Competitive Contracting in the US:
Overcoming Barriers

Competitive contracting (tendering) for transit service in the United States first received national attention in the late 1970s in San Diego, California. Since then, the practice has spread to all regions of the country. Contracted services save, on average, 30 percent compared with publicly produced service, and savings in some localities have been as high as 60 percent. And while there have been some failures, in general, competitively contracted service has proved to be equal or superior to publicly produced service with regard to safety and reliability and superior to publicly produced service in flexibility.

Yet, after more than a decade and after scores of labor arbitration hearings, court disputes, and legislative battles, only eight percent of total public transit bus service in the US is provided through competitive contract. In contrast, more than 70 percent of demand responsive (dial-a-ride) service for the elderly and disabled and 30 percent of school bus services is provided through competitive contract.

The reluctance to convert to competitive contracting of public transit is related to the organization and funding structure of public transit service delivery, to the barriers thus created, and to the social, economic, and political milieu of urban mass transportation in the US.

To the Reader The text, which follows, does not include a comprehensive survey of the evidence for the benefits of competitive contracting of public transit service in the United States. The reader is referred to the many studies and publications that present the evidence to date. In addition, the paper addresses only regular bus service open to the general public and does not include special transportation services such as those for the elderly and disabled known as demand responsive or dial-a-ride services. To avoid, as much as is possible, needlessly confusing or overburdening the reader, the paper is a simplified overview of the current barriers to competitive contracting and the strategies used to surmount those barriers; therefore, clarifications as well as references have been relegated to endnotes.

US PUBLIC TRANSIT STRUCTURE

The most common way countries convert from publicly-produced transit service to competitive contracting of service is through passage of national legislation. While this may not obviate difficult legislative battles or expensive transition costs, it does escalate the transition and avoid the multiple state and local court cases, arbitration hearings, and legislative campaigns that have occurred in the US. Public transit agencies in the US are quasi-governmental public monopolies, some even have the right to levy taxes. Nonetheless, transit agencies are funded by and regulated by all levels of government. Conversion to competitive contracting usually does not involve a relatively simple change in law or policy at one level of government, nor is there a single pattern for conversion. For, despite similarities, there are endless variations of structure and regulation that pertain to the public transit agency depending on state and local laws as well as the unique structure and location of the agency itself.

In the US, federal (national) assistance to transit is relatively minor; only 10 percent of total public transit (bus) operating costs is provided by the federal government. But, federal assistance provides almost 62 percent of capital assistance. This federal contribution has an undue influence on the total costs of transit services as well as on the barriers to competitive contracting. In addition, the federal government spurred the conversion of transit from regulated private franchised monopolies to local public monopolies and thus influenced the design and functioning of public transit agencies.

The Federal Urban Mass Transportation Act In 1964, Congress passed the Urban Mass Transportation Act that transformed unsubsidized transit service by regulated private monopoly to subsidized transit service by public monopolies and determined the shape of transit authorities across the nation. Concerned about the precipitous drop in transit ridership that was driving many of the nation's franchised private transit companies into bankruptcy, the federal government provided capital funds through the new Urban Mass Transportation Administration (UMTA) to help localities buy the failing private companies. These federal dollars require(d) local or state matching funds. A decade later, UMTA began to partially fund public transit operating deficits.

UMTA is empowered to distribute funds to "designated recipients" most often, transit authorities. Sometimes, as in California, metropolitan planning organizations are the designated recipient, and they channel the funds directly to the transit agency. Rarely, city governments, such as Phoenix, are recipients and the transit agency is a division of city government. The choice of designated recipient of federal funds is determined by the governor of each state. Otherwise, federal funding for transit bypasses state governments.

The states, however, often have passed enabling legislation to create regional transit districts, which combine central cities and suburban areas into one service area. In most instances, suburban areas contribute to regional transit subsidies based on sales or gasoline tax receipts or based on some other criteria unrelated to the amount of service received. In other instances, suburban areas contract with the regional transit district for services. Characteris- tically, both planning and operations of transit service are provided by the centralized transit authority, which, most often, is located in the center city.

Although funding most often does not flow directly to the central city governments, the central city almost universally dominates the composition of the board of directors, the planning and delivery of transit services, the management culture, and the labor environment of the regional transit authority. The power of the central city is enhanced by the formula used to determine the distribution of the bulk of federal funding. The formula is based on a number of factors including population density and public transit ridership, which skews power away from lower-density suburbs and toward the city. The domination of public transit by the central city has important implications in the US: central cities are overwhelmingly governed by one party and tend to be lenient toward the demands of organized labor; public sector employment tends to be proportionately larger and more influential in cities than in suburban areas; and US media is located in the central cities such that central city concerns, interests, and biases tend to dominate the local newspaper and television coverage even when the total suburban area population exceeds that of the central city. (Many US cities have only one major daily newspaper, and most reporters for the major dailies are union members; broadcasters are even more heavily unionized).

BARRIERS TO COMPETITIVE CONTRACTING

Public Transit Funding: Less than half of public transit revenues are derived from fares and advertising revenues. (Chart: US Transit Operating Revenues) Nearly 60 percent of public transit revenues in 1989 were provided by public subsidies. One-third of the public aid is contributed by the states, and almost 60 percent is contributed by local governments usually through sales or gasoline taxes. While the federal government provides only 14 percent of transit operating subsidies, federal assistance amounts to almost 62 percent of capital public aid. Transit agencies do not receive pro rata capital sums on an annual basis. Buses are required to be kept for twelve years, and they are purchased in custom lots so that individual transit agencies receive large grants in some years and negligible amounts in others. This method of funding capital expenses accords exceptional power to the labor unions; the power is enhanced by large construction grants for facilities and for popular rail projects.

In many states and municipalities, transit is funded through dedicated taxes. These taxes vary from area to area and may be a percentage of sales, gasoline, or property taxes that, by law, must accrue to the transit agency, or they may be taxes directly levied by the transit agency. In either case, the transit agency does not have to go through the annual budgeting process to receive funds from the state, city, or transit district, nor do they have to compete for funding with other public services. Dedicated taxes have been shown to have a cost-escalating effect on the transit agency by Shughart and Kimenyi.

Public Transit Costs: Public transit costs have escalated at twice the rate of inflation since 1970. Before receiving subsidies, public transit cost increases were close to the rate of inflation. Today, public transit costs continue to increase relative to inflation, while private bus industry costs are declining relative to inflation. In fact, public transit costs per mile have increased at a faster pace than US medical costs.

Transit's dependence on local, state, and federal funding has made it subject to myriad regulations from all levels of government. Alternatively, no one governmental entity has been confronted with the full impact of transit cost escalation. The willingness of various governmental entities to cover transit's costs have acted as a barrier to privatization; public transit has not felt the need to control its costs.

Power of the Public Sector: The power of public sector interest groups in America to garner subsidies has been well documented in the public choice economics literature. Public transit employee interests have exerted pressure beyond the usual concerted efforts of public sector employees and unions to effect the legislative process. Most large public transit agencies pay for full-time lobbyists in Washington as well as in the state capitol, and transit management also spends time lobbying. Most large transit agencies have large, fully developed public affairs departments. In addition, the American Public Transit Association, in which most transit agencies hold membership, is involved in lobbying activity.

The strength of public transit lobbying efforts is suggested by patronage, spending, and service figures. From 1979 to 1989, US employment increased over 21 percent. Because work trips form the highest proportion of transit trips (transit provides nearly 6 percent of the work trips as opposed to 2 percent of all trips), one would expect that patronage would increase. Yet, the number of passenger boardings declined by nearly 6 percent; operating costs climbed almost 36 percent after adjustment for inflation, and the amount of transit service offered increased by only 4.9 percent. Subsidies grew by 290 percent to over $8 billion despite every indication that transit was not using the bulk of funds to finance service increases.

Public Sector Labor Unions: Perhaps the biggest barrier to competitive contracting is resistance by the transit unions. Transit union power flows from the influence of public sector union power in America's largest cities and from public sector employee compensation gains especially in state and local governments, but it is also connected to the special protection afforded transit unions by the federal legislation that created public ownership of transit.

Only 16 percent of total employees in the US belonged to labor unions by 1989. Except for the large industrial oligopolies, there is little pattern bargaining and no national governmental bargaining. Labor union membership in the private sector has declined from a high of almost 35 percent in the 1955 to just 12 percent in 1989. Public sector membership has increased from 13 percent to nearly 40 percent by 1989. This increase in unionization has coincided with an increase in public sector pay from parity to more that 10 above the private sector.

The pay premium of public sector employees is more pronounced in public transit, where unionized drivers are paid up to double that of drivers in the unionized private sector and 65 percent more than the average production worker. Transit drivers, whose jobs require less than graduation from high school (grammar or secondary school), receive nearly 11 percent more in total compensation than employees with four or more years of college education. The average compensation for all transit employees exceeds the average compensation for US employees with college degrees by more than 30 percent. Public transit benefits average 50 percent double that of the average private sector worker.

Special Labor Protection: The monopoly power of public transit labor unions has been magnified by a particularly expensive provision of Urban Mass Transportation Act of 1964, and as amended. Section 13(c) of the act requires that adequate labor arrangements be made to ensure that employees are not harmed as a result of federal funding. Under 13(c), the US Department of Labor must certify annually that adequate arrangements have been made to protect labor before any single transit grant can be approved for operating or capital expense. This certification process has been interpreted to require negotiation of special labor agreements between the transit agency and its union agreements that are in addition to existing labor agreements. Public transit unions have sought concessions from public agencies that they otherwise could not have obtained through the collective bargaining process. Failure of the transit agency to agree to these concessions has resulted in delay or could result in loss of federal funding. In essence, Section 13(c) has given transit labor unions the power of veto over the coveted capital (and operating) grants.

This second chance at labor protection has added to the monopoly power of public transit unions. Most union contracts are silent on the issue of competitive contracting, but the threat of lost or delayed federal funding has constrained the use of competitive contracting. In addition, one provision of 13(c) requires that an employee whose job is eliminated due to economies or efficiencies be provided up to six years' severance pay. (In the US, only railway employees have similar protection.) This provision has proved to be a costly barrier to some methods of conversion to competitive contracting.

Labor Bargaining

Section 13(c) requires that transit agencies have some method of dealing with impasse or the failure of labor and management to reach accord. Because 13(c) is not specific on method, transit agencies and unions must determine methods for the resolution of differences. Agency to agency variations in dispute resolution result from differing state and local laws, but, more often, differences in methods between transit agencies are a function of the proclivities of individual transit boards and management.

In general, impasse may be resolved through binding or non-binding arbitration, through strikes, or through court action. Transit unions rarely resort to strike. Strikes by public employees are prohibited in some states, which has not stopped their occurrence. More importantly, strikes have backfired badly for transit unions. Because most Americans are not dependent on public transit for mobility, there is little public pressure to accede to union demands. In addition, strikes cause long-lasting loss of ridership, which could result in loss of union jobs.

Instead, transit unions have pressured agencies to use binding arbitration to resolve disputes and to include this requirement in labor contracts. Most transit agencies have signed such contracts. The prevalence of these clauses results from a model 13(c) agreement developed jointly by the transit unions and the American Public Transit Association in 1975, which specified that disputes be settled by binding arbitration. While individual agencies were not required to adopt this contract or its provisions, many did to avoid lengthy contract negotiations.

Binding arbitration does not always result in a decision that is favorable to the union; but more often than not, arbitration has resulted in positive gains for the unions when applied to compensation, hours, or to issues covered by the current contract. On the issue of competitive contracting of transit service, arbitration has resulted in mixed rulings. In general, rulings against competitive contracting are more likely when a clause in the present contract expressly forbids contracting of work. However, there have been instances where contracts are silent on contracting and the arbitrator has ruled against competitive contracting. Arbitrators also have ruled against competitive contracting when the transit agency did not notify the union of proposed intent to contract or when the transit agency did not bargain in "good faith."

If the transit labor contract and the state law does not require binding arbitration, and if the agency does not agree to voluntary arbitration, impasses may be taken to court. The various state laws and the labor contract, then, are the decisive elements in allowing competitive contracting. In some states, contracting has been viewed by the courts as a management prerogative, and it is not a negotiable item between labor and management.

Public Transit Managers

Public transit administrators have resisted the competitive contracting of transit services. Indeed, most instances of competitive contracting have occurred as a result of withdrawal from the regional transit district or as a result of outside pressure from other legislative or governmental bodies.

It is difficult to ascertain the motivations that underlie this resistance. Theorists posit that competitive contracting would result in a diminution of power resulting from a down-sizing of agencies or from the loss of funding that might occur if transit could be provided for less. As in Colorado, management jobs might be lost when significant portions of service are competitively contracted, and administrators might suffer reduced compensation or perquisites as a result. Whatever the reason, it is clear that public transit administrators have derived special benefits from the present system.

Transit managers, as well as transit drivers, routinely are more highly compensated than their private sector equivalents. Like drivers, managers' average benefits are close to 50 percent of their salaries as compared to 25.7 percent in the private sector. The average transit employee receives 70 percent more in compensation than the average US employee.

The Chicago Transit Authority (CTA) provides a conservative example of the differences in compensation. From 1975 to 1988, CTA costs increased only 19 percent relative to inflation as compared with the transit industry average of 32 percent. Yet, the director of the CTA, who is not the most highly paid transit administrator in the nation, receives more pay than elected officials like the governor of Illinois, the mayor of Chicago, and US Representatives (the highest paid members of Congress) or appointed officials like the Chicago police superintendent and fire commissioner.

CONVERSION TO COMPETITIVE CONTRACTING

The unique interaction of transit funding, legal provisions, and the power of transit labor unions has created multiple barriers to the conversion to competitive contracting in the US. Nonetheless, an increasing number of transit agencies have begun to contract for services. The search for ways to overcome the barriers has resulted in a laboratory of models to convert to competitive contracting.

Agency Choice

Despite the obstacles, some agencies have decided to convert to competitive contracting. This has the advantage of full support by the transit agency reducing the chance of unfair practices against the private bidders and contractors. It also has the advantage of avoiding the loss of federal funding, which can occur when localities withdraw from the regional transit district.

Oftentimes, the conversion results in time and costs expended in labor- initiated binding arbitration as in the case of Fort Wayne (Indiana) or court suits as in the case of St. Louis. In both cities, these actions resulted in findings for competitive contracting, primarily because there was no clause in the current contract prohibiting competitive contracting, the agencies faced loss of current service in the absence of the cost savings from competitive contracting, and there were no layoffs of union personnel as a result of the action. In cases such as Houston, where the transit agency competitively contracted for new service, and metropolitan San Francisco, where the transit agency competitively contracted routes that had been sole source contracts with a private operator, arbitration and court action was avoided. Nonetheless, a number of agencies have sought to competitively contract but were prevented from doing so through arbitration findings or through court action.

Federal Support

The administrative level of the Urban Mass Transportation Administration (UMTA) for the past decade has favored competitive contracting of transit service. UMTA's proposed rule to require a portion of each transit agency's service be competitively contracted as a condition for receiving federal funding was rejected by Congress. Congress did allow the UMTA rules that prohibit public transit agencies from providing school bus service and, with limited exceptions, charter and tour services. These rules helped to strengthen the private bus industry and allow for their entry in smaller markets, which increased the free market foundation needed for conversion to competitive contracting. To further promote competitive contracting, UMTA has tried three basic approaches in addition to education efforts:

1. A requirement that transit agencies allow for private sector involvement in the planning process;

2. The use of discretionary monies to further competitive contracting; and

3. The funding of demonstration projects to illustrate the advantages of competitive contracting.

UMTA currently requires that transit agencies consider the use of competitive contracting for new or restructured services and routes. In addition, transit agencies must allow for the interaction of the private sector in the planning process. Theoretically, these requirements would create a public forum for private operators to bring agency and public attention to the savings of competitive contracting.

Of themselves, the requirements have had little impact. Free of the mandate to competitively contract, the transit agencies compliantly consider competitive contracting, but find it unsuitable for use in their region. And the private sector has been poorly prepared and not inclined to spend the money and time to attend planning meetings or to mount an expensive active public campaign to promote competitive contracting. Even where the private sector has become active in the planning process, the media rarely have reported the issues involved, and competitive contracting of transit service has not become a part of the public debate.

Transit agencies are more apt to seriously consider competitive contracting when doing so will increase their chances of obtaining desirable capital monies from a discretionary fund. Several transit agencies, such as Santa Cruz (California), have initiated competitive contracting of a portion of their service to receive or increase their chances of receiving these "demonstration" funds.

Many of these contracted services have been faithfully executed by the transit agency. Unfortunately, these grants can only be used to institute new services and so are applicable to primarily high-growth areas. In addition, some agencies have accepted the money and then been less than honest in bid procedures. UMTA requires that the agency bid fairly in competition with the private sector, but, in many cases, the transit agency has bid below their attributable, fully allocated costs to be awarded operation of the route. This violation of UMTA regulations can be contested by private providers, but it requires time, money, and expertise from the private sector. Where the private sector has protested and where the transit agency has not bid fairly, UMTA has insisted the agency reconsider the award or return that portion of federal funds.

Some transit agencies have applied to receive UMTA pilot project monies to study the savings and performance of competitively contracted service. The funding has provided for vehicles and facilities that are beyond the ability of the transit agency to fund from capital formula grants. The results of these "compelled" conversions have been mixed. Areas, such as Los Angeles, that otherwise have been favorable to competitive contracting have shown positive benefits from competitive contracting. (See Los Angeles Case Study.) Both the agency and the contractors have been pleased with the contracting relationship. Where the agency has been reluctant to competitively contract and has done so to receive the funding, such New Orleans, competitive contracting has not been as successful. In New Orleans, for example, the agency leased to the contract operator buses that had been discontinued by the manufacturer for poor performance, that were more than double the average age of the agency fleet, and that were beyond their useful life. While the contractor ran the buses at savings of 53.7 percent compared to agency operation, the media and the agency complained about the poor maintenance and breakdown rate of the vehicles.

UMTA also has provided demonstration funding through its Entrepreneurial Services Program Grants to encourage private sector operators to develop transit services that do not rely on public subsidies. The grants cover some costs of planning routes and services and a small portion of capital assistance. The unsubsidized services must not be in competition with the subsidized public transit services. The program has met with very limited success. Because of low population densities and low transit ridership in the US, few transit services can exist without subsidy. Private operators, too, would have the added time and expense of federal reporting requirements for a period of years. Finally, the federal application process is cumbersome and can take a year or more.

State Legislation

In the US, changing state law to require competitive contracting of transit service is closest to the standard model of changing national law. This method has the advantage of avoiding multiple settlements of labor grievances across several jurisdictions and as privatization increases, although state law is still subject to review by the state courts. To avoid conflict with Section 13(c) labor protection clauses, state law would either require the conversion of competitive contracting to proceed within the natural employee attrition (turnover or wastage) rate and thus avoid employee layoff and payments for idle workers,or the law would include provision for retention of idle workers or payment for up to six years for those who suffer layoff.

Competitive contacting bills have been introduced in a number of states, but, to date, only Colorado has passed legislation that requires competitive contracting. In 1988, the Colorado Legislature voted to require the Denver Regional Transit District to competitively contract 20 percent of total bus service over the objection of the transit agency and despite the fierce lobbying of the unions.

The Denver competitive contracting law, Senate Bill 164, required that no employees suffer layoff as a result of the contracting; instead, workers were to be paid although idle. The legislation was passed as a demonstration (experimental) project and required a full independent audit to be presented to the Legislature. The audit was to compare public with private safety and service quality and the full cost of competitive contracting to the costs that would be incurred had the agency continued to produce service. The first parcel of six separate parcels of service was awarded in 1989.

The revised final audit of Denver competitive contracting projected savings at 27.5 percent after accounting for the public agency costs of idle labor and facilities. The audit reported that service and safety on average were comparable during the period of study, although the private contractors were improving. (The period of study covered approximately the first year of the operation of service; some contracts had been operating more than a year, one had not begun.)

The results of the final revised audit were controversial. Nonetheless, the audit demonstrated future savings after accounting for the more than $9 million of short-term costs of idled labor. When a bill was introduced to increase the amount of service to be competitively contracted, however, both the labor unions and the transit agency publicly claimed there had been no savings through competitive contracting, and the bill was defeated.

Withdrawal from Regional Transit District Service A number of localities have begun to competitively contract after withdrawing from the regional transit district or after discontinuing the routine practice of awarding contracts for services solely to the nearby transit agency. Withdrawal has the advantage of full support by the transit agency as well as avoidance of labor liabilities and grievances. One disadvantage of withdrawal is that it can result in loss of federal funding as in Johnson County (Kansas). In this case, the regional transit agency in Kansas City continued to receive full federal funding for the metropolitan area of which Johnson County was a part, but since Johnson County was no longer a part of the transit district, it forfeited any benefit of federal funding it otherwise might have received. Alternatively, Snohomish County (Washington), which qualified for federal funding in its own right, discontinued 70 percent of its contracting with the Seattle transit agency and was able to retain its federal funding when it began competitive contracting.

Separation of Policy from Operations

A small number of transit districts have separate policy and operations boards and staffing. State legislation created these oversight models to improve transit management and cost performance. A side effect, in some cases, has been that the oversight (or policy) boards have determined that the transit agency was not the best or lowest cost producer of transit service. Transit contracting in Los Angeles, for example, has followed the creation of separate policy boards. Separation of policy from operations can make it easier to convert to competitive contracting if the board has the will to do so. However, bureaucratic capture can occur just as easily on the policy board as on the operations board.

Private Sector Advocacy Groups

In some areas, private sector bus operators have formed advocacy groups to promote the use of competitive contracting. These state or regional groups, usually through their executive director or advocate, work to educate the general public and their elected officials and to influence public transit agencies to use competitive contracting. The groups spread costs among a number of operators, although there is a problem with free riders.

Advocacy groups provide needed information to both the transit agency and group members once the transit agency has made the decision to competitively contract; the agency is monitored during the bidding development process to assure reasonable terms and non-biased procedures, and private operators as a group receive information on how to satisfy bid applications. If the agency violates UMTA regulations (for example, by bidding below agency costs), the advocacy group protests, thus removing the onus on any one private operator and spreading the costs of protesting. Once the contract has been awarded, the advocacy group assists the contractor in contract compliance and applies peer pressure to laggard contractors to boost performance. The group also informally monitors the agency to prevent contractor harassment.

State and regional advocacy groups have a mixed record with regard to effectiveness. In some areas, such as California, an experienced advocate and a proactive board in combination with high-growth transit districts has been very successful in increasing the amount of competitive contracting. In other areas, boards have been reluctant to aggressively pursue conversion to competitive contracting and have limited the effectiveness of the advocate, and contracting has not increased. Advocates are particularly effective when they can combine efforts with other advocacy groups such as taxpayer and good government leagues to pressure transit agencies to convert or to bid fairly.

National advocacy groups have publicized the issue and otherwise have assisted in the conversion to competitive contracting. The American Bus Association, the American Legislative Exchange Council, and the International Taxicab and Livery Association have published reports and newsletters, developed model legislation, held seminars and conferences, and have provided legal and technical assistance to operators and to legislators.

LOS ANGELES: A CASE STUDY

A number of methods have been used in the Los Angeles metropolitan area to avoid the obstacles to competitive contracting. The Santa Clarita Valley was part of the (Southern California Rapid Transit District the Los Angeles transit agency) special (transit) taxing district but withdrew and competitively contracts for transit service; the City of Los Angeles withdrew a portion of services from the transit agency and converted these to competitive contract; and citizens of the Foothill area petitioned the policy board (Los Angeles County Transportation Commission) for a separate transit district to competitively contract for services. The conversion to competitive contracting was aided by an active private sector advocacy group and its competitive contracting coordinator.

The study will focus on the City of Los Angeles, the County of Los Angeles, and the Foothill Transit Zone. To simplify, the City of Los Angeles will be designated LA; the County of Los Angeles will be referred to as the County; the Southern California Rapid Transit District will denoted as the Transit Agency; the Los Angeles County Transportation commission will be designated the Commission; and the Foothill Transit Zone will be referred to as Foothill or the zone.

Shuttle and Express Service

In 1985, LA, the Commission, and the Transit Agency agreed to give LA responsibility for services that had been provided under contract by the Transit Agency for 14 years a shuttle service serving the downtown area and a proposed express service. LA decided to competitively contract for the services. During the first year of competitive operation, ridership on the shuttle service increased by 10 percent, and private costs saved 38 percent over transit agency costs. LA expanded the service, and a two-year evaluation indicated savings of 60 percent.

Fifteen-route City/County Services In 1986, the Transit Agency decided to discontinue a number of unproductive routes. The Commission decided to transfer responsibility for operation of the routes to LA and the County. The action was taken for a variety of reasons:

1. The Commission, the policy board created by the state to plan and program all transportation dollars for the County, was increasingly dissatisfied with the Transit Agency's mounting operating costs.

2. The Transit Agency's contracts with the two major labor unions prohibited contracting to lower cost private operators to reduce operating costs.

3. Based on the continuing success of the contracted LA express and shuttle services and successfully contracted services in adjacent municipalities, there was a growing consensus among the Commissioners that unproductive service should be reassigned.

4. UMTA "demonstration grants" of capital assistance were available to areas that competitively contracted.

Eleven local and express routes were transferred to LA and four local and express routes were transferred to the County from the Transit Agency. Because of the labor protection agreements connected with the UMTA legislation, the County withdrew its application for a demonstration grant but retained the service. A second year evaluation of the contracted routes indicated that operating costs of the routes declined by 51 percent, miles between roadcalls (vehicle breakdown on the road) increased by 90 to 416 percent, and the accident rates per 100,000 miles decreased by 31 to 37 percent.

The Foothill Transit Zone

From 1984 to 1985 and subsequent to exhaustive public hearings, the Commission developed guidelines for the establishment of transportation zones. Upon final Commission approval of the guidelines, 29 cities of the San Gabriel Valley submitted an application (also preceded by public hearings) for the creation of a new transit zone comprised of 35 bus routes and to be known as the Foothill Transit Zone. If the plan was approved, operation of the routes would be transferred from the Transit Agency to the new zone. The application did not receive the required two-thirds vote of the Commission. The plan was resubmitted after reducing the zone to 20 cities and 14 routes (111 buses), and accepted by the Commission in December of 1987. The zone represented nine million estimated boardings and over $90 million in combined subsidies and fare revenues. The routes were to be transferred in phases over a two year period so as not to adversely affect any Transit Agency employees.

The Commission may have been influenced to accept the creation of the new zone by the actions of the Transit Agency, which had been planning to increase fares by 50 percent while decreasing service to the Foothill area. The Transit Agency had not been able to control its costs, and one estimate of savings resulting from the transfer of the routes and competitively contracting for service exceeded $9 million annually.

Operation of the first two Foothill routes was scheduled to begin July 1, 1988. However, two Transit Agency unions and the national federation of unions (AFL-CIO) filed a lawsuit with the Superior Court, or lower state court, to prevent Foothill from operating the routes and to prevent the Commission from funding routes and using its discretionary authority to transfer routes from the Transit Agency to the Foothill Transit Zone. The unions also argued that the Commission must get the Transit Agency's consent prior to transferring the routes. The lower court issued an injunction against the transfer (of all but two routes that were already in operation by a private operator) pending the hearings on the case.

To pressure the Transit Agency to give consent to the transfer of routes, the Commission withheld from the Transit Agency over $50 million in discretionary funding (at the rate of $9 million per month). The Commission cited as reason for withholding the funds the failure of the Transit Agency to abide by the Commission's guidelines for labor contracts, which prohibited labor agreements that prevented competitive contracting for service. Both the Transit Agency and the labor unions asked the court to issue an injunction to prevent the Commission from withholding of discretionary funds. The court denied the injunction. The Transit Agency and the Commission then developed an eight-point plan that included Transit Agency consent for transfer of the routes.

Hearings on the union lawsuit brought against the Commission began in May, 1989 and were concluded a month later. Attorneys for the unions argued that creation of the Foothill Zone was inconsistent with state statutes and the labor agreements with the Transit Agency as well as with the federal 13(c) agreements signed by the Commission. Union attorneys pleaded for a narrow, restrictive interpretation of the state law that the Commission had used to create the zone. In July, the court lifted the temporary injunction, denied permanent injunction, and rendered its decision: the potential harm to the area's bus riders that resulted from not allowing the more cost-effective Foothill Zone to contract for service far outweighed the possible adverse affects on Transit Agency employees. Three more routes were transferred to Foothill.

The unions appealed the case. The appeals court denied the union petition for an injunction against operation of the routes that had been contracted and the further transfer of routes and refused to hear the case. The Supreme Court then issued a temporary injunction but reversed its decision the following day and remanded the case back to the appeals court with instructions to rule on the merits of the injunction, which would affect the five routes that had (and have) not been transferred.

A panel of four Appeals Court judges heard arguments in February, 1991. On April 3, 1991, the California Court of Appeals upheld the decision of the lower court and ruled in favor of creation of the transit zone. The Commission estimates that, to date, its total legal costs will be just below $1 million; legal costs for all parties could exceed $3 million. The unions plan to appeal the decision to the California Supreme Court. Concurrent with the decision of the appeals court, auditors were completing a draft of the required audit of Foothill's competitive contracts and a comparison of their costs and performance with that of the Transit Agency. Preliminary figures indicate total hourly savings of 40 percent and savings of subsidy per passenger of 60 percent; ridership on the contracted routes increased by 20 percent in 1990. Fares are nearly 30 percent lower than those of the Transit Agency.