HOUSE OF REPRESENTATIVES APPROPRIATIONS COMMITTEE TRANSPORTATION COMMITTEE In re: 1992-1993 Appropriations Hearing Mass Transit Privatization Mass Transit Systems Stenographic report of hearing held in Majority Caucus Room, Main Capitol, Harrisburg, Pennsylvania Thursday April 2, 1992 9:30 a.m. HON. DWIGHT EVANS, CHAIRMAN Hon. Victor J. Lescovitz, Vice Chairman Hon. Joseph W. Battisto, Secretary Hon. Gordon Linton, Subcommittee Chairman on Education Hon. Thomas C. Petrone, Subcommittee Chairman Health & Welfare Hon. Gaynor Cawley, Subcommittee Chairman on Capital Budget MEMBERS OF APPROPRIATIONS COMMITTEE Hon. William F. Adolph Hon. Alice S. Langtry Hon. Paul J. Angstadt Hon. Edward J. Lucyk Hon. Robert E. Belfanti, Jr. Hon. Nicholas J. Maile Hon. Kevin Blaum Hon. Dennis M. O'Brien Hon. Karl W. Boyes Hon. Richard D. Olasz Hon. Alvin C. Bush Hon. Merle H. Phillips Hon. Nicholas A. Colafella Hon. Joseph R. Pitts Hon. Jeffrey W. Coy Hon. Jere W. Schuler Hon. Robert C. Donatucci Hon. Paul W. Semmel Hon. Robert J. Flick Hon. Thomas M. Tigue Hon. Jon D. Fox Hon. Terry E. Van Home Hon. Michael C. Gruitza Hon. Peter C. Wambach Hon. Richard A. Kasunic Hon. John N. Wozniak Also Present: Dick Willey, Executive Director Beth Balaban, Policy Analyst Reported by: Erik Randolph, Budget Analyst Dorothy M. Malone, RPR Mike Rosenstein, Executive Director, Minority Staff Don Easton Dorotky M- M*lone JO ^^ Registered Professional Reporter *, ^s^ j"7| 135 S LanJis Street \^^ j-|ummelstown, Pennsi^lvania 17036 ^^ _y^ \ f inn -i —#»\Zi_J X Also Present: (cont'd) Paul Landis, Executive Director Paul Parsells, Executive Director Dorotk4 M Malone l^egisterea f-'rofesrional l-^eporter 135 S L^nJii Street \—I ummelrtown, (--'ennsijlvanici 17036 2 I N D EX Robert Peskin, KDMG - Peat Marwick Jilliam Millar, Executive Director, PAT James Lutz, Executive Director, Red Rose Tansit Authority Lancaster, Pennsylvania; President, Pennsylvania Association of Municipal Transportation Authorities Louis J. Gambaccini, General Manager, SEPTA 3 CHAIRMAN EVANS: The hour now being 9:30, I would like to say good morning to members of the Committee as well as the staff as well as the people in the audience. I would like to read a brief statement. This is a joint hearing of the House Appropriations Committee and the Transportation Committee. Representative Joe Petraca is the Chairman of the House Transportation Committee. His executive director is here representing him as well as maybe some other members who will come in from the Transportation Committee. Today's hearings concludes the formal House Appropriation hearings for the 1992-1993 budget. I want to thank the members of the various standing committees as well as the experts on all of the issues we have addressed for the assistance in making these the most comprehensive hearings ever held in this Committee on the budget. This morning we will be speaking with representatives,from Peat Marwick. Robert Peskin will address the issue of privatization as it relates to the transportation issue. In order to make the best decisions possible, we need to look at all possibilities, to explore all options available, the pros and the cons, the consequences of such decisions. Before we get to it I would like to make a statement. I would like to, again, express to the 4 members I would like to thank you for your endurance of the last three months of these public hearings. I know they have been extensive and we have done a lot and I would like to thank the members . I want to see if Chairman Pitts has any comments. REPRESENTATIVE PITTS; No. I think we have covered the gamut from agencies and departments to think tanks and appreciate the chair's cooperation in arranging the hearings so all parties could be heard. I am looking forward to hearing the presentation on privatization and competitive contracting. Thank you. PR. PESKIN: Mr. Chairman, it is a pleasure to return to Pennsylvania this morning to talk about Denver's very interesting experience in competitive contracting and privatization of public transit services. It was last year that we had an opportunity to speak to PAMTA at their annual meeting in Hershey about the first year of Denver's privatization experience. This morning I will be talking about their second year of experience. If I can, I would like to use the overhead projector which follows along with the presentation. CHAIRMAN EVANS: For the record, would you state your title and your position? DR. PESKIN: My name is Robert L. Peskin. 5 I am a manager with KPMG Peat Marwick in Virginia. This morning we will be talking about the second year of Denver's privatization experience covering the period from July 1990 through the period of June 1991. A little bit of background about Denver's experience. The Denver Regional Transportation District, DRTD, contracted out 20 percent of its transit services. And this was in response to Colorado's Senate Bill 164 of 1988 which required that competitive contracting take place, that the services be put out for bid in relatively small pieces and encourage competition by small local minority businesses. That cost comparisons be done on a fully allocated basis and that a performance audit be done by an independent certified public accounting firm, not the CPA firm that RTD currently had engaged for its,financial audit. I think it is fair to say that RTD viewed this legislation as somewhat of a threat to the institution and had a choice of either fighting it or embracing the concept. They decided to embrace the concept to make privatization work. To never be in a position, had privatization failed, to have had fingers pointed toward them saying you made it fail. Instead, as you will see in this presenta­ tion, they made it work. REPRESENTATIVE LUCYK: What is RTD ? 6 DR. PESKIN: RTD is the Regional Transportation District, that is an agency created by state law, funded through a dedicated tax that operates public transit bus services in the Denver region and is currently responsible for a capital development program which includes bus and light rail transit. As part of embracing this concept of privatization, RTD management and the board of directors had some fundamental objectives in how privatization would be implemented. They wanted to make it transparent to the passengers. So that the first day that competitive contracting and privatization began, th.e passenger, the customer could not tell the difference. They would board a transit bus on the same route, the same schedule, the same bus stop,- paying the same fare. And ideally the only way they would tell the difference is the driver would have a different face and there would be a different company patch on the driver's shoulder. So'again, the same fares, the same schedules, the same routes, similar " looking bus, similar looking driver and similar looking uniform. Now while every effort was made to attract small local minority businesses, the selection process in the end resulted in three national firms being,awarded all the privatized or competitively contracted routes in 7 Denver. The selection process came through first qualifying firms in terms of the strength of their financial statements and their experience in privatization and the strength of their management team that was going to implement the privatization hid on the basis of price. The price was the subsidy that these firms would be requesting from RTD to operate th£ service. The lowest subsidy was the one that won the service. The service was phased in over time. It took roughly a year to get all the pieces of privatization into place and this is partially because it was a bit of a learning exercise for RTD to enter. Subsequent to implementation of privatization the Legislature continued to address privatization and there was some legislation that made it through one House and died in the other that originally was talking about increasing privatization from 20 to 50 percent, ultimately from 2Q to 4Q percent. Made it through the Colorado Senate but was defeated in committee in the Colorado House. That is essentially where the legislation stands right now. RTD management strongly indicated to the Legislature that they viewed the initial several years of privatization as an experiment and they requested that the legislators let the experiment run its course and that is essentially what has been happening so,far. 8 As I get into talking about the findings, E wanted to make our position very clear. This is a lot topic in the public transportation area and there are some very vocal proponents and opponents to privatization. E am sure that you have heard from many of them. Our view Ls not as an advocate. We were hired per the legislation :o conduct a "neutral and unbiased study" and that is what ?e did. And I will be presenting both the good news and :he bad news. There are some very favorable things to say ibout the competitive contracting, but there are a lot )f warning flags up there as well. It is not a venture :hat we would recommend a public agency get into it without mtting a lot of time and effort in it to make it work. [t is very difficult to make privatization work. The focus of our review was to look at, me, to savings. That is the bottom line. How much of :he taxpayers' money was saved resulting in privatization? But we are also interested in the contractors.! >ide. Are they making a profit? Well why is that .mportant you might ask? Well, if they are not making a irofit they probably don't want to be in the business.