ANALYSIS Te State of Contracting WRITTEN BY TIM AMMON F


ollowing the financial crises of 2008 through 2012, there were high expectations across the industry that the volume of contracted services


would increase dramatically due to the extreme financial pressures on school districts. Tat the volume of contracting did not in- crease as expected raises the question: Why? Tere would appear to be three key


reasons: • Status quo bias – Tere is an incredibly strong force that motivates people to con- tinue doing what they are doing, even if it is not in their best interest. Te behavioral science literature provides a number of reasons as to why, but the key idea is that overcoming this inertia is very difficult.


• Complexity – School districts, whether they are currently contracted or not, often see the solicitation process as a complex and labor intensive effort. Whether this is true or not is debatable, but the perception of complexity is real and must be considered. Tis causes some districts to forego the effort and further reinforces the status quo bias.


• Time lag – From the initial discussions about contracting, whether a conversion or renewal, to fully executing a new agreement, the plan may require 12 to 18 months. For many districts, this was enough time for the financial conditions to stabilize and to reduce the imperative to make substantial structural changes to their operation.


While these forces would seem to have


constrained short-term opportunities for contractors, there are more significant structural challenges facing school districts that are likely to provide significant future opportunities. Annual operating costs are the most commonly discussed differences between district-owned and contracted services, but there are much more relevant cost concerns that are likely to encourage consideration of contracting in both the short and medium term. Tese concerns


include: pension and benefit costs, capital replacement requirements and the ability of the existing operations to manage to in- creasingly constrained budgetary conditions.


LONG-TERM EMPLOYEES AND LONG-TERM COSTS


It is not news that public sector pension


costs are increasingly difficult to sustain. According to a February New York Times article, more than 40 states have recently enacted laws that have attempted to reform the method by which pension costs are calculated, in an effort to slow the long- term growth of the obligations. Even in states where changes have been made to the systems, failure to actually fund the annual contributions has exacerbated the problem, resulting in massive underfunding of obliga- tions in a select number of states. As these burdens become more acute and begin to eat into funding normally targeted at services, it is highly probable that states and localities will seek out the ultimate in pension cost reduction: avoiding the cost altogether by no longer being responsible for the employees. Tis is likely to open up markets that have historically been at best ambivalent to contract service providers.


SHORT-TERM EXPENDITURES WITH LONG-TERM DIFFICULTIES


Funding for school bus replacement is one of the easiest and most consequential things to defer. Unless you have state laws prevent- ing it, there is no doubt that you can always keep a bus running for another year. Te real question is how much that extra year will cost you in out-of-pocket maintenance costs, downtime and other reliability concerns. Te financial pressures of funding


replacement are evident in places like Tennessee, where a traditional law dictating replacement periods may be repealed, and the issues in South Carolina remain legend- ary. Additionally, recent work we completed in Michigan indicates that the deferral in


replacement expenditures is hitting states where there was a previous history of rea- sonableness. Te ability to acquire and put capital to use is something private compa- nies are adept at and represents an addition- al avenue of opportunity.


INNOVATION ON MANY FRONTS When innovation is discussed, it is most


often in terms of technology. However, there are other options for innovation that offer opportunities to contractors. One of the key questions facing the student transportation industry is: Where will the next generation of managers and leaders come from? Budget cuts have resulted in the loss of the transpor- tation director position in many districts. Contractors can offer innovative models


of oversight and leadership including regionalized management, centralized route development for multiple districts, and regionalized maintenance services. Tese models reduce the total number of specialized positions that must be recruited and trained at a time when the size of that potential population is shrinking. While the original expectations for


contracted opportunities did not materialize as expected following the financial crisis, the structural concerns associated with school district operations should result in addition- al opportunities in the near future. Clearly articulating how bus contractors can assist school districts in mitigating the impacts of these concerns on the educational mission will be a key requirement. l


Tim Ammon is a consultant with Management Partnership Services, Inc., in Rockville, Md. He has extensive experience in system implementation and use and evaluating school bus routes and schedules and has analyzed all aspects of transportation and fleet management operations. Ammon also assists in the specification and implementation of transportation software applications.


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