Outsourcing School Services is a Bad Bargain

If you want the truth about privatization and how it costs more, consider what is happening to public school transportation in Pennsylvania. School districts across the state that contract with private bus operators spend more money on transportation than those that manage their own bus fleets, according to a new report from the Keystone Research Center (KRC), an independent research and policy development institute based in Harrisburg, PA.

“Handing the reins over to the private sector is not always a good bargain for taxpayers,” according to KRC Executive Director Stephen Herzenberg, who co-authored the study with KRC economist Mark Price. “Over two decades of hard data make clear that school bus contracting is a poor bargain.”

Their conclusions note that “limited competition, private contractor leverage, and high private salaries lead to higher costs with privatization.” In Pennsylvania, the total cost for taxpayers is nearly $223,900 higher per year when a typical school district goes from providing in-house bus services to contracting with a privateer.

“We estimate that if all (Pennsylvania) districts switched to the self-supply of transportation services, total spending on student transportation services would fall by $78.3 million dollars with all of the cost savings accruing to the state,” according to the report.

Nationwide, approximately 4,000 private companies transport roughly 25 million students to school each day. In Pennsylvania, researchers found that 72 percent of school bus transportation was contracted out by school districts in 2008, up from 62 percent in 1986. Researchers also identified 29 school districts that substantially increased their use of private carriers between 1992 and 2001. In the first year after privatization in these districts, total spending on student transportation increased by 10 percent or more in 20 out of the 29 school districts.

Despite indicators such as these, school officials still see privatization as a means of cutting costs. And the reason is simple: instant cash. “School districts contract out school bus transportation to gain a short-term infusion of cash from selling bus fleets—an especially alluring option with districts now facing deep cuts to funding for classrooms,” according to the study. Furthermore, in Pennsylvania, the state surprisingly provides a higher reimbursement to districts that contract out school bus services while also covering most cost increases.

Another reason privatization is a poor bargain: contractor leverage. School officials lose almost all bargaining power after they dispose of their district’s bus fleet to a contractor or other buyer. With school officials at their mercy, contractors have all the leverage they need to dictate future costs, for example, regarding transportation to playoff games for sports teams, disabled students’ transportation costs, the price of fuel, and other variables.

“The upfront cost of repurchasing a fleet of buses is a major obstacle for a district that wants to cut ties with a private operator,” said Price, a labor economist. “Switching to a new contractor may not be an option either, because some areas have only one or two private companies. As a result, contractors negotiate higher payments or slip in added costs for field trips or special services.”

Contractor leverage, too few contractors bidding for jobs and high private-sector executive salaries also contribute to high rates charged by private companies. In addition, districts incur administrative costs for monitoring contractors and often suffer the consequences of disingenuous contracts favoring the privateer.

“Contractors may promise lower costs than actually result – a phenomenon referred to as “low balling” in the industry,” according to the report. Low balling occurs when an initial contract that appears to save the district money is followed by the negotiation of additional charges for additional services not fully anticipated in the initial contract, such as previously unscheduled field trips. “Districts may not revert to self-provided services when prices increase because of the up-front cost of repurchasing a bus fleet or the public embarrassment of vetting a failed and costly privatization with the school board and local community.”

Among the solutions proposed by researchers is technical assistance to school districts to reevaluate their transportation services. “The state could also make low-interest loans available to assist districts with the purchase of new school buses, and create a non-profit that steps in when needed to provide more competition. A commonwealth non-profit also avoids the need for district-owned fleets.”

“Pennsylvania should make every tax dollar count instead of giving school districts incentives to adopt inefficient transportation systems,” according to Herzenberg. “We can change course now and use the savings to improve the quality of our children’s education.”