MBTA commuter rail contracts rose by a greater percentage than in-house bus costs

While proponents of privatizing the MBTA point to the rising cost of in-house operations there, the cost to the agency of contracting out appears to have risen even faster.

The annual cost to the MBTA of contracting for commuter rail services has risen by 99.4 percent since 2000, compared with a 74.9 percent increase in the annual cost of the agency’s in-house bus operations, according to cost information we’ve compiled from public online sources (see below).

In our view, the rising cost of the commuter rail contracts since 2000 casts further doubt on the claims by the Pioneer Institute and other privatization proponents that contracting out for services will automatically save hundreds of millions of dollars at the T.

In case you missed it, the Pioneer Institute issued a report earlier this month that compared the actual cost of MBTA bus operations to a proposal based on bids from outside contractors to undertake those functions.

The Pioneer report concluded that had the state auditor allowed the planned privatization of the bus operations to go forward, the MBTA would have saved $450 million between 1997 and 2015. The report claimed those allegedly foregone savings were the fault of the Pacheco Law, which the auditor had cited in objecting to the outside contract proposal.

(As discussed below, the state auditor did not definitively reject the MBTA’s contract proposal, but rather asked the agency to resubmit its proposal after addressing concerns raised by the auditor about its cost calculations. The MBTA never did resubmit its proposal, but instead chose to sue the auditor in state superior court to reverse the auditor’s decision, and lost.)

The Pacheco Law requires state agencies seeking to privatize existing operations to show that bids from private contractors would be lower than a calculated cost of continuing to perform specified work by regular state employees “in the most cost-efficient manner.”  The state agencies must submit their calculations to the state auditor, who has the final say as to whether the functions can be privatized.

Largely due to unrelenting political pressure from the Pioneer Institute and other privatization advocates, the Legislature approved a 3-year freeze earlier this month on invoking the Pacheco Law with regard to privatizing MBTA functions.

Last week, we raised a number of concerns about the methodology of the Pioneer report, including criticizing its comparison of actual in-house MBTA costs to bids.  We argued that it’s meaningless to compare actual costs to hypothetical costs over a nearly 20-year period.

We think it would make more sense to compare actual in-house costs to actual contract costs over a multi-year period.  An obvious candidate for an evaluation of actual contracting costs appears to be commuter rail.

The MBTA has contracted out for commuter rail service since the 1980s, according to a state audit report on the agency. Beginning in 1987, Amtrak began providing commuter rail services to the T under a cost-plus-overhead and profit contract. In 1995, this was changed to a negotiated fixed price contract with a three-year term and two one-year options.

In May 2000, according to the audit report, the MBTA was given permission by the federal government to extend the Amtrak contract without bidding for an additional three years.  The total cost of the three-year contract extension, plus additional work that was in included in subsequent contracts, came to $168 million per year.

The Massachusetts Bay Commuter Rail Company (MBCR) subsequently won a competitive RFP process to operate the commuter rail system, starting in 2003.  The cost per year of that fixed-price contract was $217.4 million, which amounted to a 29.4 percent increase over the cost of the Amtrak contract three years earlier.  In that same period, the in-house cost of MBTA bus operations rose by just 12.8 percent, based on the Pioneer report’s figures (See chart below).

In 2008, the MBTA granted MBCR a three-year contract extension at a cost of $246 million per year, which amounted to a 46.4 percent increase in commuter rail contracting costs to the MBTA since 2000.  In that same time, the in-house bus operations cost had risen 40.4 percent.

In 2011, MBCR received a final 2-year commuter-rail contract extension costing $288.5 million a year.  By that time, the MBTA’s cost of contracting for commuter rail had risen by 71.7 percent since 2000, whereas the in-house cost of MBTA bus operations had risen by 55.7 percent.

Finally, the MBTA signed an eight-year contract last year with Keolis Commuter Services at an annual cost of $335 million, according to The Boston Globe.  (Note: the headline on the linked Globe story appears to be wrong.)  As a result, by the time Keolis began operations last July, its annual contract cost was 99.4 percent higher to the MBTA than the Amtrak contract cost had been in 2000. In contrast, the cost of in-house bus operations at the MBTA was only 74.9 percent higher in 2014 than it had been in 2000.

By the way, it may be only a matter of time before the Keolis contract cost rises above the $335 million annual amount, given that the company is reportedly already losing money operating the MBTA commuter system.

The Pioneer report characterized the in-house cost of MBTA bus operations as “inordinately expensive,” and concluded that for that reason, replacing that in-house service with contracted work in 1997 would have saved hundreds of millions of dollars.  But the Pioneer report failed to consider the actual experience that the MBTA has had with contracting.

One might argue that you can’t legitimately compare the cost of commuter rail operations to bus operations.  But at the same time, we think our comparison shows that entering into contracts for services doesn’t guarantee that the costs won’t rise dramatically.  Since 1995, the commuter rail contracts have all been fixed-price contracts.

The Pioneer report misrepresented the state auditor’s objection to the MBTA’s 1997 privatization proposal as a “ban” on the award of the contracts

The Pioneer report referred in different places to the state auditor as having “banned” or “blocked” or “barred” the MBTA’s proposal to privatize the agency’s bus services in 1997.  According to the report, this adverse decision, which was based on the Pacheco Law, not only thwarted the MBTA’s attempts to save costs and improve quality of its bus service, but the MBTA never again attempted to privatize that service.

But the actual decision by then State Auditor Joseph DeNucci did not ban or block or bar the MBTA from privatizing its bus services.  Instead, DeNucci invited the MBTA to resubmit its proposal after addressing a number of issues raised in his decision letter and in a previous letter regarding the proposal.   Among those issues were alleged failures by the MBTA to support specific cost savings in its bid proposal and to provide measurable indicators of service quality as a baseline for comparison, such as information about on-time performance.

It does appear that the MBTA was not happy with the issues and inquiries DeNucci’s staff was raising about the MBTA’s privatization proposal.  According to DeNucci’s letter, the MBTA objected at one point to the auditor’s questions about how claimed savings in contracting out functions at garages in Charlestown and Quincy could be achieved since a third facility in Everett was providing services to support the two other garages.

When the auditor inquired as to how costs would be reduced at the Everett facility, the MBTA responded that the auditor’s inquiry was “of no significance,” and “beyond the scope” of the Pacheco Law.

DeNucci’s final letter to the MBTA stated the following:

Recommendation:
We believe that the MBTA should seriously address each of the above substantive issues disclosed
by our review. A carefully considered objective analysis of these matters, such as the Everett and
Arlington facilities, quality of service, changes and extra work, pension costs, 13(c), and bid price
changes, should be undertaken prior to privatization. A hasty, ill-considered, rather than a thorough
analysis, would not well serve the MBTA’s ridership and the taxpaying public.

Conclusion:
Therefore, pursuant to Section 55(a) of Chapter 7, MGL, this office hereby notifies the MBTA of
its objection to the awarding of these contracts. In accordance with Section 55(d), this objection is final
and binding on the MBTA, until such time as a revised certificate is submitted and approved by this
office. As always, this office is available to discuss our findings and provide further assistance to the
agency. (my emphasis)

Whatever reasons the MBTA had for not answering the auditor’s questions, the fact that those questions remained unanswered was the reason that the auditor objected to the MBTA’s privatization proposal.  Nevertheless, the auditor clearly invited the MBTA to try again and to resubmit a revised privatization plan that addressed the issues in the auditor’s review.

The Pioneer report implies that it is somehow the fault of the Pacheco Law and the state auditor that the MBTA never did revise or resubmit its proposal, and never again attempted to privatize its bus services.  That seems to us to overlook the MBTA’s responsibility for failing to comply with the auditor’s reasonable requests for information.

If you want someone in authority to grant a request you’ve made, and they say they may well grant it, but first they would like some more information about it, do you then say “it’s none of your business?”  That, in effect, appears to be what the MBTA told the auditor in the the bus privatization case.

It was the MBTA’s choice not to answer the auditor’s questions and subsequently to sue the auditor rather than resubmit its proposal.  It was also the MBTA’s choice never to submit another privatization proposal to the auditor for those services.

Now, not only is the Pioneer Institute continuing to complain about the auditor’s 1997 decision, we think the Institute has failed to make the case that the decision cost the taxpayers money over the intervening years.

And one more thing about the Pioneer report’s calculation of the alleged foregone savings 

As noted above, the Pioneer report’s figure of $450 million in lost savings from 1997 to the present, due to the Pacheco Law, is based on comparing the T’s actual in-house operating cost for bus service to an outside contract bid.  The report stated that as a means of comparison, it escalated the proposed contract bid between the years 2002 and 2013, the last date for which in-house cost data on the MBTA was available. The Pioneer report escalated the contract bid by the same percentage rate that it escalated the in-house cost each year.

But why did the Pioneer report not escalate the contract bid for the first five years of the comparison (from 1997 to 2002)? For no readily apparent reason, the report lists the same hourly contract rate for those first five years of its comparison. Yet, the report shows in-house MBTA costs rising by over 18 percent during that same initial five-year period. Had the report applied the same escalation rate to the contract bid as it did to the actual in-house costs throughout the comparison period (1997 to 2015), it would reduce the alleged $450 million in foregone savings by about $72 million.

If there was a reason that the Pioneer report assumed the bus contract costs would remain flat for the first five years, but would escalate after that, it isn’t stated in the report, as far as I could tell. But even if the report had assumed the same escalation rate throughout the comparison period, we would still reject the entire comparison of actual to proposed numbers.