costs @ 4.7% $112,164 Non-approved costs @ 4.7% $81,534

Net Dist Expense $1,185,369 Net Dist Expense $659,039

June 11, 2011

First, the comparison assumes that, even if the to a dramatic increase in the rate of new bus district kept transportation in-house, it would purchases. But there is no clear rationale to adopt the same age limits private industry support this assumption. Oregon school buses sets on buses, and thereby would commit are required to undergo extensive and regular 21 inspection to guarantee roadworthiness and benefits of privatization. safety standards. As long as buses meet these standards, they can remain in operation Third, the costs for contracting out were no matter how old they are; Central Point significantly underestimated because they and many other districts regularly use buses included only those costs that would be that may be 15-20 years old, but continue charged by the contractor and not those to operate in a safe and efficient manner. the district would retain in-house. Most Because private companies use buses for importantly, under the First Student commercial purposes during non-school contract, the District retains responsibility hours, and because they want to be able to sell for purchasing fuel, which was budgeted at buses at a higher price in the event a district $300,000 for 2011-12. This cost was included cancels its contract, they insist on maximum in the costs for in-house transportation, but age cutoffs. Thus, CPSD's contract with First was excluded in the scenario for contracting Student mandates age cutoffs of 12 years out. This one omission distorted the cost- for transit and conventional diesel buses, 10 benefit analysis by $300,000. Similar years for conventional gasoline buses and 8 omissions were made for administrative years for small buses or vans. 20 But there is no and other costs the district continues to bear reason for the district to adopt these standards even after contracting with First Student. if it maintains student transportation as an District officials may have been tempted to in-house service. By falsely assuming the believe, once the district contracted with First district would adopt the age standards of Student, district staff would no longer have private industry — even if it kept its own fleet to worry about transportation. However, — district staff inflated the cost of keeping this assumption is mistaken. As outlined in transportation in-house by $375,000, thereby the RFP, even under the contract with First providing board members with a highly Student, the district remains responsible skewed sense of the tradeoffs entailed in for a significant range of transportation privatization. 21 management responsibilities, including identifying all students eligible for regular Secondly, the costs of in-house operation in and Special Education bus service; reviewing the Board Brief were overstated by using as a regular reports and conducting regular baseline the district’s budgeted transportation meetings to monitor and ensure contractor costs for the 2011-12 school year. As is the performance; overseeing route planning, case in many public agencies, actual annual weather contingencies, and student behavior expenses for most school districts are or bus accident problems; and providing generally less than what is budgeted at the maintenance and insurance for the bus start of the year. In 2010-11 for instance, CPSD maintenance and repair facility. 23 The costs budgeted $13.3 million for school support involved in carrying out these duties are services, but the district actually spent only included in the estimate of in-house costs, but $12.2 million — 92 percent of the budgeted omitted from the cost of operating with First amount. 22 If the same pattern held true for Student. student transportation, the real cost of in- house transportation in 2011-12 would be Finally, the Board Brief ignores the fact that, just under $2.2 million — $195,000 below if transportation were kept in-house and the the budgeted amount used in the Board Brief. fleet remained district property, the district Again, overestimating the cost of in-house would retain a valuable asset at the end of the service served to overstate the comparative contract — which it would not have if it sold

22 off the fleet. According to CPSD consultant Unfortunately, to the extent board members John Fairchild, if the district had kept its fleet, relied on the Brief in evaluating the financial by 2016 those buses would have still been benefits of contracting out, they were worth $226,000. 24 In addition, if the district significantly misled. continued its past practice of purchasing two new buses per year (in order to replace aging As shown in the table below, these omissions vehicles), those new buses would likely be fundamentally skewed the board’s ability worth over $650,000 at the end of the five- to evaluate the proposal to contract out year period. 25 Thus, combining the preexisting transportation. In their discussion of the fleet with newly purchased buses if the district options before the board, district staff focused had continued in-house transportation, it on a comparison between “Scenario #2” — in would have possessed a fleet worth over which the district would continue to operate $875,000 at the end of the five-year contract transportation as an in-house service, but period. The loss of this asset must be included would adopt “industry” cutoffs for maximum in any assessment of privatization; however, allowable bus ages, and therefore would it was not included in the analysis district undertake a greatly accelerated schedule management provided to the Central Point of bus purchases — and “Scenario #4,” in School Board. 26 which the district would contract out the entire transportation function. It was this Board members reading the Brief must comparison that both the district’s business have accepted it as a good-faith accounting. manager and human resources director

Table I: Central Point School District: June 2011 Board Brief and Corrections

Annual Scenario #2 Scenario #4 Operate system Outsource Projected in-house but with transportation Savings, “industry” age limits based on RFP #4 vs. #2

Gross expenses $2,761,773 $1,734,770 $1,027,003

Expenses net state reimbursement $1,019,211 $659,039 $360,172

Undo assumption that district must -$375,303 increase schedule of bus purchases to meet “industry” age cutoffs

Use actual, not budgeted, costs -$195,000

Include fuel costs $300,000

Value of fleet as remaining asset after $875,000 five years

Adjusted gross expenses $2,191,470 $2,209,770 -$18,300

Adjusted expenses, net state $808,745 $839,491 -$30,746 reimbursement

23 referred to in declaring that contracting Brief acknowledged the costs of increased bus out would save the district approximately purchases that would be required by adopting $375,000 per year. If we adjust these figures First Student’s fleet standards, it made no for the omissions detailed above, we see a very pretense that the wages and benefits of bus different calculus. If we revise the Board Brief’s drivers would be protected. The analysis estimate for in-house costs — by undoing presented to state authorities, by contrast, the assumption of accelerated bus purchases assumes drivers’ compensation will be held and projecting costs based on actual rather harmless; but it omits entirely the cost of than budgeted expenses — the gross cost increased bus purchases that would result of maintaining in-house transportation from privatization. Thus, while these analyses is reduced to $2.19 million, or just over differ, each makes its math work by omitting $800,000 after state reimbursements. By one of the two major cost categories. What comparison, if we adjust the contracting out Mr. Fairchild and district staff were apparently option by adding in fuel costs and accounting unable to do was to show the district could for the lost value of the bus fleet as a district both pay for the type of fleet demanded by asset, the cost or contracting with First Student First Student as well as maintain wage and increases to $2.2 million, or almost $840,000 benefit standards — and still save money. after state reimbursements. 27 Taken together, these corrections suggest that what was Problems with the Official declared to be a significant net gain for the district turns out to be a slight net loss. Cost-Benefit Analysis Provided by CPSD for the State of Oregon Based on this Board Brief, the Central Point According to ORS 279B.033, prior to making School Board voted to terminate its in-house a decision to contract out a support service, bus service, sell off the district’s fleet and hire school districts are required to perform a First Student to transport students. Tellingly, detailed cost-benefit analysis that includes however, district managers did not rely on the estimates of costs for employee wages and Board Brief to prove the deal with First Student benefits; equipment, supplies and other satisfied state requirements for proving cost savings from functions other than labor materials; planning and training; and 28 costs. Instead, they asked John Fairchild, the miscellaneous other costs. same consultant who prepared the analysis for the Board Brief, to prepare a separate However, CPSD never provided this level cost-benefit analysis designed specifically of detail. Instead, the district offered an to satisfy state requirements. This analysis analysis that aimed to establish the legality offered a completely different set of numbers of privatization without providing the and projected more modest savings; yet these information required by law. 29 Indeed, numbers were equally flawed in their own the district’s cost-benefit analysis does not way. even attempt to document the actual costs entailed in contracting out. Rather, the CPSD Interestingly, the Board Brief and the Fairchild document starts by comparing the district’s analysis provided to state authorities are, in budget for in-house transportation for the one way, companion pieces. The two largest 2011-12 school year with imaginary costs that cost categories in school transportation are might be incurred by First Student if they labor and bus purchases. While the Board operated in a particularly high-road manner. 24 The district hypothesized that First Student of correspondence, in January 2011, Wulf would offer the same wage and benefits emailed Robinson that “we have a better package currently received by district approach to the cost analysis — finally!” employees — while acknowledging there From the record of email exchanges, it appears was no reason to believe First Student would likely the cost-benefit methodology employed actually maintain employees’ wage and by Mr. Fairchild — which avoids disclosing benefit standards. 30 But the district reasoned if wages, benefits and other cost categories it could show privatization would save money, required by statute — may have originated in even if labor costs were held equal, it would the offices of First Student itself. have satisfied the legal requirement of proving savings were not based solely on wage and While there is no clear evidence of illegality, benefit cuts. the district’s seeming collusion with First Student to evade reporting requirements, and There is reason to be concerned about the the clear conflict of interest in hiring a First professionalism and impartiality of this Student consultant to analyze the company’s analysis. The document was not produced contract proposal, calls into question both the by CPSD officials themselves, but by John professionalism and the impartiality of the Fairchild, a private consultant. By his own analyses presented to CPSD board members admission, Fairchild worked regularly through and to the public. the period 2001-08 for Laidlaw, a major bus transportation company which became part of Ultimately, John Fairchild crafted an First Student in 2008. Since that time, he has “analysis” that contained virtually none of worked as a paid consultant for First Student, the financial detail mandated by the new including specifically advising the company statute, but purported nevertheless to prove on how to respond to the cost-benefit analysis the contract would comply with state law. 31 required in ORS 279B.033. Fairchild is a Fairchild projected it would cost $2,386,740 consultant in an industry that counts First for the district to provide transportation Student as its single largest player. It is logical services in-house in 2011-12, compared with to anticipate he might continue to perform a total of $2,280,420 to have the same service work for the company in the future and thus provided by First Student. Thus, Fairchild have a self-interest in not jeopardizing this concluded contracting out would save the relationship. District $106,000 per year, even assuming employee compensation was held constant. 33 In the year leading up to privatization, CPSD Business Manager Vicki Robinson Correcting the Fairchild/CPSD corresponded extensively with First Student, Model of Cost-Benefit Analysis asking the company to provide the detailed cost breakdown required by law. The company In what follows, we revisit Fairchild’s cost- repeatedly refused to provide such details, benefit analysis using his same methodology and First Student representative Tim Wulf but correcting for some costs that were complained to Robinson “the legislation omitted from his calculations. Like Fairchild, was poorly written which is throwing a we assume First Student will offer the same curve ball at everyone,” while assuring her wages and benefits as employees received the law was “only a speedbump” on the from CPSD and then determine whether, path to privatization. 32 After several months under those conditions, the district would 25 Exhibit II: Fairchild Cost Analysis for ORS 279B.033 (Page 1 of 3)

save money by contracting out bus service. zero cost for bus replacement if the district In making this calculation, however, there contracted with First Student. This assumption are five significant corrections we make to is simply not plausible. A contractor, just like Mr. Fairchild’s assumptions regarding First a school district, must replace buses when Student’s non-labor costs. they get old. Contractors are not charities and the cost of replacing buses must inevitably be First, and most importantly, we provide a included in their charge. complete accounting of bus purchase costs. Fairchild’s analysis accounts for the cost of In fact, we find the costs of bus replacement purchasing new buses for the district’s in- are significantly greater with First Student house service, but not for the contractor. If transportation service were kept in-house, than they would have been had the district Fairchild assumed the district would pay maintained transportation as an in-house $139,500 in 2011-12 for the purchase of service. This is because private contractors new buses,34 but he assumes there would be such as First Student insist on replacing buses 26 Exhibit II: Fairchild Cost Analysis for ORS 279B.033 (Page 2 of 3)

much more frequently than school districts corporate transportation, and other group normally require. Contractors have strong outings.” 35 In addition, since contracts last incentives to insist on newer buses. The buses a maximum of five years, contractors may are the private property of the contractor (even want to ensure they’re not left owning a fleet if fully paid for by the district), who is free to of older, low-value buses when a contract is use them for transporting gamblers to casinos, terminated. fans to sporting events or any other type of customer during non-school hours. In CPSD, As explained above, there is no age limit First Student has already begun advertising the for district-owned buses and many remain fleet’s availability for “weddings, field trips, roadworthy and in operation for 20 years 27 Exhibit II: Fairchild Cost Analysis for ORS 279B.033 (Page 3 of 3)

or more. But private operators insist on Because the impact of industry age limits may replacing all buses on a much stricter not be fully realized in one five-year contract, timetable, regardless of the bus’ condition we compared in-house and contracted-out or roadworthiness. In CPSD, the decision to bus replacement costs over a 15-year period. contract out included adopting strict “industry If CPSD retained transportation in-house, standard” age limits, as identified in the the district could have continued purchasing district’s RFP: 37 two buses per year, plus one additional bus during that 15-year period in order to comply • Conventional gas buses: 10 years with the Oregon regulations mandating the replacement of diesel buses with lower- • Conventional diesel buses: 12 years emission engines by the year 2025. 38 Over this 15-year period, the district would need to • District approved heavy-duty transit purchase a total of 31 buses, at an annual cost buses: 15 years of $153,089 in 2012 dollars. 39 • All other transit buses: 12 years. By contrast, First Student’s bid indicates that • Conventional small bus or van: eight it will purchase 25 buses in the first year of years the contract, to complement the 16 buses it retained from the district’s old fleet. In Imposition of these age limits leads to a addition, First Student pledged to purchase dramatic increase in the number of buses the nine new buses during the life of the five- district must purchase. Historically, CPSD year contract. 40 Finally, of the 41 used buses replaced its fleet of 35 route buses at a rate of that will be servicing the district in 2011-12 approximately two buses per year. The average (combining holdovers from the CPSD fleet age of CPSD buses at the time of contracting with First Student additions), 10 will reach with First Student was 14 years, with 24 buses their maximum allowable age and will need more than 12 years old. Despite their age, to be replaced within the life of the five-year the district’s route buses passed annual state contract. First Student has pledged to replace inspection and were considered operationally all of these with new vehicles. 41 Where the sound. district would have purchased 10 new buses 28 Exhibit III: CPSD In-House Fleet Replacement Model current size, and each Central Point School District, Bus Purchases 2001-10 bus is replaced with a new vehicle when it Year Purchased S/R Capacity Type Fuel reaches its maximum allowable age — as 2001 2001 Spare 84 Transit D is mandated by the First Student contract 1987 2001 R 71 Conventional D — we project that 1987 2001 R 71 Conventional D where the district would buy 31 new 1988 2001 R 71 Conventional D buses over the next fifteen years, 1988 2001 R 71 Conventional D First Student will 1988 2001 OOS 71 Conventional D purchase 87 new buses. The cost of 1989 2001 R 71 Conventional D this greatly increased schedule of new 2002 2001 R 18 Handi- D bus purchases totals 2002 2002 R 84 Transit D $371,887 per year in 2012 dollars, or 2003 2003 R 24 Cutaway D more than twice the cost of maintaining 2004 2003 R 22 Cutaway D an in-house fleet. 42 2005 2004 R 83 Transit D Thus, the first step we take in adjusting 1999 2004 Spare 14 Cutaway G the Fairchild analysis is to account for this 2006 2005 R 84 Transit D cost. 2006 2005 R 34 SPED D Secondly, it appears 2007 2006 R 71 Transit D First Student charges 2000 2006 R 14 Cutaway G the full cost of bus purchases over a 2010 2009 R 84 Transit D five-year period. 43 By contrast, Oregon Based on fleet inventory from: ODE Form 581-2256, Aug. 28, 2010; ODE Form 581-3171, June 30, 2010 law mandates the district-owned buses be depreciated over between 2011-16, First Student will purchase a 10-year period. 25 used buses and 19 new buses, for a total of Faster depreciation costs both the district 44. Again, to capture the impact of industry and the State of Oregon money. Moving up age limits over time, we calculated First the schedule of payments means foregoing Students’ bus replacement needs not just for interest earnings on those funds, or paying the first five-year contract, but over the coming interest to borrow money that would 15 years. Assuming the fleet maintains its otherwise still be available. All told, assuming 29 modest interest rates, the cost of paying 2.3 percent in the coming decade. 49 However, for First Student’s accelerated depreciation standard inflation rates overstate the level of schedule — separate from the increased cost increases faced by First Student. By far the schedule of bus purchases itself — amounts to biggest driver of inflation in recent years has $42,017 per year. 44 been the price of oil. In 2010-11, for instance, the overall national inflation rate was 3.2 Thirdly, Fairchild’s estimate also exaggerates percent, but the price of gasoline during this the savings from privatization by assuming year rose 26.4 percent. When energy costs contracting with First Student would save are omitted, the rate of inflation for the the district 10 percent on material costs. This past decade falls from 2.4 percent to 2.05 projection entails two assumptions: first, percent.50 Yet under the terms of the contract, First Student’s size will enable it to purchase the CPSD is responsible for purchasing bus materials more cheaply; and second, the fuel directly and these costs are not included company will pass these cost savings on to in First Student’s per-mile rates. 51 Thus, the the district rather than absorbing them as inflation rate associated with First Student’s profit. Neither Fairchild, First Student nor operation should be based on the adjusted CPSD has ever provided evidence supporting inflation rate that excludes energy costs. these assumptions. In deposition, Fairchild Indeed, this measure — CPI excluding energy conceded he had no data to support the — is used in other school transportation assumption. 45 In May 2012, CPSD Financial contracts. First Student’s own contract with Services Manager Spencer Davenport the Lake Oswego School District, for instance, confirmed he too was unaware of any provides for annual rate increases based on supporting evidence nor did he possess the CPI excluding energy costs. 52 In CPSD, any evidence that First Student had, in fact, however, the company has negotiated an produced such savings in the months since it annual price increase based on an inflation took over CPSD transportation. 46 rate that includes the cost of fuel and thus results in price increases in non-fuel costs The budget line item for CPSD material costs above those the district would face if it kept for 2011-12 (excluding fuel) totals $302,700. transportation in-house. Fairchild’s assumption artificially reduced the estimate for material costs under the First Looking again at the coming 15 years, we Student contract by 10 percent, or $30,270. estimate real inflation in the costs associated Adding this amount back in helps produce with student transportation (excluding a more realistic assessment of the costs of fuel) will average 1.95 percent. 53 Thus, First contracting out. Student’s prices will go up slightly more than one-half of one percentage point faster Fourth, First Student’s contract includes than the price increases the district would mandatory annual price increases of 2.5 otherwise face. This additional cost amounts percent per year, significantly higher than the to an annual total of $17,195 per year in 2012 rate of increase that the district would likely dollars. 54 face if it kept transportation in-house. At first glance, First Student’s charge may seem Fifth and finally, the decision to contract- reasonable: the rate of inflation has averaged out entails the district forfeiting the asset 2.4 percent over the past decade and the represented by its bus fleet. Although First Federal Reserve Bank projects it will average Student paid the district to purchase the fleet, 30 the district is repaying the entire cost of that Thus, if we follow the methodology that purchase price over the life of its five-year CPSD proposed to state authorities — contract. 55 In financial terms, the purchase assuming employee compensation is held and pay-back cancel each other out. But by harmless — it is clear privatization fails the giving up its fleet, the district suffers a net first test set by Oregon law: it would result in a loss equal to the amount its fleet would be large net loss to the taxpayers. worth at the end of the five-year contract. As detailed previously, we estimate this value as Conducting a Fact-Based approximately $875,000. Cost-Benefit Analysis in Keeping with Oregon Statute When Fairchild’s analysis is corrected in just Having followed the district’s novel these five simple ways — accounting for methodology, and discovering that First Student’s bus purchases and the loss privatization would result in a net economic of the district’s fleet, including the cost of loss if labor costs were held constant, we accelerated depreciation and higher-than- inflation rate increases and eliminating Table II: Corrections to Fairchild Cost-Benefit Analysis the unfounded Annual Five Year assumption regarding savings on material Privatization cost savings $106,000 $530,000 costs — it becomes projected by Fairchild analysis clear that, if employee compensation Corrections standards were First Student bus purchase costs -$371,887 -$1,859,435 maintained, the choice to contract-out Material costs — no basis -$30,270 -$151,350 transportation would for assumed 10 percent savings result in a large net loss Accelerated (five-year) deprecia- 56 -$42,018 -$210,090 to the public. Even tion cost to State of Oregon if the only adjustment Contractor 2.5 percent annual made to the Fairchild -$17,195 -$85,975 numbers was to price increase vs. 1.95 percent CPI include the costs of Forfeiture of bus fleet -$175,000 -$875,000 First Student’s bus purchases, this by itself Net result of privatization, -$530,370 -$2,651,850 would show that rather holding labor costs constant than saving $106,000, the impact of contracting out would be a loss of $265,000. now offer a cost-benefit analysis that more When we include all five of the above the faithfully follows the dictates of Oregon law corrections, we see that, if labor costs were — one that estimates separately the costs held constant, privatization of CPSD's student for each major category of transportation transportation service would result in a net expenses, both in-house and contracted out, loss of just over $530,000 per year, or $2.6 in order to determine whether privatization million over the life of the five-year contract. produces savings, and whether such savings 31 derive from wage and benefit cuts. by First Student and CPSD representatives in court proceedings related to the contract First, for the district’s in-house costs, we begin and evidence gathered in interviews with with the school district’s 2011-12 approved First Student drivers. Based on these sources, budget, just as Mr. Fairchild did. 57 But we we are able to derive independent estimates incorporate two important adjustments in for the most important cost categories, order to make the numbers more accurate. including labor and bus purchases. Where we lack independent data for certain smaller cost categories, we follow Mr. Fairchild and First, we place costs in the appropriate use the district’s 2011-12 budgeted costs as categories so we can clearly distinguish approximations for First Student’s likely costs. between labor and non-labor costs. Mr. Fairchild’s analysis inexplicably categorizes As described above, First Student’s insistence $400,000 of bus drivers’ and mechanics’ on strict age limits for its bus fleets results in health benefits as “miscellaneous costs.” 58 dramatically increased costs for bus purchases. This doesn’t affect the ultimate comparison We estimate that during the first five-year between the overall costs of operating in- contract, the choice to privatize transportation house and contracting out, but it does impact is likely to result in total bus purchase costs the extent to which savings are understood to of $2,383,077, or almost three times as great derive from wage and benefit cutbacks. As will as the five-year cost of $855,538 if the district be shown below, First Student provides little had kept the service in-house. 59 Averaged over or no insurance benefits to its bus drivers and a longer-term 15-year period, the annual cost mechanics. Under Oregon law, this $400,000 for bus replacement under the First Student savings must clearly be accounted for as labor contract is estimated at $371,887, more than cost savings. By wrongly classifying health double the cost for maintaining an in-house insurance as a “miscellaneous” expense, fleet. 60 As described above, First Student’s Fairchild’s analysis disguises the extent to practice of depreciating its buses over a five- which cuts in wages and benefits lay at the year schedule, rather than a 10-year schedule, heart of First Student’s business model. Thus, makes these purchases yet more expensive for we adjust Fairchild’s analysis to put the full the district by adding approximately $42,018 cost of employee benefits in the category of per year to the cost of the contract, or an labor costs. additional $210,090 over the life of the five- year contract. 61 Secondly, we use our own estimate of bus replacement costs. As described earlier, we We assume that First Student’s material and estimate the district’s annual bus replacement miscellaneous costs are largely identical to costs for the five-year contract to average just those of the district operation. 62 Like Mr. over $153,000 per year. Fairchild, we note that First Student will be paying $72,900 per year to rent the district’s Other than those two changes, our estimate of bus shed and repair facility. 63 Unlike Fairchild, in-house costs for providing transportation is we do not assume contracting out results in identical to those of Mr. Fairchild. lower material costs. However, we do project First Student may realize a 5 percent savings In estimating the comparable costs of in maintenance and repair costs due to the contracting with First Student, we use data newer condition of its fleet. All told, including from First Student’s bid, statements provided bus purchases, we project material costs under 32 Table III: Bus Purchase Schedules, 2011-16 But other than those job titles, employees report that, while the company formally offers New Buses Purchased a health insurance option, the plan requires that employees pay the full cost of their CPSD First Student premiums; as a result, not a single bus driver Year 1 2 1 reported having health insurance through First Student. Likewise, the company offers a Year 2 2 11 401(k) plan in lieu of a pension plan, with a maximum annual employer match of $250. Year 3 2 3 None of the employees we interviewed report Year 4 2 4 participating in the plan, apparently leaving the company with no financial obligation for Year 5 2 0 retirement benefits. 66 Thus, the best available evidence suggests that First Student has Total new 10 19 effectively eliminated pension and health Used Buses Purchased insurance benefits for its drivers.

CPSD First Student In addition, there is evidence that the company pays significantly lower wages Year 1 25 than those offered by the district. Some Year 2 savings result from reduced average per- hour wages since First Student is currently Year 3 employing many entry-level drivers who are paid at reduced wage rates. While drivers Year 4 who transferred to First Student from the district are grandfathered in at their previous Year 5 wage rates, new hires are reported to be Total used 0 25 earning lower wages, approximately $10-$11 per hour. It is not known how many new TOTAL 10 44 drivers the company has hired, but several employees report there is “huge” turnover among the workforce. In addition, even those the First Student contract to be $1,042,809, higher-wage employees formerly employed an increase of more than one-third above the by the district, whose hourly rates were 64 district’s total costs of $755,789. grandfathered in by First Student, nevertheless have seen their earnings reduced. They report Our estimate of First Student’s labor costs is that First Student’s operation includes less based both on company documents and on regular pre-trip inspections. Not only does this interviews with current employees. According raise safety concerns among some drivers, but to reports from drivers, First Student appears it also results in reduced working hours. Wage to be providing no funding whatsoever losses have also occurred in cases where First toward health insurance or pension benefits Student has shortened routes, leaving some for its drivers. First Student pays 77 percent drivers with fewer hours on the job. Also, First of the health insurance cost of management, Student has sharply curtailed the number paid administrative and maintenance personnel. 65 holidays employees receive. Finally, employees 33 report that no matter what their official wage calculations (see Table IV) estimate that rate, they are paid minimum wage when contracting out will result in a cost savings they attend trainings — a steep cut from of $205,339 per year, or just over $1 million the district's practice of paying employees over the life of the five-year contract. These their regular wage rate for all hours they are savings come entirely from steep cuts in wage required to work, including training. 67 and benefit compensation — slashed by $726,573 per year, or $3.6 million over the All told, we estimate First Student is saving five-year contract. Indeed, apart from labor, $726,000 per year — or a total of $3.6 the First Student contract is more expensive million over the five-year contract — by than in-house transportation in every other cutting the wages, health insurance and cost category. If we exclude First Students’ pensions of employees. This represents a 48 savings due to wage and benefit cutbacks, percent reduction in labor costs compared privatization would result in a net loss of with the compensation received by in-house $521,234 per year, or just over $2.6 million over the duration of the five-year contract. employees. By cutting compensation almost in half, First Student has created dramatic hardship for bus drivers and equally dramatic How do First Student’s Actual economic gain for the company. Invoiced Costs to Date Compare with Our Estimate of the Beyond the major cost categories of bus Cost-Benefit Analysis? purchases and employee compensation, there are several additional areas where As discussed above, our budget-based analysis privatization has resulted in additional costs projected the costs of operating transportation for the district, and we include these in our under the First Student contract would total analysis. As described above, First Student’s $2,194,990 per year. Based on the first seven contract includes annual price increases months of First Student’s operation, we believe that rise faster than the costs of an in-house this estimate is reasonable and perhaps even operation. Averaged over the coming 15 conservative. Indeed, First Student’s track years, we estimate these higher price increases record suggests its cost to the district is likely amount to a cost difference of approximately to significantly exceed our projection. Table

$17,195 per year.68 Finally, the choice to V below shows the charges First Student has contract with First Student entails the district’s invoiced to the CPSD from September 2011 giving up its bus fleet. As discussed earlier, we through March 2012. From September through estimate at the end of five years the district’s January, these charges averaged $132.639 per fleet would be worth approximately $875,000. month. 69 However, in February the company Thus, the decision to contract out includes assumed responsibility for two Special the cost of forfeiting this asset, estimated at Education bus routes, previously operated by $175,000 per year over the life of this five-year a neighboring school district under contract contract. to CPSD. 70 This led to a dramatic increase in monthly charges for Special Education (SPED) Taking all of these costs into account, a transportation. 71 Assuming that the final five reasonable cost-benefit analysis demonstrates months of the 2011-12 school year will follow the privatization of bus services in CPSD the pattern of February and March, we project fails the second test set by Oregon law. Our First Student’s per-mile charges will total $1.56 34 Table IV: Cost to Taxpayers for Transportation Services

One-Year Five-Year Savings/ Savings/ First Loss due to Loss due to In-House Student Privatization Privatization

Salaries, Wages & Benefits $1,513,891 $787,318 $726,573 $3,632,864 Material Costs $755,789 $1,042,810 -$287,021 -$1,435,103 Bus Replacement $153,089 $371,887 -$218,798 -$1,093,990 Miscellaneous Costs $130,650 $189,863 -$59,213 -$296,065 Contractor Accelerated $0 $42,018 -$42,018 -$210,090 Depreciation Contractor 2.5 percent annual rate $0 $17,195 -$17,195 -$85,975 increase, versus 1.95 percent CPI Forfeiture of Asset of Bus Fleet $0 $175,000 -$175,000 -$875,000 Total $2,400,330 $2,194,990 $205,339 $1,026,697 Savings/Loss -$521,234 -$2,606,168 for all Categories But Labor

million for the 2011-12 school year. However, these charges do not include the district’s this year will still be less costly than successive administrative expense for determining the years. Since First Student is expected to continue number of students eligible for bus service operating these routes in future years, charges each year, planning routes, responding to for every month of 2012-13 and the remaining parent complaints and overseeing the First years of the contract will be similar to those Student contract itself. 74 Finally, First Student’s recorded in February and March of the past higher-than-inflation annual rate increases year. 72 Thus, in 2012-13 and successive years, impose additional costs beginning in the the company’s charges are expected to total just second year of the contract that do not appear over $1.78 million per year. in the first year’s invoices but are included in our estimate. Averaged across the five- This figure remains $240,000 below our year contract, First Student’s price increases projection of First Student’s costs. But the represent an additional cost of approximately invoices submitted to the district do not $17,195 per year. capture the complete range of transportation costs associated with the First Student Once we account for the full range of Contract. Most importantly, they do not costs, the evidence suggests the cost of include the price of fuel, which is purchased contracting with First Student is likely at independently by the district and was least $2.1 million per year. Since we have budgeted at $300,000 for the 2011-12 no data for maintenance, repair and district school year. 73 In addition, there may be administrative costs, it is impossible to further costs First Student charges the district estimate a final total; but it is clear the record beyond those captured in the monthly of First Student’s charges to date points to per-mile charges, including shop labor for total expenses that are generally in line with repair and maintenance of buses. So too, our own estimates described earlier. 35 $451 $1,715 $1,151 $4,089 $6,975 -$6,075 $43,841 $155,110 $148,514 $100,854 $1,481,171 $1,559,281 blended $1,551,102.98 $1,485,142.50 Avg. 2011-12 2011-12 Avg.

$101 $799 $1,514 $6,018 $4,089 -$6,075 $56,058 $171,507 $113,092 $177,582 Avg. $1,711,097 $1,783,997 Feb-March $1,715,068.90 $1,775,818.90

$103 $788 $7,931 $3,328 $4,089 -$6,075 $31,624 $88,616 $132,639 $125,522 Avg. $1,251,244 $1,334,565 Sept-Jan $1,255,216.10 $1,326,387.06 $4,089 $131.08 $809.48 $6,033.31 $1,325.70 -$6,075.00 March $1,802,989 $1,875,889 $58,158.12 $186,771.05 $120,313.36 $180,696.05 $1,867,710.50 $1,806,960.50 $71.19 $4,089 $788.24 $1,701.53 $6,003.45 -$6,075.00 $1,619,205 $1,692,105 $53,957.49 $105,870.83 $162,317.73 $168,392.73 February $1,623,177.30 $1,683,927.30 $4,089 $515.66 $648.00 $2,510.86 $5,696.91 -$6,075.00 $1,130,587 $1,057,687 $29,064.60 $73,804.82 January $112,240.85 $106,165.85 $1,061,658.50 $1,122,408.50 $48.95 $4,089 $820.02 $4,054.44 $7,860.08 -$6,075.00 $1,221,527 $30,086.44 $1,148,627 $78,464.94 $115,259.87 $121,334.87 December $1,213,348.70 $1,152,598.70 $4,089 $410.60 $849.29 $4,307.56 -$6,075.00 $10,448.99 $1,532,706 $1,459,806 $34,424.44 $102,011.88 $152,452.76 $146,377.76 November $1,463,777.60 $1,524,527.60 First Student Invoiced Expenses to CPSD, 2011-12 CPSD, Expenses to Invoiced Student Table V: First $4,089 $990.90 $643.64 $9,728.62 -$6,075.00 $1,503,816 $1,576,716 $36,723.58 $108,767.02 October $150,778.76 $156,853.76 $1,507,787.60 $1,568,537.60 $4,089 $141.21 $633.33 $5,921.74 $5,767.52 -$5,210.48 $1,211,291 -$6,075.00 $27,818.63 $80,028.86 $1,086,286 $120,311.29 $109,025.81 September $1,203,112.90 $1,090,258.10 Annual total before credits Credit for rent Credit for TIC Optional second camera Optional computer- assisted routing system Fuel Annual total Optional color camera Addition for min. mileage Addition 10-month total 10-month Est. July-Aug. avg. charges avg. Est. July-Aug. SPED transp. routes Monitors Total before credits Total 10-mo. total before credits 10-mo. Per-mile rate charges rate Per-mile transp. routes Regular Other Extracurricular Maintenance of district equipment Maintenance labor Parts Outside repairs Total

36 Summary: Four Approaches numbers presented by CPSD consultant John to Cost-Benefit Analysis Fairchild — when properly corrected — and LERC’s own budget-based analysis show any This report provides four approaches to savings from privatization are entirely due to comparing the costs and benefits of CPSD's steep cuts in the wages and benefits of bus maintaining transportation in-house or drivers. Essentially, privatization in CPSD has contracting with First Student: the Board Brief meant turning family-wage jobs into low-wage presented to CPSD's decision makers; CPSD jobs in order to pay for new buses that First consultant John Fairchild’s analysis provided Student use to operate commercial services to state authorities to document compliance during non-school hours. Furthermore, with Oregon statute; LERC’s own analysis of this assessment fits with the real-time data comparative costs; and the actual track record available from First Student expenses recorded of First Student’s charges over the past school over the 2011-12 school year. No matter how year. Together, these four avenues for assessing one approaches the question, the answer the benefits of contracting out in CPSD reach appears to be the same, namely that CPSD's a common conclusion. When all costs are contract with First Student fails to meet the considered, we estimate the net impact of test established by Oregon statute. contracting out for the school district ranges between annual savings of $205,000 and a slight net loss of $18,000 per year. 75 It appears Table VI: Range of Estimated Annual Savings from Privatization the slight net loss of Student Transportation may be the most realistic figure, since Estimated Costs Associated it alone calculates with First Student Contract in-house costs based Estimated Costs Board Brief LERC budget-based analysis on actual, rather of In-House Operation $2,209,770 $2,194,990 than budgeted, Board Brief expenses. However, -$18,300 -$3,520 $2,191,470 in the absence of more detailed Fairchild analysis for information from State of Oregon $176,970 $191,750 $2,386,740 the district and First Student, all LERC budget-based these numbers analysis $190,530 $205,310 remain estimates, $2,400,300 and therefore we Notes: simply conclude the Savings estimates are based on total public costs, including state and local expenses. ultimate bottom Board Brief estimates are based on “Scenario 2” for in-house costs and “Scenario #4” for line of privatization contracting out, with corrections described above in the text of this report. lies somewhere in Fairchild analysis for State of Oregon estimates for in-house costs include corrections 76 described above in the text of this report. Contracted out costs are not used since they this range. It is assume First Student’s labor costs would be the same as were budgeted for in-house critical, however, operation. that both the LERC budget-based analysis is described in detail in the text of this report. 37 Beyond the First Contract: transportation in Oregon. Long-term Concerns with Bus Privatization In the case of Lake Oswego (LOSD), the district has seen transportation costs increase The analysis so far shows privatization of bus at a rate well above inflation in the years service may cost more than it saves, and that since privatization. Over the past nine years, to the extent it does generate savings, these are transportation costs in the district have entirely made up of wage and benefit cuts to increased an average of 4.8 percent for a 46 local employees. These conclusions are based percent total increase over the period, or more on analyses of costs and benefits associated than double the increase in the local inflation 78 with CPSD’s initial five-year contract with First rate. Student. However, there is reason to believe the costs of contracting out will grow even One of the sources of long-term costs is more burdensome in future years beyond the higher-than-inflation annual rate increases. As first contract. described above, First Student’s excessive rate increases are estimated to cost the CPSD just over $17,000 per year during the initial five- Once a school district has sold off its bus year contract. But the impacts of overcharging fleet, the cost of reestablishing transportation become much more burdensome over the service as an in-house function may be long term. Due to the effect of compounding prohibitively expensive. For this reason, interest, even a modest overcharge — such when districts prepare to negotiate a second as the difference between First Student’s contract, they do so from a position of 2.5 percent annual price increase and the weakened bargaining leverage since — having estimated long-term inflation rate of 1.95 already sold off their fleet of buses — they percent — amounts to an increasingly heavy have little choice but to contract with one burden over time. For instance, if CPSD or another of the private service providers. renews its contract for just two more five-year As Lake Oswego Business Manager Stuart periods, by 2025 the cumulative impact of Ketzler observed in 2006 on the occasion of the district’s initial decision to privatize bus Table VII: Oregon School District service, in future contract negotiations: Transportation Contracts

"Our options will of necessity consider Total Percentage what it would cost us or one of Laidlaw’s competitors to finance a whole fleet of In-House 120 61% buses if we decide to not exercise our extension option. I am sure Laidlaw and First Student 39 20% all of their competitors are mindful of our Mid Columbia 31 16% options as they prepare their rates." 77 All Other 8 4% (8 Companies) This problem is compounded by the fact that the market for school transportation is Total Contracts 78 39% extremely concentrated. As shown in Table VII and Exhibit IV, just two companies — Total Districts 198 100%

First Student and Mid-Columbia — control Source: Oregon Department of Education, Pupil 90 percent of the private market for student Transportation, www.ode.state.or.us/search/page/?=1149 38 Exhibit IV: Student Transportation in Oregon with 70 percent of this amount, or $161,000, Total Contracts being reimbursed by state taxpayers. First 8 Student’s charges In-House appear to constitute 31 a clear violation of the contract terms, yet First Student Contracts district staff have been unable to effectively 120 39 Mid Columbia police the contract Contracts language. When informed of this All Other discrepancy by the (8 Companies) authors of this report, Lake Oswego Finance

Source: Oregon Department of Education, Pupil Transportation Director Stuart www.ode.state.or.us/search/page/?=1149 Ketzler suggested that the district had no choice but to accept First Student’s rate increases will amount to an rate increases based on the higher inflation increased cost of $166,000 per year. Averaged factor because the lower rate is based on “an over the entire 15-year period, the cost [inflation] index that is no longer tabulated.” difference will average $74,500 per year. 79 But this is simply not true: the federal government publishes the inflation rate for In LOSD, one of the factors driving up all items except energy — specifically for the long-term costs is the contractor’s failure to Portland-Salem metropolitan area — every abide by inflation controls written into the year on a website that is freely available to the contract itself. As described earlier, since the public. 82 district is responsible for all fuel costs over a fixed minimum, LOSD's contract with First Without more detailed information, it’s Student stipulates that annual fee increases impossible to tell how much of LOSD's will be based on a rate of inflation defined overall cost increase is due to rate increases as the Consumer Price Index (CPI) excluding or other transportation costs. It is clear, 80 out energy costs. In reality, however, First however, that the district’s costs have increased Student has instituted annual increases based significantly above the rate of inflation — on the overall CPI — including energy costs even while the number of riders served and — resulting in significantly steeper price miles driven have decreased. increases. The contractor openly informed the district that its price increases were based on Beyond rate increases, private contractors this higher-than-contracted rate, but it appears may seek to increase long-term charges that district staff were unable to provide in myriad aspects of the transportation sufficient oversight to catch this violation. 81 system, including design of the bus routes In the years since 2005, we estimate that First themselves. When school districts operate Student’s overbilling amounts to a total of their own fleets, they have an interest to $230,000 in charges to the school district, constantly seek opportunities for plotting 39 Exhibit V: Tri-County Portland Metro School Districts the shortest possible routes in order to Cost Per Rider Over Miles Per Rider minimize gas, wear- and-tear and labor 2,500 costs. Contractors, however, do not 2,000 typically absorb the 1,500 costs of gas, and

1,000 their fee from the

Cost Per Rider Cost Per district increases 500 with every mile

0 100 200 300 400 500 600 driven. Thus they Miles Per Rider have no incentive to economize on route Contracted In-House Linear (contracted) Linear (In-House) length and every reason to allow or encourage routes to lengthen beyond Table VIII: First Student Charges Estimates based on Back Full Price of Bus Purchase what is strictly Minimum RFP necessary. The track Over Five-Year Contract Guaranteed route record of private Mileage sheets contractors suggests Regular route rate per mile, no bus purchase $2.09 $2.09 that, over time, routes Regular route rate per mile, with bus purchase $2.26 $2.26 are indeed designed Bus purchase add-on, per mile of regular routes $0.17 $0.17 in ways that produce significantly higher SPED route rate per mile, no bus purchase $2.22 $2.22 mileage than would SPED route rate per mile, with bus purchase $2.41 $2.41 be the case for in- Bus purchase add-on, per mile of SPED routes $0.19 $0.19 house operations. Total regular miles per year, estimated 446,646 491,259 Using 10 years Total SPED miles per year, estimated 156,930 172,605 of Oregon DOE Total add-on premiums per year $105,746 $116,309 transportation data gathered for 26 Total, five-year contract $555,838 $611,358 districts in the Tri- Notes: County (Multnomah, RFP route sheets were discussed in email between Meunier and Fairchild, May 23, 2011, Clackamas and noting they showed 663,864 miles of CPSD pupil transportation in 2009-10. The estimate Washington) area, here uses that total and assumes 26 percent of those miles were SPED, as was true for the first five months of the 2011-12 school year. we conducted a Minimum guaranteed miles, according to the contract, are 3,449 miles per day. Although regression analysis only 170 days are guaranteed, RFP states schools normally run 175-176 days per year. comparing costs per Figure here is for 175 days at 3,449 miles and assuming 26 percent of miles are SPED, as rider trend against was true before the addition of February 2012 routes. miles per rider. 83 Projected Based on Miles as of February 2012 includes the addition of two SPED routes in February 2012 that dramatically increased SPED mileage. Totals here assume that change Exhibit V shows the will remain in effect from February 2012 through the end of the five-year contract. results of this analysis. Five-year total cost includes accounting for 2.5 percent annual inflation in per-mile charges. The red data points 40 Exhibit VI: Lake Oswego School District charges and generally Transportation Expenditures, 2003-11 weaker negotiating position, districts face Actual Transportation Expenditure significant long-term $2.5 million costs that may not appear in the first five- $2 million year contract. While it may be difficult to $1.5 million quantify the impact of such concerns, $1 million they must be taken $500,000 into account when a district is determining $0 whether or not Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 to contract out its transportation service. represent in-house transportation service; In the case of LOSD, the blue points are contracted out. The X axis it’s not possible to identify exactly which shows miles per rider; the further right one factors were most responsible for driving the goes, the more rural the district, with greater cost increases, and therefore we cannot know distance between riders. As the distance whether a similar pattern should be expected between riders increases, we would normally in other districts. Nonetheless, the LOSD expect to see the cost per rider increase as well, experience raises a concern regarding the as the cost of transporting students increases potential for privatization to entail significant with greater distance. Indeed, the cost per costs that become apparent only over the long rider does increase as districts get more rural, term. even for in-house operations. However, where bus service is contracted out, the cost per rider Exhibit VII projects the anticipated cost increases at a significantly higher rate. Rural of CPSD's contract with First Student over districts that have contracted out their bus the next 15 years. If costs increase only in service pay significantly more per rider than accord with the inflation rate, the increases otherwise similar districts that retain in-house will be modest. However, if CPSD faces cost transportation. This suggests that smaller rural escalations in line with those experienced districts may lack the ability to effectively by LOSD (the “Expected Increase” line in oversee their transportation contractors, and Exhibit VII), the increase may be much more contractors may use their control over route dramatic. 84 planning to chart unnecessarily lengthy bus routes in order to maximize per-mile Legal and Ethical Questions charges. Based on this 10-year data set, we Regarding CPSD Privatization estimate that contracted transportation costs approximately eight cents more per mile and $64 more per annual student than in-house The report thus far has focused on the transportation. economics of bus privatization. But the terms of transportation contracts in CPSD and Thus, in route planning, higher-than-inflation elsewhere also raise potentially troubling 41 legal and ethical concerns. Many of the most neither the company nor the district openly troubling questions revolve around the sale acknowledges the complete terms of this of district bus fleets and the subsequent transaction, it is made clear in the small operation of a privately-owned bus fleet paid print of the contract and in the record of for by public dollars. discussions leading up to the parties’ agreeing on final terms.

Exhibit VII: Central Point School District When First Student Projected Transportation Costs Based on Lake Oswego Experience bid to provide transportation CPSD — Projected Transportation Costs service for CPSD, $4 million the company $3.5 million submitted two $3 million different rate sheets $2.5 million — one assuming $2 million the company would $1.5 million purchase the district’s $1 million bus fleet and the $500,000 other assuming it $0 would not. In the bid that included Jan-21 Jan-20 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-22 Jan-23 Jan-24 Jan-25 Jan-26 purchasing the Contract Estimated Cost Expected Increase fleet, First Student increased its per-mile Estimated cost is based on actual contract value and negotiated rate increases. Expected increase is based on Lake Oswego’s rate of increase since privatization. rate by 17 cents for regular bus routes and 19 cents for Special Education (SPED) In CPSD, one of the most glaring irregularities routes. 86 concerns the fact that First Student appears to have charged the district for the entire cost In examining the data available to First of First Student’s purchasing the district’s bus Student at the time it submitted this bid, it fleet — a transaction that amounts to First appears the per-mile premium the company Student taking possession of the fleet for free. charged for purchasing the CPSD fleet was This directly undermines one of the central intended to recoup the entire $565,000 rationales for privatization. The district claims purchase price of the fleet over the life of the “we have invested the proceeds from the five-year contract. sale of our bus fleet into our classrooms and schools… each dollar saved … adds value to The contract stipulates First Student is the educational opportunities provided to guaranteed a minimum of 3,449 miles per our students.” 85 But the evidence suggests day, and the district’s RFP states contractors that this is demonstrably false: all the funds should expect to operate 175 or 176 days received from the sale of the fleet were repaid per year. 87 Assuming a 175-day school year, to First Student in higher per-mile charges; and conservatively assuming 26 percent indeed, the district has never challenged of the miles are SPED, the bus-purchase the facts of the repayment schedule. While premium for the five-year contract would 42 total $555,838, just Exhibit IX: First Student, Used Buses Purchased $10,000 shy of the to Service Central Point School District total purchase price. 88 Yellow Book Alternately, an early VIN Type Manufactured Passengers Current Value version of the RFP 208745 Conventional 2005 72 $27,200 that was shared with First Student 208735 Conventional 2005 72 $27,200 included “route 208795 Conventional 2005 72 $27,200 sheets” showing 202035 Conventional 2005 72 $27,200 CPSD operated a total of 663,864 miles of 208715 Conventional 2005 72 $27,200 pupil transportation 208755 Conventional 2005 72 $27,200 in the 2009-10 school year. Prior 208725 Conventional 2005 72 $27,200 to the addition of 208775 Conventional 2005 72 $27,200 the two new SPED 227812 Van 2002 21 $9,100 routes in early 2012, SPED accounted for 213904 Van 2004 33 $15,100 approximately 26 242556 Van 2006 20 $22,500 percent of annual 218551 Conventional 2001 72 $10,900 miles. If First Student assumed the district 218531 Conventional 2001 72 $10,900 would require the 213026 Conventional 2006 72 $33,800 same mileage in 2011-12, its per-mile 215557 Conventional 2007 72 $39,200 premiums would 208577 Conventional 2007 72 $39,200 total $611,358 over 215587 Conventional 2007 72 $39,200 the life of the five-year contract, or $45,000 215577 Conventional 2007 72 $39,200 above the purchase 215567 Conventional 2007 72 $39,200 price. 89 208587 Conventional 2007 72 $39,200

In either case, it seems 205597 Van 2007 20 $25,500 clear First Student 234232 Van 2002 17 $9,100 calculated its per- mile premiums in 208458 Transit 2008 84 $64,600 order to charge the 50726 Van 2006 24 $22,500 district over a five- year period for the 50727 Van 2008 24 $28,800 entire purchase price of its fleet. Indeed, to know whether “the District want[s] the this logic is confirmed by an email from CPSD Personnel Manager appraised value of the 16 [current CPSD] Mike Meunier who, in preparing the terms of vehicles included in the rates; which also the contract, noted “the contractors” wanted means the District would receive a check for 43 that amount.” 90 Thus, both bid calculations But under the terms of the contract, this asset and internal district communications point becomes the property of First Student. to a one-to-one transaction in which First Student charged back the entire cost of Thirdly, First Student’s practice of charging purchasing the district’s fleet. the full cost of bus purchases over five years raises additional questions. If we assume This transaction raises several potential legal this is standard company practice for all bus questions. purchases, we should expect that per-mile rates are calculated in order to capture the full First, both the district and the state appear cost of all bus purchases over a five-year time to be, in part, paying for something they’ve horizon. But since per-mile rates have never already bought. Under state statute, buses are been known to be reduced after buses are paid depreciated on a straight 10-year schedule. off, this raises a concern regarding potential After 10 years, though the buses retain value double-billing. as an asset, they have been completely paid for. In the case of CPSD’s fleet, at the time of In the simplest of cases, if a school district privatization, the share of the fleet’s purchase purchases an entire fleet of new buses from price that had not yet been depreciated First Student — with the purchase cost built stood at $486,687. 91 In other words, once into the per-mile rates — these costs will be the district and state paid this amount, they fully paid for within five years. In the second would have paid for the entire purchase price five-year contract, however, these buses will of the fleet. However, under the contract with continue to be in operation, not yet having First Student, the district and state will jointly reached their allowable age limit. If First pay $565,000 to First Student to cover the company’s cost of purchasing this fleet. The Student does not reduce its per-mile rates difference between these two figures — nearly by the amount designated for bus purchase $80,000 — represents taxpayers paying for (and there is no evidence that contractors something they have already purchased. ever reduce rates in this manner), the district may be effectively paying twice over — or, in the case of a bus with a 12-year age limit, 2.4 Second, and more fundamentally, the logic times over — for the same asset. of the district selling First Student its fleet, and then paying the company to cover the purchase price, violates basic norms of A slightly more complicated but likely more commerce. If we sell a car, we give up the asset common problem concerns the sale of used of my car and get cash in return. No one sells buses. To understand this problem, suppose a car, turns over ownership of the vehicle, and that CPSD's contract includes the purchase then also repays the buyer for the cost of the of a new bus, and that after five years First purchase. It appears that the district has paid Student decides to sell that bus to a different twice in this transaction — it has given up school district within the state of Oregon. The the asset of its bus fleet, and it has also paid company will presumably charge the new First Student for the entire cost of buying its district for the current value of the used bus. fleet. Having paid the full purchase price, the But if First Student has already charged CPSD district should logically retain ownership of the full purchase price over the course of its the fleet at the end of the five-year contract— five-year contract, this bus will already have an asset we estimate will be worth $226,000. been 100 percent paid for. In this case, the 44 second school district is paying for something a concern that may be worthy of legislative that has already been completely paid off. attention. And the State of Oregon — which funds 70 percent of both districts’ transportation costs Fourth, contracts may have an incentive to — will be paying a second time on an asset it overpay for the purchase of district fleets— to already purchased. the ultimate detriment of taxpayers. Indeed, this may have been the case in CPSD. First This question arises regarding the 25 used Student’s own records show the “fair market buses First Student has brought to the CPSD value” of the CPSD fleet as $469,560. 92 Yet the fleet. We assume that, as with the sale of the company purchased the fleet for $565,000. district’s own fleet, First Student has built the According to the official Yellow Book values full purchase price of these buses into the for buses contained in the CPSD fleet, it per-mile rates charged. But where did these appears First Student may have overpaid by an buses come from? Have any of them come average of 16 percent per bus. from other Oregon school districts, or districts in other states with similar practices, where This generosity may be reminiscent of they may have already been entirely paid off? First Student’s overpayment to LOSD at We do not know the origin of these buses the time that district first contracted out its and thus can’t answer this question. But we transportation services in 2003. At the time, believe the prospect of such double-payments First Student stated explicitly in its contract — particularly involving buses sold from one that LOSD's fleet was only worth $650,000, Oregon school district to another — poses but First Student would purchase the fleet

Table X: Lake Oswego School District Transportation Costs, 2003-11

Total Year End Transp. Cost % Increase Inflation Total Riders Total Miles

June 2003 $1,608,600 0.0% 0.0% 2,526 401,428

June 2004 $1,676,500 4.2% 0.8% 3,615 381,368

June 2005 $1,948,087 16.2% 1.4% 2,085 385,875

June 2006 $1,982,367 1.8% 2.6% 1,899 412,852

June 2007 $2,027,296 2.3% 2.6% 1,898 435,449

June 2008 $2,159,267 6.5% 2.6% 1,756 405,804

June 2009 $2,199,679 1.9% 3.7% 1,797 381,839

June 2010 $2,340,485 6.4% 3.3% 1,724 361,467

June 2011 $2,348,809 0.4% 0.1%

Total 46.0% 18.2%

45 at the inflated price of $1 million, on the repeat the overpayments many times over, condition that the district paid First Student assuming the contract is extended beyond its back the difference — $400,000, including initial term. interest — over the life of the five-year contract. This payback was built into First For example, in LOSD the district repaid Student’s per-mile charges and submitted to First Student $400,000 over its first five- the state as a reimbursable “transportation” year contract to compensate the contractor expense; these facts are uncontested by district for overvaluing the fleet. In theory, when officials. the first five-year contract was concluded, First Student’s hourly charge should have Because the State of Oregon routinely been reduced by the amount designated for reimburses 70 percent of “all contracted repayment of this $400,000 loan. Instead, transportation,” contractors may have an when First Student’s contract was renewed incentive to overpay for bus fleets as a way of in 2008, its per-hour charges were increased sweetening a contract and solidifying districts’ by the rate of inflation. Thus, in its current decision to privatize transportation. 93 Such 2008-13 contract, the district and the State of agreements may represent a win-win accord Oregon are once again repaying this $400,000 for the district and the contractor, but one that loan from First Student. 94 For a contractor, any is carried out at the expense of state taxpayers. temporary cost that increases initial per-mile For the contractor, the overpayment may help charges is fortunate because, while the cost seal the deal, and in any case will be paid back will pass in time, the charge will continue to by the district over the life of the contract. For be paid and repaid indefinitely. the district, the overpayment is a welcome additional infusion of cash at the time of Finally, the CPSD contract points to another privatization. And most critically, while the common problem, which is the prospect of district gets 100 percent of the overpayment public funds being used to pay for private up front, it will only have to repay 30 percent commercial activities. The buses used to of it over the course of the contract; the rest transport CPSD students are the private will be paid by the state. property of First Student, and the company has the right to use them for any purpose For instance, assuming, as may have been it chooses when they are not required for the case, that First Student paid CPSD student transportation. Across Oregon, approximately $100,000 more than the true school buses are used for a variety of private, value of its fleet — the district gets a check for for-profit purposes during evening and $100,000, and has to repay $33,000 of this weekend hours — including transporting amount over five years. The rest — from the fans to sporting events, customers to fairs and district’s point of view — is pure profit. But amusement parks and gamblers to casinos. this comfortable arrangement is carried out at the expense of state taxpayers. CPSD's contract with First Student requires the district’s bus shed and maintenance and repair Furthermore, the impact of these facility be reserved “for the exclusive use of overpayments continues to be felt for providing pupil transportation services to the many years. Since the repayment of these district” unless otherwise agreed to by district overpayments is built into the contractor’s staff. In addition, the contract mandates bus per-mile charge, and since these charges only fuel will be provided by the county “only increase over time, the district and state will for certified pupil transportation,” and that 46 Table XI: Yellow Book Value and First Student Purchase Price for Central Point School Buses

Yellow FS Bus Year Book Purchase Type Built Passengers Miles VIN Value Price Difference % Diff.

Transit 2000 77 228,868 11 511 5 $6,100 $9,200 $3,100 50.8%

Transit 2000 77 246,562 11 511 3 $6,100 $9,200 $3,100 50.8%

Transit 2001 84 166,693 115133 $9,900 $16,700 $6,800 68.7%

Transit 2002 84 146,685 115095 $16,000 $22,800 $6,800 42.5%

Transit 2005 83 117,475 11 511 8 $34,000 $40,500 $6,500 19.1%

Transit 2006 84 98,703 11 511 9 $45,700 $50,800 $5,100 11.2%

Conv 2007 71 110,246 11 5107 $33,800 $36,500 $2,700 8.0%

Transit 2010 84 39,061 115108 $85,200 $89,500 $4,300 5.0%

Transit 2010 84 26,338 11 5110 $86,200 $89,500 $3,300 3.8%

Transit 2010 84 40,693 11 511 6 $84,200 $89,500 $5,300 6.3%

Transit 1992 90 289,934 115097 $500 $800 $300 60.0%

Van 2004 22 163,474 115126 $13,100 $22,500 $9,400 71.8%

Conv 2006 34 132,535 115124 $24,500 $38,000 $13,500 55.1%

Total, Buses Retained in Service $445,300 $515,500 $70,200 15.8%

Notes: Data is from 2012 Yellow Book. Because we aimed to identify 2011 values, we treated each bus as if it was one year younger than it is, and used the 2012 value for that bus. E.g. to estimate the value of a 2007 bus in 2011, we looked at what a 2008 bus of the same type was worth in 2012. This way we had an accurate estimate for a four-year-old bus as of 2012. If anything, our Yellow Book estimates may therefore be slightly high, since they don’t account for price inflation from 2011 to 2012. If that is true, the overpayment is also slightly greater than that shown here.

“procedures will be developed, implemented, company is doing so, advertising “easy and and linked to daily bus reports” so that efficient bus rental solutions for ... weddings, district managers can ensure the public is field trips, corporate transportation, and other not buying gasoline for private commercial group outings” that run out of the district’s transportation. 95 facility. 96 More strikingly, CPSD Financial Manager Spencer Davenport and Personnel Yet it appears these safeguards have never been Manager Mike Menuier report the district put in place. The district has never granted has no mechanism in place for knowing permission for First Student to operate a whether buses that service district students private bus service out of its facility, yet the are being used for non-educational purposes 47 during off hours, nor any means of knowing it appears likely repairs due to commercial whether public funds are being used to pay activity are done at public expense. Finally, for maintenance, repair or depreciation costs since First Student’s charges to commercial resulting from private commercial use of the customers are even higher than to the school fleet. Nor does the district have any controls in district, it is likely that these charges include place regarding the use of publicly-purchased some number of cents-per-mile designated to gasoline for private commercial purposes. First offset the purchase price of the vehicle — even Student receives fuel through Jackson County, though the district is simultaneously being and thus enjoys reduced federal and state fuel charged for the full purchase price. 99 In that taxes. 97 The company is required to report the event, one of the parties would, once again, extent to which such fuel has been used for be paying for something that has already been purposes other than student transportation, paid for. and to reimburse the exempted taxes associated with that mileage. For the company Unfortunately, a similar pattern appears to be to use district-bought gasoline for its private occurring in LOSD. There, too, the district’s ventures would not only violate the terms of contract with First Student mandates the its contract with CPSD, but if not reported, bus facility may only be used for student it might also constitute federal and state transportation unless the district provides tax evasion. Despite the seriousness of this prior written approval. The contract further potential contract violation, District staff requires “any school bus or other vehicle used report “we wouldn’t know” whether First under the contract serving the Lake Oswego Student is using district-supplied gasoline to School District which was used on behalf of transport commercial customers out of the any other district, or for any other purpose or CPSD facility. 98 party, must be broken out separately from the main fuel invoice and the documentation for If First Student uses these buses for private the time and cost of fuel associated specific purposes, they will wear out faster, require to the District must be provided.” 100 As in more intensive maintenance and need to be CPSD, First Student advertises a full-service replaced sooner than otherwise necessary. commercial rental facility operating out of These added costs should not be borne by the LOSD transportation facility. 101 Yet the the taxpayers, but it appears they are. CPSD district reports that it has “no records in [our] has no means of knowing how much mileage possession” regarding any private use of may have been put on a bus due to private school buses. 102 Thus, First Student appears to commercial activities. But, assuming the be operating a private commercial business — district is paying 100 percent of the purchase using district facilities — without the required price of the vehicle, it is effectively paying for permission, and potentially to be charging all wear-and-tear on the vehicle, including that the public for fuel, maintenance, repairs and which results from private travel. Similarly, if depreciation costs associated with its private a First Student bus hits a pothole while taking business. This suggestion was not contested by customers to a casino, does the company district authorities given a preview copy of this take the bus into CPSD’s maintenance shed report. and have personnel do the repair work there at district expense? It is hard to imagine the These cases raise the specter not only of company would maintain an entirely separate unethical and possibly illegal billing, but shed and maintenance facility in the area; thus also of potentially defrauding the State of 48 Exhibit VIII: First Student Advertisement for Private Bus Rentals, Central Point

Oregon. While the state is legally committed and therefore are not legally reimbursable. to reimbursing 70 percent of “all contracted If such practices have been widespread expenses” for school transportation, several across Oregon, it is possible contractors have of the transactions described above arguably include charges that do not constitute defrauded the state of significant sums of legitimate pupil transportation expenses, money. 49 Possible Legislative Concerns that any cost-benefit analysis must take into account costs imposed on Oregon taxpayers The subject of privatization has long been a through the state Department of Education, topic of concern for Oregon lawmakers. We and not solely local district costs. Contracts believe the evidence presented in this report that save the district money, but amount to suggests the need for further legislative or a net loss when accounting for the full cost regulatory attention to the issue. to Oregon taxpayers, cannot be deemed beneficial. Legislators may want to mandate that cost-benefit analyses be done on the First, it seems clear that neither CPSD nor basis of 15-year projections, which more First Student has conducted the rigorous cost- accurately capture the impacts of bus purchase benefit analysis intended by the Legislature. schedules, accelerated depreciation and To avoid replication of this problem, inflated rate increases. legislators may want to consider clarifying that the law requires contractors to identify the component costs that make up their per-mile To further safeguard tax dollars, legislators charges, including specifically accounting may also want to require that all buses used for actual wage and benefit payments; for for pupil transportation be tracked in a central the costs of bus purchase and replacement; database recording the date of purchase, value and for any purely financial transactions of the bus charged to the district and the between the contractor and district, including history of previous ownership. Without such voluntary overpayment for fleet purchases. a mandatory database, it is impossible for the State of Oregon to tell whether it is paying for In order to protect the public interest, the purchase of buses that have already been legislators may also want to consider paid for by other Oregon school districts or mandating greater contractor transparency. other parties. We have no hard evidence of illegal charges in the CPSD contract, but our evaluation of We believe legislators should also consider the available information strongly suggests adopting procedures to ensure school the possibility of wrongdoing. Our inability districts’ effective policing of contract terms to obtain documentation for First Student’s in the event they decide to contract out costs and depreciation practices points to a support services. First Student’s practice larger problem: the lack of transparency where of overcharging for annual rate increases public funds are involved. First Student’s in violation of its LOSD contract is a clear claim that identifying the components of its example of how taxpayer dollars may be per-mile charge would reveal a “trade secret” wasted through insufficient oversight. There violates the central purpose of the law. Both could easily be similar such cases that have local Central Point property tax dollars and yet to come to light, and it might be useful to Oregon income tax funds are used to pay establish procedures for guaranteeing more First Student’s bill. Therefore, citizens in thorough stewardship of tax dollars in the Central Point and throughout the State of enforcement of contract terms. Oregon deserve greater transparency and accountability. As part of effective contract oversight, legislators should also mandate districts More specifically, legislators should insist establish a mechanism for monitoring the 50 extent to which buses used to service students are being used for private commercial purposes in off-hours, including the ability to screen out maintenance, repair, fuel and depreciation costs related to private activities, and to guarantee such expenses are not be borne by Oregon taxpayers.

A Template for Accurate Cost/Benefit Analyses

In order to ensure schools receive quality service, and that taxpayer dollars are not squandered, it is critical that district managers carefully assess the costs and benefits of privatization and, in the event the district does decide to privatize a given service, maintain thorough oversight over services once they are contracted out. In previous reports, we have outlined recommended steps that school boards may take in order to safeguard taxpayer dollars when contemplating privatization of school services. We direct interested readers to the recommended due diligence procedures outlined in our previous report. 103 In addition, based on current Oregon law and lessons drawn from the recent experience of Central Point School District, we offer a template in order to assist school districts in providing board members and the public at large with an accurate assessment of the potential costs and benefits of contracting out school bus service.

51

Exhibit IX: Template for Cost-Benefit Analysis

District’s Cost to District In-House District of Savings ORS 279B.033 Cost Analysis Template Cost Contractor or Loss

Salary or Wage and Benefit Costs Salaries PERS Social Security Other Retirement Benefits Employee Health Insurance Workmen's Compensation Other Salary or Wage and Benefit Costs TOTAL Salary or Wage and Benefit

Material Costs

Bus Replacement Bus Garage Bus Repair and Maintenance Other Repair and Maintenance Utilities Liability Insurance Vehicle Fuel Parts and Service Supplies (e.g., oil, tires, replacement parts, etc.) Other Supplies Other Materials Costs TOTAL Material

Operation Stopping and Dismantling Costs

Value of Option to Reacquire Transportation Service Other Stopping/Dismantling Costs TOTAL Stopping/Dismantling

Planning, Training, and Starting Up Costs

Administrative Time for RFP Preparation and Bid Evaluation Other Planning/Training/Starting Up Costs TOTAL Planning/Training/Starting Up

Miscellaneous Costs Travel Dues and Fees Professional and Technical Services Other Miscellaneous Costs Contractor Profit TOTAL Miscellaneous

TOTAL

53

Conclusion

he privatization of school support practices may be the result of services has long been a topic of loopholes in legislative language concern for Oregon lawmakers, or of insufficient oversight by T school officials and the public at state or local authorities. It is large. Evidence that privatization clear, however, that hundreds of often imposed dramatic costs thousands of taxpayer dollars — on local employees without and perhaps millions — are being producing the promised savings wasted as a result of insufficient led legislators in 2009 to adopt controls in the privatization a new statute to guard against process. At a time when both the most damaging versions of state and local officials are contracting out. facing severe budget challenges, Oregon taxpayers simply cannot afford to allow such waste to go In the first test case under the new uncorrected. law — the decision by the Central Point School District (CPSD) to contract out school busing — it We hope this report will enable is apparent the 2009 statute has lawmakers, school officials and not achieved its goal. The contract the public at large to take more between CPSD and First Student effective steps toward guaranteeing  The contract between Inc., fails the most fundamental quality services for students and the Central Point School test created by ORS 279B.033: to safeguard much-needed tax District and First Student to the extent it saves the district dollars. Inc. fails the most money, it only does so by relying fundamental test created by ORS 279B.033: to on steep wage and benefit cuts the extent it saves the for local employees. Whether district money, it only this failure requires a legislative does so by relying on or a regulatory remedy, it is clear steep wage and benefit lawmakers’ intent has not been cuts for local employees. realized in the law’s application.

Furthermore, a detailed examination of bus privatization contracts points to a series of legally questionable practices, along with a handful of transactions that constitute prima facie violations of contractual agreements. The prevalence of ethically or legally suspect 55

Appendix: Sources

1 “Q&A: First Student’s Burtwistle on Outlook, 8 In her report to the CPSD school board on July Acquisitions,” January 2011, Kelly Roher, “Many 30, 2012, First Student transportation manager Fleets Have Steady Growth,” July 2011, both in Susan Quaintance reported “low” driver turnover School Bus Fleet, www.schoolbusfleet.com, Oregon in the first year under private management, and Department of Education, Pupil Transportation, also contended that turnover in Central Point was www.ode.state.or.us/search/page?=1149, accessed “normal” by industry standards. online, June 5, 2012. 9 Paris Achen, “Central Point District Considers 2 “Board Brief, Transportation System: Service Changing Bus Service,” Mail Tribune, March 9, Deliver Model Selection,” Central Point School 2011, online version. District (CPSD), June 11, 2011, Hannah Guzik, 10 “Central Point Decides to Put School Bus Service William Yardley, “Timber (and Its Revenues) Out to Bid,” Mail Tribune (Medford, OR), June 16, Decline, and Libraries Suffer,” New York Times, May 2011 (online version). 5, 2007, Akito Yoshikane, “Public Libraries for Profit,”In These Times, Nov. 27, 2007, Guy Tauer, 3 At the July 30, 2012, CPSD school board “Rogue Valley: Quarterly Census of Employment meeting, First Student transportation manager and Wages 2011 Recently Released,” Oregon Labor Susan Quaintance reported that 28 of 30 drivers Market Information System (OLMIS), May 30, employed by the school district had stayed on with 2012, accessed online, July 23, 2012. the contractor. 11 Oregon Community Foundation, “Southern 4 “Required Supplemental Information,” Oregon Regional Profile,” April 2011, accessed submitted as part of First Student RFP to Central online, July 22, 2012, US Census Quick Facts, Point School District, May 23, 2011, 134/140. Jackson County (OR), June 2012, accessed online, July 10, 2012, Jackson County (OR) Website, 5 Required Supplemental Information,” 134/140, “Poverty in America/Living Wage Calculator, “Central Point RFP,” Pupil Transportation version, “Jackson County, Oregon,” accessed at http:// May 13, 2011, p. 42. livingwage.mit.edu/ “, July 10, 2012, County Participating in “Sustainable Valley” to Create 6 Tim Wulf to Mike Munier, et. al, June 10, 2011, Family Wage Jobs, accessed online, July 10, “Benefit Schedule,” First American Benefit Choices, 2012. Although dated, a useful review of Jackson October 1, 2011, Collective Bargaining Agreement County’s economic challenges can be found in Between Central Point School District and OSEA “Shifting to Good Jobs: Rethinking Economic Chapter 47, July 1, 2006-June 30, 2009. Development in Jackson County,” A Report by Oregon Action, December 1999. On June 8, 2010, the school district and the union agreed on a memorandum of understanding that 12 Robert Kuttner, “Decent Work,” The American largely extended the terms of this agreement. Prospect, October 2009, Christopher Jencks, “The The district did agree to increase its insurance Low Wage Puzzle,” The American Prospect, January contribution by 6.5 percent for the 2009-10 school 1, 2004, accessed online, July 12, 2012. year. 13 Gordon Lafer and Robert Bussel, All Costs 7 For a good overview of the phenomenon Considered: A Report on the Contracting Out of School of presenteeism, see Jodie Levin-Epstein, Support Services in Oregon, University of Oregon, “Presenteeism and Paid Sick Days,” Center for Law 2004; Lafer and Bussel, All Costs Considered: A and Social Policy, Feb. 28, 2005, accessed at http:// NEW Analysis on the Contracting Out of School www.clasp.org/admin/site/publications/files/0212. Support Services in Oregon, University of Oregon, pdf, July 6, 2012. 2008. 57 14 http://www.leg.state.or.us/ors/279b.html Tribune, June 16, 2011. Meunier’s figure is based on a comparison of the Board Brief’s “scenario 15 Central Point School District officials insist #2,” which takes the approved CPSD 2011-12 that the decision was carried out in keeping with transportation budget and adds $375,303 as a first- state law. A legal challenge to the privatization of year payment on accelerated bus replacements, Central Point’s school bus system was rejected by a and compares that with the Brief’s “scenario #4,” Circuit Court judge and is now pending appeal in which lists “contractor’s estimated costs,” excluding state court. ongoing district costs such as fuel. After assumed state reimbursement payments, the difference 16 Spencer Davenport, email communication to between these two scenarios is $360,172. Gordon Lafer, October 26, 2012. The full text of Mr. Davenport’s email is as follows: “Mr. Lafer: 19 These are scenarios #2 and #4 in the Board Brief. Good afternoon. Thank you for sharing this report The Brief is attached as an Appendix to this report. with us. We generally disagree with this report Scenario #2 envisions keeping transportation in- and its findings. The focus of our school district house but having the district commit to upgrading is to provide the best educational opportunities its fleet in order to meet “industry” standards of for our students given the tools and resources maximum bus ages, rather than continuing to available. Contracting for our pupil transportation operate older buses even if they meet state safety services aligns with this and has allowed us to standards. By contrast, Scenario #3 envisions focus available resources on our classrooms and not only upgrading to “industry” standards, but schools. We calculate our cost savings for the committing to purchase the full complement of last school year alone to be $456,000. Ignoring buses that First Student proposed to purchase over $120,000 in unemployment benefits paid to life of the five-year contract. transportation employees would drive these savings from operations even higher. In addition 20 CPSD Request for Proposals, May 13, 2011, p. 23. to these operational savings we have invested the proceeds from the sale of our bus fleet into our 21 Indeed, these costs were inflated even above classrooms and schools. With these savings and the actual cost of matching First Student’s bus investments being more focused on classrooms purchase plan, since the Board Brief assumed the and schools each dollar saved and/or invested district would have to purchase all new buses, adds value to the educational opportunities whereas First Student actually purchased a large provided to our students. The report you provided number of used buses to service Central Point fails to recognize this value added to our students students. both in the short and long terms. Furthermore, we disagree, as does the court, with the claim that 22 Central Point School District, audited financial the district and its advisers did not follow the law statement for 2010-11 school year. with regards to the cost benefit analysis. As you are aware this claim was denied in the Circuit Court of 23 RFP, pp. 26-41. Jackson County on March 19, 2012. Best, Spencer 24 Davenport.” The $456,000 claimed savings is a John Fairchild, “Scenario #1 Data,” spreadsheet figure that the district has never before suggested, prepared for CPSD. whether in public discussions, board hearings, 25 This is an estimate, projecting that the district or court records. In response to this email, we might purchase two small buses each in years 1 and asked Mr. Davenport if he could share the data 4 and two large conventional buses in years 2, 3 used to calculate this savings level, but none was and 5. Based on purchase price estimates recorded forthcoming. by Fairchild, we estimate the cost of small buses at 17 Quoted in Paris Achen, “Central Point district $60,000 and large buses at $120,000. The values considers changing bus service,” Mail Tribune, are depreciated on a straight 10-year schedule, as March 9, 2011. mandated by Oregon law. The estimate for the value remaining on these buses at the end of the 18 Quoted in Hannah Guzik, “Central Point five-year contract is calculated as the remaining decides to put school bus service out to bid,” Mail undepreciated value under this state formula. 58 26 It may be argued that the forfeiture of the fleet as Davenport, email communication to Gordon a district asset should not be counted in the cost- Lafer, Oct. 26, 2012. However, this decision has benefit analysis since it is offset by First Student’s been appealed and is pending a hearing by the payment to the district when it purchased the state Court of Appeals. fleet for $565,000. This argument is mistaken for 30 two reasons. First, the per-mile fees First Student John Fairchild, the consultant hired by CPSD is charging the district serve to recoup the entire to conduct the cost-benefit analysis, did not use cost of the fleet purchase; thus, the loss of the fleet any actual, historic or budget cost information as an asset — represented as the projected value to estimate the contractor’s labor costs. Instead, of the buses in 2016 — is a net loss to the district Fairchild’s analysis explains that “these [contractor after accounting for First Student’s purchase of the estimate] numbers are simply “pass thru” and not fleet and its charge-back in per-mile fees. Secondly, substantiated by proposer." John Fairchild, Cost- the baseline assumption for in-house operating benefit analysis to show compliance with ORS costs includes the cost of continuing to purchase 279B.033 approximately two buses per year; this value of 31 Deposition of John Fairchild, Stephanie Hicks vs. over $650,000 is foregone in privatization and is Central Point School District and First Student Inc. not offset by any payment or other compensation Jackson County Circuit Court. Nov. 17, 2011. Pp. from the contractor. 11-17. 27 The value of the fleet after five years, $875,000, is 32 Email correspondence between Vicki Robinson divided by five to estimate the value of this loss as and Tim Wulf. Nov. 23, 2010 to April 28, 2011. an annual cost item. CPSD Case Records. “CPSD 1-106 Emails Vicki 28 http://www.leg.state.or.us/ors/279b.html and Tim." Pp. 14-78.

33 29 It appears that CPSD officials may have prepared For reasons that remain unclear, CPSD Human their cost-benefit analysis even before the terms of Resources Director Mike Meunier told the local the contract with First Student were established. press the district would save $360,000 per year, A record of extensive communication between more than triple the savings estimated by the First Student and CPSD officials suggests the two district’s own consultant. Quoted in Hannah offices engaged in ongoing discussions regarding Guzik, “Central Point decides to put school bus how to shape the cost-benefit analysis beginning service out to bid,” Mail Tribune, June 16, 2011. long before the Board of Education approved 34 Conversation with Spencer Davenport, May 1, the decision to privatize transportation service. 2012. Davenport reported these funds came from In the case of Stephanie Hicks vs. Central Point state reimbursements for previous bus purchases; School District and First Student Inc., the defense the $139,500 does not represent local tax levy submitted two cost-benefit analyses as evidence of money. compliance with ORS 279B.030. The first analysis, conducted by then-CPSD Business Manager Vicki 35 “First Student Charter Bus Rental/White City, Robinson, was completed in January 2011. In Oregon,” http://www.firstcharterbus.com/ communication with the author of this report, branch/12630/whitecity-oregon, accessed May 21, Central Point Finance Director Mr. Spencer 2012. Davenport insisted the district’s cost-benefit analysis conformed to the requirements of Oregon 36 The conflicting interests of school districts state law, and noted that a challenge to the legality and private contractors on this issue became of CPSD’s privatization of transportation was apparent in 2003 when the Lake Oswego School rejected in Circuit Court. Mr. Davenport wrote District determined to contract its bus service to “we disagree, as does the court, with the claim that Laidlaw, a company subsequently taken over by the District and its advisers did not follow the law First Student. When the school district first issued with regards to the cost benefit analysis. As you are its RFP, it stated buses used by the contractor aware this claim was denied in the Circuit Court must simply “meet or exceed the State of Oregon of Jackson County on March 19, 2012.” Spencer minimum standards,” noting that “the district 59 recognizes that the existing bus fleet has an 41 First Student's commitment to purchase new average useful life beyond that recommended by buses was included in its contract with the district, normal industry standards.” However, Laidlaw and confirmed by CPSD Business Manager Stuart and other contractors preparing to bid on the Davenport, in telephone conversation with the RFP successfully lobbied the district to revise this authors, May 1, 2012. According to First Student’s language, adding a new requirement that the fleet bid, the company will add 23 buses to the CPSD “meet the current recognized industry standards” fleet, with an average age of 5 years. for maximum age limits. The 2003 Lake Oswego RFP and revisions are described in Gordon Lafer 42 As with the cost estimate for in-house bus and Bob Bussel, All Costs Considered: A New replacement purchases by the district, bus costs Analysis on the Contracting Out of School Support are based on published values for the three major Services in Oregon, University of Oregon, February types of buses, and costs for future years are 2008, p. 34. projected using a 1.95 percent annual inflation rate and a 4.6 percent discount rate; thus, the 37 RFP, p. 23, incorporated into the First Student $386,389 figure represents the net present value contract by reference. in 2012 of annual bus replacement costs over the duration of the 15-year period. These projections 38 ORS 468A.796(2) mandates that all diesel are subject to certain assumptions — most notably, engine buses must be replaced with school buses we assume that for the 25 buses First Student manufactured after Jan. 1, 2007, by Jan. 1, 2025. brought into CPSD, the district was charged the used value of the buses; we assume that the nine 39 For the purpose of our model, we took the new buses First Student has pledged to purchase 2011 price of each of the three major bus types are additions to the fleet rather than replacements (as listed in the Yellow Book) and projected these for other buses (this seems likely at least for the costs out to each year of the period. For future one bus and five 20-passenger vans slated to be bus purchases, we estimated an inflation rate of bought in 2011-12, though it is less clear for the 1.95 percent, which is roughly accurate for the two buses and one van to be bought in 2013-14); past 10 years. Finally, we applied a discount rate and we assume that First Student either does not to future bus purchase costs in order to measure enjoy any ability to purchase buses at a discount the impact of future expenditures in present rate, or if it does, it does not pass this savings on terms. In choosing a discount rate, we believe it is most appropriate to use CPSD’s cost of capital. to the district (the prices it paid for the district’s That is to say that the value of deferring a capital own buses certainly do not suggest First Student is expenditure from 2011 to a point in the future is a discount buyer). If these assumptions are varied, equal to the interest rate that the district would the net present value of annual bus replacement pay on a loan in order to make such a purchase costs over the 15-year period could be as low as in 2011. Based on current economic conditions $312,554 (if one assumes that First Student gets and the likely creditworthiness of the district as a a 10 percent discount below Yellow Book value special tax collection district, we have chosen a 4.6 on bus purchases, and passes the full value of percent discount rate. The estimated annual cost the discount on to the district; that none of the of $153,089 is the net present value of annual bus nine new buses purchased in the first five-year purchase costs for the 15-year period. Note that contract are additions to the fleet; and that the our model projects a slightly higher cost for district district was charged used-bus rates for the 25 bus purchases than the $139,500 estimated by buses First Student added to its fleet in 2011) or John Fairchild. as high as $487,949 (assuming the district was charged new-bus prices for the 25 buses added 40 First Student's commitment to purchase new to its fleet; that the nine new buses are additions, buses was included in its contract with the district, and that First Student either gets no discount on and confirmed by CPSD Business Manager Stuart bus purchases or keeps that savings for itself rather Davenport, in telephone conversation with the than passing it on to the district). Note that the authors, May 1, 2012. According to First Student’s Board Brief prepared by Mr. Fairchild projected bid, the company will add 23 buses to the CPSD first-year costs of $490,000 for the schedule of bus fleet, with an average age of 5 years. purchases proposed by First Student, with that cost 60 increasing over the life of the five-year contract. costs by contracting out its bus service. Robinson Those projections assumed all newly acquired is quoted in Paris Achen, “Central Point district buses would be new, whereas First Student’s actual considers changing bus service,” Mail Tribune, practice has been to purchase a substantial number March 9, 2011. On Robinson’s communication of used buses. Our projected cost of bus purchases with First Student, see also email correspondence here is based on the actual First Student practice, between Vicki Robinson and Tim Wulf. Nov. 23, and therefore is lower than the $490,000 figure 2010 to April 28, 2011. CPSD Case Records. “CPSD projected in the Board Brief. 1-106 Emails Vicki and Tim." Pp. 14-78.

43 First Student’s bid sheet, when read together 46 Spencer Davenport, phone conversation with with the CPSD RFP and related documents, shows Gordon Lafer and Jaxon Love, May 1, 2012. First Student charged the district for the full cost 47 Fairchild Cost Analysis - Exhibit IV, P. 2. Sum of of purchasing the district’s fleet, with the entire rows 28 — 46, 48-51. cost to be recovered over the course of the five- year contract. In addition, the spreadsheets used 48 2.5 percent annual fee escalator clause is by John Fairchild to calculate the four scenarios included in the Executive Summary of the RFP, as presented in the CPSD Board Brief show the confirmed by CPSD Financial Services Manager district would be charged the full cost of new bus Spencer Davenport in email to Gordon Lafer, June purchases over the course of a five-year contract. 14, 2012. In calculating the costs of the scenario in which the district would purchase buses to match the 49 U.S. Bureau of Labor Statistics, CPI-U, Change fleet First Student proposed to create, Fairchild in Annual Averages, ftp://ftp.bls.gov/pub/special. estimated the district would need to spend requests/cpi/cpiai.txt. Federal Reserve Bank of $490,000 in the first year of the contract. His Philadelphia, Survey of Professional Forecasters, spreadsheets note this “assumes buses purchased October 2011. http://www.phil.frb.org/research- on 5 year lease plans with five equal payments and-data/real-time-center/survey-of-professional- beginning the first year.” This assumption is also in forecasters/spf-documentation.pdf keeping with communication from First Student 50 to the district, described in email from CPSD CPI-U, Annual Averages for All Items and for All Human Resources Director Mike Meunier. Given Items Except Energy, 2002-11. First Student’s refusal to provide any alternative 51 CPSD, Request for Proposal, May 13, 2011, information regarding the terms on which bus Section III, part 1, p. 41. purchase costs are built into the company’s per- mile fee, we assume all bus purchases follow the 52 Contract for Pupil Transportation Services, Lake principle embodied in the charge for purchasing Oswego School District and Laidlaw Transit Inc., the CPSD fleet. 2003, p. 21.

44 Based on the projected cost of bus purchases 53 Our assumption is based on the average as announced by First Student for the five-year difference over the decade 2002-11 between contract. We calculated the cost of paying for national CPI-U for all items and national CPI-U those purchases over five years versus 10 years and for all items excluding energy, which was 84.7 converted this into 2012 dollars using a discount percent of the all-items rate. We kept this same rate of 4.6 percent. ratio and estimated that the forecast long-term inflation rate of 2.3 percent for CPI-U overall 45 Deposition of John Fairchild, Stephanie Hicks should be adjusted to 84.7 percent of that rate in vs. Central Point School District and First Student order to exclude energy costs, resulting in a non- Inc., Jackson County Circuit Court. Nov. 17, 2011. energy inflation forecast of 1.948 percent per year. Pp. 43-44. Fairchild apparently adopted this assumption from an earlier document put together 54 This is derived from calculating the difference by then-CPSD Business Manager Vicki Robinson, between 1.95 percent and 2.5 percent inflation, who in turn reported First Student told her the assuming a starting contract cost of $1.73 million district would save “five to 10 percent” in material per year, and assuming a 4.6 percent discount rate. 61 The difference over a five-year contract is almost 61 This figure is based on the assumption that First $86,000 in 2012 dollars, or a bit over $17,000 Student charges the district only the used-bus per year. The $1.73 million starting contract cost value for the 25 buses that it brought to service is a conservative estimate of First Student’s likely the district at the start of its contract. If those charges to the district (our estimate of likely First buses were charged at the new-bus rate, the cost Student annual charges is higher), taken from the of accelerated depreciation would be significantly Board Brief presented to CPSD board members in higher than that cited here. June 2011. 62 Fairchild assumed First Student could do 55 As described elsewhere, the entire purchase price without the roughly $10,000 that the district of the CPSD fleet is being charged back to the spent on its managers paying professional district, built into the rate-per-mile charged by First dues or attending meetings outside the School Student. District. There is no supporting evidence for this assumption, and it seems unlikely that any 56 We do not correct Fairchild’s baseline in-house multinational corporation would operate in this transportation budget for the difference between way; thus we have assumed First Student will budgeted and actual expenses, as we did in the continue to bear these costs. analysis of the Board Brief. Because the Fairchild analysis used to show compliance with state law 63 Central Point School District No. 6, Request assumed the same $2.386 million baseline budget for Proposal For Pupil Transportation Services, for both in-house and First Student operations, May 13, 2011. Sec. III, 1, “Contractor Facilities,” the cost-benefit analysis is not affected by the incorporated by reference into the contract difference between approved budget and actual between CPSD and First Student. We have expenditure figures. followed Fairchild’s methodology in treating this as a cost of contracting out. The district is 57 Adopted Budget 2011-12 Central Point foregoing use of the maintenance facility (or the School District No. 6. pp. 68-71. (Hard copy right to rent it out to other potential tenants) only.) Although the adopted budget most likely but is benefiting from the rental payment; thus, overstates the district’s actual costs (as explained conceptually one might think this transaction has in the discussion above concerning the Board no net financial impact. It is possible, however, Brief), our analysis continues to use this budget First Student has built the cost of this rental fee as a baseline for estimating both in-house and into its per-mile charges to the district — as it First Student costs since this is the only document has with the cost of purchasing the district’s fleet that provides breakdowns for each cost category. — and this would result in the rent being a net Therefore, it provides the most useful structure cost, as Fairchild suggests. Since Fairchild had for analyzing the cost categories required under greater access than we do to the internal financial Oregon statute. Since we use the same baseline for deliberations of both First Student and the district, in-house and contracted out costs, this should not we have chosen to follow his methodology on impact the overall cost-benefit analysis. this point and treat the facility rental as a cost of contracting out. 58 Fairchild Cost Analysis — Exhibit IV, p. 2. Rows 64 64, 69, and 73 correspond to employee insurance We follow Fairchild in treating the $72,900 for special education; vehicle purchasing, service annual rent paid by First Student for use of the and maintenance; and vehicle operation services district’s bus repair and maintenance facility as respectively. a net expense of contracting out. The district is foregoing use of the maintenance facility (or the 59 Both these figures are net present values in right to rent it out to other potential tenants) 2012 dollars and are based on the assumptions of but is benefiting from the rental payment; thus, 1.95 percent CPI (excluding fuel) and 4.6 percent conceptually one might think this transaction has discount rate. no net financial impact. It is possible, however, that First Student has built the cost of this rental 60 All figures net present value in 2012 dollars. fee into its per-mile charges to the District — as 62 it has with the cost of purchasing the district’s per month in the second half of the year than in fleet — and this would result in the rent being a the first half, and this partly explains the increase net cost, as Fairchild suggests. Since Fairchild had in charges in February and March. However, in greater access than we do to the internal financial comparing October 2011 with February 2012, deliberations of both First Student and the district, district staff concede that there were fewer days we have chosen to follow his methodology on of bus service in February, and yet First Student’s this point and treat the facility rental as a cost of SPED charge was more than $17,000 higher that contracting out. month, primarily due to the addition of these two routes. CPSD Business Manager Davenport 65 “CPSD 438-463 — Emails Fairchild Meunier and Personnel Manager Mike Meunier, telephone Wulf”. Email from Tim Wulf to Mike Meunier. June conversation with G. Lafer, Aug. 7, 2012. 10, 2011. P. CPSD 448. 72 Our estimate assumes these high monthly 66 First Student’s 401(k) plan, including a charges — similar to February and March 2012 — maximum annual employer match capped at only for the 10 months of the school year, with $250, is described in a June 10, 2011, email from much lower mileage projected for the summer First Student Business Development Director Tim months. Wulf to CPSD Human Resources Director Mike Meunier. 73 The fuel charges included in the invoices shown represent the rare occasions in which a bus runs 67 Information on First Student’s driver turnover, out of fuel unexpectedly or on a long-distance trip. reduced driver hours for particular routes and All regular fueling is done with fuel purchased minimum wage compensation for training directly by the district. sessions was extrapolated from interviews with former CPSD transportation employees who 74 The district has not provided detailed currently are employed by First Student. See breakdowns for these costs, so we do not have “Survey Log - CPSD Transportation — Merged.xls.” a firm estimate for them. But they are clearly included in the estimates for in-house costs, so 68 Our assumption is based on the average they should be taken into account as continuing difference over the decade 2002-11 between expenses associated with contracting out. national CPI-U for all items and national CPI-U 75 for all items excluding energy, which was 84.7 After reviewing a pre-publication version of this percent of the all-items rate. We kept this same report, CPSD Business Manager Spencer Davenport ratio, and estimated the forecast long-term replied that “we calculate our cost savings for the inflation rate of 2.3 percent for CPI-U overall last school year alone to be $456,000.” Yet Mr. should be adjusted to 84.7 percent of that rate in Davenport did not point to a single number in order to exclude energy costs, resulting in a non- the report that he contested was false. When asked energy inflation forecast of 1.948 percent per year. for detail to explain the basis for the claimed $456,000 savings, he did not provide any. Spencer 69 As shown in the table, these charges do not Davenport, email communication to Gordon account for the “credits” for facility rental and a Lafer, Oct. 26, 2012. “tech in charge” personnel charge for September. 76 First Student has chosen to pay its facility rental Our analysis of the Board Brief estimates in- fee by crediting the district on its annual invoices, house costs based on actual district expenses rather but we treat these costs separately, totaling up than the higher amount in the approved budget; the contractor’s charges to the district and then the difference is about $195,000. By contrast, accounting for the rental payment under the the Fairchild analysis and LERC’s own analysis category of “material costs.” take the approved budget as a starting point. The $195,000 difference in these models accounts for 70 Communication from Mike Meunier, CPSD the Board Brief’s projecting that privatization would Transportation Director, to Jaxon Love, May 2012. result in a slight net loss, while the other analyses project it would yield a savings of approximately 71 District staff report there are more days of school $200,000 per year. In the absence of more detailed 63 information from the district and First Student, the cost of these bus purchases were built into the Fairchild framework provided a useful means of contract terms from the start; the question of why comparing the costs of in-house and contracted- the annual charges are rising faster than inflation out service. We believe the actual costs — which cannot be traced to bus purchases. (Stuart Ketzler, show privatization resulting in a small net loss Executive Director of Finance, Lake Oswego School — are likely closer to the truth; but these too are District, email communication to G. Lafer, Sept. an estimate. Therefore, we report a range in this 24, 2012). report that includes the possibility of privatization causing a slight net loss or modest net savings to 80 Lake Oswego School District and First Student, the district. Contract for Pupil Transportation Services, Section XXVII, subsections 3 and 4. 77 Stuart Ketzler, email to G. Lafer, July 26, 2006. Quoted on p. 39 of Lafer and Bussel, All Costs 81 Documents provided to Gordon Lafer by Lake Considered: A New Analysis on the Contracting-Out of Oswego School District Executive Director of School Support Services in Oregon, Labor Education Finance Stuart Ketzler, June 27, 2012. and Research Center, February 2008. 82 Stuart Ketzler, Executive Director of 78 Lake Oswego School District’s finance manager Finance, Lake Oswego School District, email argues that transportation costs might have risen communication to G. Lafer, Sept. 24, 2012. The faster than the general inflation rate even if the U.S. Bureau of Labor Statistics, Current Population district had retained transportation as an in-house Survey, annually publishes the Consumer Price service, particularly if employee health insurance Index for all items except energy, specifically for and pension costs were to increase significantly. the Portland-Salem metropolitan area. The data This is, of course, possible — but it’s not relevant is available to the public at ftp://ftp.bls.gov/pub/ to understanding cost trends in the district’s special.requests/sanfrancisco/cpiport_table.txt. ongoing contractual relationship with First 83 All data provided by Oregon Department of Student. The first question at hand is whether there Education. are additional costs to privatization that appear only in later years, and that, therefore, should be 84 The “contract estimated cost” line in this chart taken into account in the cost-benefit analysis takes First Student’s estimated charges for 2011-12 conducted in order to make the decision about and assumes they will increase by the projected whether or not to contract out a given service. The inflation rate of 1.95 percent; the “expected second question at hand is whether, once districts increase” line projects an annual increase of 4.84 have sold off their fleets and therefore are in a percent, the rate experienced by Lake Oswego in weak bargaining position vis-à-vis transportation the years since privatization. contractors, contractors take advantage of this relationship to unnecessarily increase charges 85 CPSD Business Manager Stuart Davenport, email in later years. (Stuart Ketzer, Executive Director communication to Gordon Lafer, Oct. 26, 2012. of Finance, Lake Oswego School District, email communication to G. Lafer, Sept. 24, 2012.) 86 “Ex. 2 — First Student Bid." Pp. 3-6. The first two pages are the non-fleet purchase rate sheet. 79 Due to the function of compounded interest, This rate contains a regular transportation per-mile even a modest difference in inflation rates, such rate of $2.09 and a special education rate of $2.22. as that between 1.95 percent and 2.5 percent, The last two pages are the fleet purchase rate sheet, generates very large dollar differences in later years, which specifies a purchase price of $565,060 for as each year’s increase is based not only on the the CPSD fleet. The per-mile rates for regular and percent difference for that year’s costs, but also special education transportation are $2.26 and the cost basis that has been built up over previous $2.41, respectively. years due to excessive fee increases. Lake Oswego Finance Director Stuart Ketzler suggests costs have 87 P. 23 of the RFP (Ex. 1) includes the “GENERAL increased partly because the district is purchasing SCOPE. Contractor shall during the period a large number of buses for First Student. But the hereinafter set forth, provide and maintain 64 the required number of school buses and bus depreciation of buses as mandated by Oregon drivers to transport conveniently, safely and statute and then determined “this results in a reliably, all students designated by the District to significantly undervaluing of [the] fleet by at be served under the provisions of the contract. least 30 percent,” and thus inflated the price by Such transportation shall be provided for regular 30 percent. These three methodologies yielded home-to-school and special education (including appraised values that together averaged $565,060, school-to-school) transportation service for each or nearly $100,000 above the fair market value for and every day that the school is convened and, in the buses. Letter to Central Point School District addition, Contractor shall during the period of this Superintendent Randy Gravon from Mollie Blagg, agreement provide transportation for all students President, Western Bus Sales, Inc., May 3, 2011. or other authorized personnel as may be required Provided to the authors by CPSD. by the District for field trips, excursions, athletic activities, extended school year, summer school, 93 OAR 581-023-0040(5)(c) allows for or any other purpose designated by the District. reimbursement of “all contracted transportation." The current school year is based generally on 175 94 or 176 days of school in which transportation is Indeed, because First Student’s hourly rates required.” increase with inflation, we estimate the district will end up paying First Student a total of nearly 88 SPED amounted to 26 percent of total mileage $430,000 over the five-year 2008-13 contract in the first five months of the 2011-12 school year, as a second repayment of the bus-purchase before the addition of the two new SPED routes. overpayment. Nearly $300,000 of this amount will be paid by the State of Oregon. These facts have 89 Five-year total costs include accounting for First not been contested by district officials who were Student’s annual 2.5 percent increase in per-mile provided a preview copy of this report. charges. 95 RFP, Section III, Part 1, “Contractor Facilities,” 90 Email communication from CPSD Personnel incorporated by reference into the contract. Director Mike Meunier to CPSD consultant John Interestingly, in the version of the RFP submitted Fairchild, May 22, 2011. as part of the district’s court case, it is clear the original text of the RFP reserved use of the facilities 91 This figure is from John Fairchild’s calculation in exclusively for student transportation uses; the preparation for the Board Brief, June 2011. text was later amended — perhaps at the urging of First Student — to also allow other uses “as agreed 92 The fair market value of the fleet was noted on upon by the district.” the Bill of Sale executed by First Student, June 25, 2011. First Student’s purchase price was based on 96 Advertisement is at http://www.firstcharterbus. the average of three appraisals provided by Western com/branch/12630/whitecity-oregon. CPSD Bus, Inc., each using a different methodology. Business Manager Spencer Davenport and Although the fleet’s fair market value was recorded Personnel Manager Mike Meunier reported they as $469,000, each of these methodologies have never granted First Student permission to resulted in a significantly higher value. The first operate private bus services out of district facilities, approach used Yellow Book values for each telephone conversation with Gordon Lafer, Aug. 7, bus, but then adjusted them upward to “cover 2012. the cost for equivalent replacement pre-owned units that would meet all Oregon state school 97 School buses receive a tax waiver for diesel fuel. bus specifications.” The second methodology See Oregon Department of Transportation, Fuels used current prices for new equivalent buses, Tax Compliance Guide for Use Fuel Users, http:// depreciated based on the RFPs age requirements, cms.oregon.gov/ODOT/CS/FTG/docs/UserPDFs/ assuming 10 percent value remaining at the end UFU_Compliance_Guide.pdf. Both the county of that period. By backloading depreciation, this and First Student are required to file Schedule methodology significantly inflates the current A reports with ODOT showing the mileage and estimated value of the fleet. Finally, the third fuel used for student transportation and other methodology started with the 10-year straight line purposes and reimbursing the unpaid taxes for 65 the non-student-transportation mileage. On school districts’ exemption from federal fuel taxes, see “School bus fuel tax exemption preserved,” School Bus Fleet magazine, Feb. 23, 2012. http:// www.schoolbusfleet.com/Channel/Contractors/ News/2012/02/23/School-bus-fuel-tax-exemption- preserved.aspx. ORS 825.017(1) also specifies “vehicles used by, or under contract with, any elementary or secondary school district are exempt from the payment of weight-mile taxes when engaged exclusively in transporting students to or from school or authorized school activities or those activities sponsored by the State Board of Higher Education.” If First Student uses buses for mixed purposes, it would not be entitled to this exemption.

98 CPSD Financial Manager Spencer Davenport and Personnel Manager Mike Meunier, telephone conversation with Gordon Lafer, Aug. 7, 2012. Through several rounds of questioning on this topic, Mr. Meunier stated “we wouldn’t know necessarily on gas,” explaining that “I’m not sure there would be a check for the gas” and, therefore, that “I don’t know how we would know” if First Student was using district-supplied gas for private ventures.

99 As of August 2012, First Student charged private customers seeking transportation out of its Central Point facility $2.79 per mile for large buses and $2.47 per mile for small vans. By comparison, the school’s charge for the 2012-13 school year is $2.47 for large buses and $2.31 for vans. Communication from Susan Quaintance, First Student Location Manager, White City, Oregon, Aug. 7, 2012.

100 Article 1, Section 1.2; Section XVII, Clause 7.

101 http://www.firstcharterbus.com/branch/22034/ lakeoswego-oregon/

102 Letter to Gordon Lafer from LOSD Executive Director of Finance Stuart Ketzler, June 27, 2012.

103 Lafer and Bussel, All Costs Considered, 2004, “Recommended Procedures for Due Diligence,” pp. 49-52.

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