2
Public and Private Provision of Transit in the United States

The contracting of transit services by public agencies is often viewed as a recent phenomenon. Yet the public and private sectors have long collaborated in the provision of urban transportation in the United States. While the nature of this collaboration has evolved over the years, public and private involvement in transit has endured. This chapter describes the evolution of the public- and private-sector roles in transit provision to provide historical context for the ensuing discussion of transit contracting today. Also described are key legislation and public policies that have influenced transit service contracting in recent decades.

Early Experience: Private, Regulated Transit Service

Genesis of Local Transit Regulation

Long before electric streetcars and motor buses, horse-drawn vehicles provided urban transport on a for-hire basis. Early forms of such vehicles included the hackney—a coach pulled by one or two horses—which flourished in England for more than 200 years beginning in the 17th century. At the time, passenger transportation needs were escalating in London and the other burgeoning cities of preindustrial Europe (Smerk 1992, 3–7). Although a small proportion of city dwellers could afford hackneys, the English government soon began to treat this mode of transport



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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience 2 Public and Private Provision of Transit in the United States The contracting of transit services by public agencies is often viewed as a recent phenomenon. Yet the public and private sectors have long collaborated in the provision of urban transportation in the United States. While the nature of this collaboration has evolved over the years, public and private involvement in transit has endured. This chapter describes the evolution of the public- and private-sector roles in transit provision to provide historical context for the ensuing discussion of transit contracting today. Also described are key legislation and public policies that have influenced transit service contracting in recent decades. Early Experience: Private, Regulated Transit Service Genesis of Local Transit Regulation Long before electric streetcars and motor buses, horse-drawn vehicles provided urban transport on a for-hire basis. Early forms of such vehicles included the hackney—a coach pulled by one or two horses—which flourished in England for more than 200 years beginning in the 17th century. At the time, passenger transportation needs were escalating in London and the other burgeoning cities of preindustrial Europe (Smerk 1992, 3–7). Although a small proportion of city dwellers could afford hackneys, the English government soon began to treat this mode of transport

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience as an essential public service. Partly for this reason, the government established rules governing how much the hackneys could charge, where they could travel, and how many of them could provide service. The degree to which such licensing rules actually benefited urban travelers by ensuring sufficient service and fair pricing rather than benefiting the hackney operators by protecting them from competition is unclear, although the former benefits were their ostensible purpose. Similar regulations were applied to successive forms of horse-drawn urban transportation. One such successor, the omnibus, was introduced in London in the early 1800s. Because it provided fixed-route and scheduled service, could carry up to 20 passengers, and was thus affordable to more people than the hackney, this wagon-like vehicle became immensely popular in Europe and to a lesser extent in the largest cities of the United States (Smerk 1992, 6–7). Like the hackney operators, those offering omnibus service were subject to public service regulations governing the fares they could charge, routes they could ply, and kinds of services they could offer. Lasting Effects of Early Regulations The decision to regulate the private suppliers of urban transportation has had lasting effects. The early regulations were based on the principle that for-hire passenger transportation in cities was important enough to the public that government intervention was warranted to ensure sufficient and stable service. The way taxicabs are regulated today is a legacy of the early hackney rules.1 Perhaps more important, however, the early regulatory schemes established the basic model of transit service provision that would come to predominate in the United States through the first half of the 20th century. In this joint public-private model, the public sector sets the standards for transit service, while the private sector owns and operates the service. Indeed, urban transit regulation, from its earliest applications, can be viewed as a form of public and private contracting. The agreement is straightforward in principle. The public is promised enhanced safety through licensing and inspection of vehicles and drivers, protection from exploitive fares, and a certain steadiness of service. In return, the regulated operators receive a degree of economic protection through limits on competitive entry and pricing (Meyer et al. 1965, 353–359). A reason for regulating the early hackney and omnibus services was that relative ease of entry into the business would lead to an overabundance of willing suppliers. Neither service required large capital investments or specialized

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience labor skills. Hence cities worried that aggressive competition would result in erratic and unstable services characterized by operators repeatedly entering and exiting the business, leading to poor service quality. A longer-run concern was that a small number of well-financed or colluding operators could withstand the competitive onslaught, deter further competition through below-cost pricing and other exclusionary tactics, and charge high fares by exploiting their market power.2 Emergence of Franchised Operations A common means by which cities regulated competition was by establishing franchises for public transit operators. In return for exclusive rights to operate in a designated area, franchise operators agreed to provide stable service for a specified period and to abide by limits on the fares they could charge (Jones 1985, 28–30). The operators were largely protected from competition (though not from other modes) and promised a fare structure that would be sufficient to meet their operating costs and generate profits on invested capital sufficient to maintain the service (Jones 1985; Meyer et al. 1965, 353–359). In the United States, the early transit services followed this regulatory model. Franchises became even more popular following the introduction of street railways (first horsecars and later electric streetcars) during the mid- to late 19th century (Smerk 1992, 7–10; Jones 1985, 28–30). Because most roads at the time were unpaved, rail traction—by getting wheels out of the mud—greatly increased the speed and reliability of urban transportation and reduced the need for horse power and its associated costs. However, the street railways required greater capital investment than the omnibuses. Rather than pay for rail construction with public funds, most cities franchised streets to individual operators, who then paid for the traction (Jones 1985; Smerk 1992). Urban historians maintain that this regulatory approach led to an overinvestment in street railways as operators sought additional street franchises and laid parallel track to preempt competition (Jones 1985; Smerk 1992; St. Clair 1986, 104–107). Moreover, awards for street franchises were associated with public corruption during the latter half of the 19th century, prompting calls for more stringent regulation of transit fares and services (Jones 1985). Electric street railways were introduced in the 1880s. Electric power made it possible to increase vehicle size and operating speeds dramatically while reducing operating costs (Jones 1985, 30–34). The streetcar operators could therefore extend their networks to reach more potential customers. Widespread introduction of electric street railways, as discussed below, occurred at a time

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience when American cities were undergoing rapid growth as a result of many new technologies (such as public water and sewer systems, structural steel, and elevators), industrialization, and immigration from the countryside and abroad (Tarr and Dupuy 1988). Although the electric streetcar, coupled with changes in the urban environment, revolutionized transit, most cities entering the 20th century continued to use franchises as the main means of regulating service. Regulation of Private Transit Services: 1900 to 1960s Rise of Electric Street Railways The widespread introduction of electric streetcars at the close of the 19th century was a watershed event for American cities. The electric streetcars (along with rapid railways) allowed cities to expand outward by creating residential areas on the city edges (Smerk 1992, 14). They also allowed city centers to grow upward, as the street railways and their interurban lines carried millions of workers to centrally located high-rise office buildings and industrial sites (Pushkarev et al. 1982, 4–5; Warner 1978, 5–14). During the last decade of the 19th century and the first two decades of the 20th century, private street railway companies laid more than 70,000 kilometers of track (Pushkarev et al. 1982). By 1920, just about every U.S. city and town of any size had a public transit system, and the majority of transit vehicles used in these systems were electric streetcars (St. Clair 1986, 4). It is notable that in Europe, most electric streetcar systems were municipally owned and operated before World War I.3 Yet with few exceptions—such as in San Francisco and Seattle—nearly all the street railways in the United States were privately owned and operated. Many were financed initially by real estate developers looking to extend residential and commercial areas outward to tracts of undeveloped land (Black 1991).4 The street railways were major users of electricity, and as such they were often owned and operated by electric utilities (Jones 1985, 37). Indeed, early in their development, the electric traction companies produced their own power and sold the surplus to other industrial and residential users; hence the streetcar companies were the electric power companies in many localities. By World War I, Americans living in cities averaged more than 250 street-car rides per year (Middleton 1987, 77; McKay 1988, 11). Yet by this time the nation’s ubiquitous urban railways were already showing signs of contraction. Land speculators, more interested in the opportunities presented by the automobile, were no longer investing in them (Jones 1985; Foster 1981; Altshuler

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience et al. 1979, 396–397). Growth in demand for electricity and innovations in its production and distribution made powering streetcars through a single utility more economical and feasible (Hilton 1985, 38–39). The industry began to consolidate, and as it did so, many parallel and redundant services were abandoned (Jones 1985; Middleton 1987, 78–79; Hilton 1985, 38–39). During this period of technology evolution, the basic regulatory model of transit service remained unchanged. Most cities awarded franchises for specific routes and charged operators franchise fees and levies for maintenance of bridges and road surfaces around the tracks (Smerk 1992, 8–15). Yet frequent requests for fare concessions by streetcar companies were poorly received by a public that was growing weary of poor service quality. According to historical accounts, widespread public perceptions of oligopolistic and anticompetitive behavior on the part of the streetcar companies alienated customers and government officials alike, prompting calls for even more restrictive obligations each time a franchise came up for renewal (Jones 1985, 30–37; Saltzman 1992, 34–37). Even as costs increased, many operators were not allowed to raise fares—long pegged at a nickel—and high franchise fees and levies for street maintenance were often viewed as punitive by the franchise holders (Saltzman 1992, 35). Furthermore, the franchise approach to regulation, which gave the public sector the ability to control fares and services, discouraged cities from assuming ownership or taking action to reestablish a more competitive environment. Both the transit operators and their unionized workforces were opposed to either a public takeover or substantive regulatory reforms (Jones 1985). Decline of Street Railways The above arrangements remained in place even as the popularity of the automobile grew and demand for transit began to wane after World War I. Americans purchased millions of automobiles during the 1920s (TRB 2001). By 1927 there was one registered automobile for every 3 or 4 residents in Detroit and Los Angeles, one for every 8 in Boston and Chicago, and one for every 12 in New York City—whereas two decades earlier there had been practically none (TRB 2001; Schrag 2000, 58; Foster 1981). To accommodate the automobile, state and local governments invested in better roads and traffic control devices after the war. Most interurban rail lines were abandoned during this period—some becoming the rights-of-way for new highways—while many city lines were paved over to make room for the automobile. City traffic engineers often viewed the lumbering and difficult-to-maneuver streetcars more as a source of traffic congestion than as a means of its alleviation (Middleton 1987, 168; Foster 1981).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Streetcar ridership declined throughout the 1930s, followed by a brief, albeit dramatic, respite during World War II caused by the rationing of fuel, shortages of automobile parts, and wartime industrial production that brought more people into the cities (Saltzman 1992, 28) (see Figure 2–1). The Public Utility Holding Company Act of 1935 called on electric power companies to divest themselves of ancillary holdings, including transit companies. Yet electric companies had already been divesting their transit operations voluntarily, having earned higher returns from the generation and distribution of electricity to the public than from the provision of transit service (Jones 1985, 48–50; Hilton 1985; Saltzman 1992, 37–38). FIGURE 2–1 U.S. trends in annual passenger trips by transit mode, 1920 to 1998. (NOTE: Data on demand-responsive and commuter rail ridership are not available for the periods before 1984 and 1973, respectively. SOURCE: American Public Transportation Association, Public Transportation Fact Book, selected years, 1977–2000.)

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Switch to Buses During this period, motor buses were becoming the predominant mode of public transportation in many cities, especially after the reliable diesel bus and automatic bus transmissions were introduced shortly before the war (St. Clair 1986, 4). Both the transit companies and smaller entrepreneurs—even owner-operators—began operating the free-wheeled buses, which could be redeployed more easily and required far less capital than streetcars (Jones 1985, 53–54). Sometimes local authorities encouraged motor bus services as a means of disciplining street railway companies unable or unwilling to provide quality service (Jones 1985, 54). Although controversy arose in the 1940s as some motor bus suppliers acquired distressed streetcar lines to replace them with bus operations,5 the rail-to-bus conversion was well under way even before World War II (Jones 1985, 1963–1964; Saltzman 1992, 38–39). Between 1930 and 1945, the mileage of street railways declined by more than 40 percent, while bus route miles increased by 50 percent (St. Clair 1986, 8). The early motor buses were typically operated by a single driver rather than the two-person crews (operator and fare collector) found on streetcars and often stipulated in union contracts (Jones 1985). Buses were further advantaged by the continued improvements in public roads. Even New York City, which had invested heavily in a subway system three decades earlier, was in the midst of a building boom of new parkways, tunnels, and bridges. Despite the advent of motor buses, however, urban transit patronage continued to decline following the temporary upsurge during World War II (see Figure 2–1). By this time, most of the early streetcar lines had been abandoned; in 1950, less than 10 percent of the original rail network remained in service (Middleton 1987, 169; Pushkarev et al. 1983, 6–7). Much of the urban population of the United States had moved farther from the center cities. Transit works best on dense corridors; hence, both streetcar and bus lines had long been configured to serve riders heading to and from downtowns (Levinson and Wynn 1963). Yet these markets were dwindling as both people and businesses moved to the lower-density suburbs (Meyer and Gómez-Ibáñez 1981, 41, 223). While suburbanization had been taking place in the United States since at least the 19th century (fostered by the streetcar, commuter railroads, and earlier forms of mass transportation), the private automobile—coupled with rising incomes, changing lifestyles, and the new federally funded urban freeways—allowed for increasingly dispersed settlement patterns that proved difficult for private transit operators to serve profitably (Lave 1985, 3; Smerk 1992, 18; Levinson 1996; Saltzman 1992, 26; St. Clair 1986).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Public Provision of Transit Advent of Federal Aid: 1960s and 1970s Between 1950 and 1960, transit patronage declined by more than 40 percent, and given the rapid increase in both urban populations and per capita auto use, the decline in transit’s share of total travel was even more precipitous (see Figure 2–1). As a practical matter, the regulatory model that had been in place for decades was no longer suitable for the provision of urban transit, as the number of for-profit private firms was dwindling in the face of sharply declining rider demand. In the two decades after World War II, more than 200 transit companies around the country folded, and many smaller cities lost transit service altogether (Hilton 1985, 46; Black 1991). Private transit operators that were still providing service often were not earning profits sufficient to attract the capital needed to purchase new equipment and add services (Jones 1985). Many transit companies were operating buses that were more than 20 years old, and most of the remaining streetcars were antiquated, built before World War II. Cities were the first level of government to respond to the emerging transit crisis. By the 1940s, some large municipalities—most notably Boston, Chicago, Cleveland, and New York—had taken over the private railways in their jurisdictions and were supplementing farebox revenues with public funds to finance physical plant (Jones 1985, 79). But the decades-long withdrawal of capital from the industry had taken its toll; most systems were in dire need of new equipment and facilities. With few exceptions, most American cities—having lost tax-generating households and businesses to the suburbs—were unwilling or unable to subsidize transit services (Jones 1985, 79; Meyer and Gómez-Ibáñez 1981). Federal Aid for Public Ownership and Investment in Transit As the declining fortunes of America’s cities gained national recognition during the 1960s, Congress passed legislation that for the first time gave the federal government a prominent role in the provision of urban transit. The Urban Mass Transportation Act of 1964 (later redesignated the Federal Transit Act) provided loans and grants for transit capital acquisition, construction, and planning activities. The grants were offered on a two-to-one (federal to state and local) matching basis. The aid was restricted to capital acquisitions and planning assistance partly on the grounds that federal operating subsidies for local transit agencies would introduce a federal presence in decisions better left to state and local officials (Meyer and Gómez-Ibáñez 1981, 9).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Notably, only public entities could apply for the federal grants. Given the availability of federal aid, many cities, states, and counties purchased or otherwise took over their local rail and bus systems. Thus by the 1970s, a largely new model of transit provision—public ownership—had become increasingly prevalent in the United States. Many jurisdictions consolidated the operations of smaller private and public systems under the auspices of regional transit authorities. A few states, such as Connecticut, Rhode Island, and New Jersey, formed statewide transit agencies. The evolution from public to private ownership, while not swift, was certainly dramatic. In 1940, only 20 transit systems in the country were publicly owned, and they accounted for just 2 percent of ridership (Black 1991, 69). By 1960, although the vast majority of all systems were still in private ownership, properties in public ownership accounted for nearly half of all transit ridership, mainly because the country’s very largest systems were publicly owned (Jones 1985, 79; Lave 1991, 117).6 By 1980, more than 500 systems were publicly owned, accounting for 95 percent of ridership nationally (Black 1991, 69). The federal aid was generally welcomed by states, localities, and distressed private transit companies alike (Jones 1985, 114–131). Transit labor unions favored public funding, but were concerned about possible adverse effects on unionized workers resulting from public ownership. The transit workforce had been well organized for decades, especially in the largest American cities. As early as 1920, more than half the workforce of the private streetcar companies was unionized (Jones 1985, 23). Ironically given more recent union concerns with privatization, transit workers at the time were concerned that a shift to public ownership would lead to their losing rights and benefits obtained through collective bargaining (TRB 1995). At the time, public employees were exempt from coverage under the National Labor Relations Act, and several states expressly prohibited collective bargaining by government workers (TRB 1995). As a remedy, Congress included a provision in Section 13c of the Urban Mass Transportation Act requiring that the condition of existing transit workers not be diminished through transit projects initiated with federal funds (see Box 2–1). This provision remains in effect today. Federal Aid for Transit Operations and New Services By the 1970s, nearly all urban transit systems in the United States were planned and funded by state and local governments with the help of federal aid, and most were owned and operated by state, regional, or local agencies. Despite public efforts to improve transit systems, however, ridership continued to decline in most

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience BOX 2–1 Section 13c of the Federal Transit Act As a precondition for a grant of federal assistance by FTA, Section 13c of the Federal Transit Act [Section 5333(b) of Title 49 USC] requires that grant applicants afford “fair and equitable” protections to employees affected by such assistance. Any events resulting from federal assistance that cause a change in operations or organization are subject to this precondition. The statute generally requires that provisions addressing five specific matters be included in such protective arrangements: preservation of rights, privileges, and benefits under existing collective bargaining agreements; continuation of collective bargaining rights; protection of employees against worsening of their positions in relation to their employment; and assurances of employment to employees of acquired mass transportation systems, priority of reemployment to those workers laid off or terminated, and paid training and retraining programs. In its grant application, a transit agency must estimate the impact on employees and specify the protections proposed. FTA forwards the grant application to the Department of Labor (DOL), which is authorized to determine and certify what is fair and equitable. In most cases that do not involve routine replacement of equipment or facilities, DOL refers the grant application to unions representing transit employees in the service areas. DOL encourages grant applicants and the affected unions to develop acceptable employee protections through negotiation. In December 1995, DOL responded to concerns about the timeliness of the review process by issuing guidelines that established time frames for processing certifications in an expeditious and predictable manner. The guidelines, which became effective in January 1996, allow a party 15 days to inform the Department of objections to the proposed terms of a grant. If no objections are raised or if those raised are found to be insufficient, DOL certifies the project. If the Department determines that objections are sufficient, it directs the parties to negotiate and reach an agreement within 30 days. If such an agreement is not reached within the allotted time, the Department issues an interim certification that permits FTA to release the funds (provided no action is taken during this period that would irreparably harm employees). The guidelines call for a final certification decision within 60 days from the date the grant application is received. Because Section 13c agreements are the product of individual negotiations, terms vary among agreements. Most, however, include protections against worsening conditions such that an employee who is displaced or suffers a loss of compensation as a result of a federally assisted project can be eligible for a monthly displacement allowance. SOURCES: TRB 1995; GAO 2000; U.S. Department of Labor Fact Sheet on Protections for Transit Workers (www.dol.gov).

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience systems. Having accounted for about 18 percent of urban travel in the United States as late as 1950, transit’s share had declined to less than 3 percent by 1975 (Pushkarev and Zupan 1977; Altshuler et al 1979, 21–22). As a result, many transit agencies were forced to raise fares and seek additional government funding to help cover operating costs. In 1974 Congress passed the National Mass Transit Assistance Act, which provided transit agencies with federal aid for operating expenses. This funding was used by many agencies to expand service and stabilize or reduce fares in an effort to halt the decline in ridership (Pickrell 1983; Meyer and Gómez-Ibáñez 1981). During the 1960s and 1970s, the government aid provided to transit agencies was accompanied by changing views of transit’s role in urban transportation and the array of services it should encompass. The continued movement of residents and jobs to the suburbs meant that most transit systems were compelled to extend their services farther from the traditional center cities, often into markets with little demand. Public officials from suburban districts that helped fund transit systems sought additional service in return for their subsidies (Meyer and Gómez-Ibáñez 1981; Wachs 1989 and 1985). At the same time, transit remained critical for the lower-income residents of inner cities, who had limited access to automobiles, and for the elderly and those with disabilities. Increasingly, transit was viewed as an important means of reducing metropolitan air pollution and alleviating highway traffic congestion, prompting many systems to offer services from distant suburbs into cities and increasingly from suburb to suburb (Meyer and Gómez-Ibáñez 1981). In amendments to the Urban Mass Transportation Act and other legislation during the 1970s, the federal government agreed to provide funds for urban and rural demand-responsive transit systems, as well as for alternative forms of public transportation, such as vanpools and express buses. Before the 1970s, only a few transit authorities and many social service agencies had been offering specialized transportation services for the elderly and riders with disabilities (TRB 1998, 3–9). By the end of the 1970s, hundreds of systems were offering such services with the help of federal funds—both from the U.S. Department of Transportation and from human service agencies (Walther 1988). These expanded services and increased expectations created both pressures and opportunities for transit systems to seek new methods of service delivery. Growth of Interest in Private Contracting: 1980s and 1990s By 1980, transit revenues covered only 41 percent of operating costs, and annual deficits covered by public subsidy totaled nearly $3.5 billion (Gómez-Ibáñez and

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience Meyer 1987, 64). Many reasons have been cited for these deficits, such as the continuing loss of riders, stable fares during an inflationary period, higher transit administrative and labor expenses, the extension of service to low-density suburban markets, and the increasing array of costly services being added in response to new government mandates and views of transit as a social service (Cervero 1983; Pucher et al. 1983; Lave 1991). Federal Emphasis on Private Involvement in Public Transit Whatever the cause of operating deficits, by the 1980s they had attracted the attention of public officials interested in finding ways to reduce them through the reintroduction of more privately operated services. The Urban Mass Transit Administration (UMTA) began promoting the idea of contracting with private companies for transit operations, vehicle maintenance, and administrative support. The agency predicted that the first-order benefit of contracting would be the use of lower-cost private operators for new services. Furthermore, UMTA officials anticipated that in spurring competition, contracting would confer second-order benefits by prompting public agencies to make their own in-house services more efficient and responsive to customer needs (Cervero 1988). UMTA took particular interest in the experiences of small communities in purchasing transit services, of some larger cities that had been contracting for demand-responsive services for the elderly and those with disabilities, and of a few very large urban areas that had been contracting for all transit services (Lave 1985). The agency funded several studies and concluded that large reductions in operating costs—from 10 to 50 percent per unit of output—could be expected from competitive contracting (Teal et al. 1987; Morlok and Harker 1988; Cervero 1988). UMTA also pointed to other observed benefits of contracting, such as the greater operating flexibility allowed, including the use of part-time drivers to meet peak-period demands (Cervero 1988). The agency demonstrated its commitment to privatization by requiring grant applicants for discretionary funds to seek out and document private-sector participation in transit service planning and provision. Federal legislation was cited to support this emphasis. Whereas Section 8(e) of the 1964 Urban Mass Transportation Act (Section 8e) had allowed public transit agencies to contract for services, the Surface Transportation Assistance Act of 1982 expressly required federal grant recipients to develop their transit service programs in consultation with the private sector. In implementing this statutory provision, UMTA developed guidelines in 1984 calling on grant applicants to demonstrate that they were actively involving the private sector early in the transit planning

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience process.7 Under these guidelines—which would remain in place for approximately 10 years—grant applicants were required to consider “fairly and adequately” the use of private transportation companies when implementing new services and to routinely compare public- and private-sector costs for existing services, submitting documentation of such efforts to the federal agency (Black 1991, 70). State and Local Response The new federal policy was resisted by some state and local governments that objected to the federal government’s dictating local practice (Black 1991, 70; Gómez-Ibáñez and Meyer 1987, 65). Many transit agencies were also uncertain about how such involvement would work in practice, and they questioned whether it would add more administrative and planning burdens (Black 1991; Teal 1987). Transit labor unions likewise were opposed to the new emphasis on privatization (Black 1991, 71). At the same time, however, the federal promotion of private involvement in public transit generated greater interest in contracting among a number of state and local governments (Black 1991; U.S. Department of Transportation 1986). A few transit agencies in large cities, including Denver and Los Angeles, began contracting for service on portions of their networks; Denver was required by state law to contract for transit service. Throughout the country, many small and rural communities had long contracted for transit services, in part because they did not have specialized transit organizations and because they had routinely contracted for many other government services (Teal 1987). According to a national survey conducted in 1985, one-third of demand-responsive services were being contracted to private firms, often to small taxi companies (Teal 1987). Private firms were also running express bus services in many metropolitan areas, including greater Boston, New York, Houston, and Chicago (Giuliano and Teal 1985; Smerk 1986). In some areas of the country, contracting for transit services—especially paratransit services—had become commonplace. In certain cases, competition for funds among individual units of government put pressure on transit providers to control costs and reduce public subsidies by hiring private operators. In California, for example, substantial funding for transit was generated by the 1971 Transportation Development Act (TDA), which extended the state sales tax to motor fuels and dedicated one-quarter cent of the state sales tax to transportation purposes. Under TDA, funds were distributed back to counties in proportion to their share of state sales taxes. In large, urban counties, TDA

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience funds were dedicated almost exclusively to transit; in less urbanized counties, however, funds could be used for streets and roads once reasonable transit needs had been met. In these counties, therefore, the desire to free up TDA funds for streets and roads motivated some local governments to reduce transit expenditures by contracting for transit services (Teal 1987, 30).8 Advent of Americans with Disabilities Act and Contracting for Demand-Responsive Services Passage of the Americans with Disabilities Act of 1990 (ADA), which required accessible fixed-route transit systems and complementary paratransit services for people with disabilities, further expanded the use of contracting for demand-responsive services. As interest in these services grew, many transit agencies turned to the private sector to provide them, sometimes using brokers to obtain specialized paratransit services from several private companies in the area. Transit agencies also turned to nonprofit social service agencies, such as councils on aging, to provide specialized transportation for the elderly and people with disabilities (Roy P.Drachman Institute 1994). Federal policies promoting the use of contracting and ADA’s effect in boosting demand for paratransit services led to an increase in the amount of transit contracting from the 1980s to the mid-1990s (Teal 1987; FTA 1994). The U.S. experience in this regard was not atypical. As discussed in Appendix B, several Western European countries began contracting with private companies for transit services during the 1980s and early 1990s. Yet as noted in Chapter 1, the total amount of contracting, measured as a percentage of vehicle revenue-miles, has remained relatively stable in the United States since the mid-1990s. In a 1994 rulemaking, FTA rescinded its earlier guidance on the participation of private enterprise in the provision of transit.9 Despite objections from private contractors, FTA cited as the main reasons for the recision the significant administrative burden associated with following and demonstrating compliance with the federal rules, as well as concerns about the infringement on local and state discretion. Summary The provision of transit in the United States began as private enterprise, often subject to local and state regulations to ensure sufficient and stable service. Private operators typically were awarded franchises and were subject to restrictions on the fares they could charge, the services they could offer, and the routes on which they could operate. In return, they were offered a degree of protection from competition from other transit operators.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience For numerous reasons—including rising incomes and the emergence of the automobile—a decline in the demand for transit services began in the United States during the 1920s, accelerating after World War II. Private operators, already unable to attract investment capital in a regulated environment with falling demand, found it increasingly difficult to cover operating costs. By the 1950s, hundreds of systems were failing or in severe financial distress. During the 1960s, the federal government stepped in to provide state and local governments with capital and planning funds for the acquisition of private transit systems and new equipment and facilities. By the 1970s, most urban transit systems in the United States were publicly controlled—either owned outright by state and local governments or planned and subsidized by the public sector. Private operators remained, but mainly to provide contract services to public transit agencies. During the 1980s the federal government, pointing to concerns about rising transit operating costs, promoted the involvement of the private sector in the provision of transit services. Guidelines required federal aid recipients to take proactive steps to involve the private sector in both the provision and planning of transit services, including the use of contracted service. Some state and local governments, especially in rural areas, had already been using private contracting; however, the federal emphasis prompted additional interest in the practice. The 1990 Americans with Disabilities Act, which required more transit agencies to provide specialized services for people with disabilities, led to further increases in private contracting, especially for demand-responsive services. During the past decade, even as transit contracting was becoming more popular in Western Europe, the U.S. government stopped actively promoting competitive contracting in public transit. The private sector continues to play a meaningful role in the provision of transit services; however, the extent of this role varies from system to system. The historical developments described in this chapter have influenced the level and amount of transit contracting practiced today. A more complete picture of the current state and extent of transit service contracting in the United States, gleaned from the committee’s transit system survey, is provided in Chapter 4. Notes 1.   Whether taxicab licensing rules that limit entry and pricing have conferred net benefits on consumers is a matter of debate that is not considered here. 2.   Whether such concerns were warranted is a matter of debate. Many economists have argued that below-cost pricing is difficult to sustain as an exclusionary tactic in industries that do not require large capital investments (applicable to the

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience     early hackneys and omnibuses). They argue that even if a firm succeeds in depressing competition through such exclusionary (or “predatory”) pricing, once it tries to exploit its acquired market power by raising prices to levels above cost, new firms—seeing the potential to undercut the monopolist’s high prices—can and will enter the market since there is little capital risk to doing so. The wouldbe monopolist will therefore incur repeated losses through below-cost pricing with little assurance of preserving a long-run monopoly position. The many reasons for transportation regulation and the effects on firms and consumers cannot be treated adequately in this overview. A more complete review of the history, rationale, and effects of economic regulation in the transportation industries can be found in Meyer et al. (1959) and more recently in Winston (1998). 3.   In 1894, Glasgow was the first large city to take over the electric railway services within its jurisdiction. By World War I, publicly owned transit systems in Western Europe carried four times more passengers than private operators (McKay 1988; Jacobson and Tarr 1996). 4.   Another exception to the early reliance on private financing of transit in the United States was the subway and other rapid rail transit construction projects in New York, Boston, and a few other cities. Because these projects required massive capital outlays, they were paid for mainly with state and local funds. In most cases, however, even these large urban railway systems were operated by private companies before World War II. 5.   In 1947, the Department of Justice sought an injunction against National City Lines (NCL), which had acquired more than 40 transit systems by 1946. The acquisitions were financed largely by suppliers of bus parts and fuel. Jones (1985) and others (see Saltzman 1992) argue that NCL represented mainly an effort by its backing companies to dominate the bus manufacturing industry, ensuring that abandoned street car services would be replaced with their own buses rather than those of competitors. 6.   According to Lave (1991, 117), 82 percent of transit agencies with $1 million or more in annual passenger revenue were still privately owned in 1964. 7.   Guidelines were published in the Federal Register in October 1984 (49 CFR 4310) and January 1986 (51 CFR 3306). They were further refined by UMTA in Circulars C7010.1 and C7005.1, issued December 5, 1986. As noted later in this chapter, FTA rescinded these guidelines in 1994. 8.   Since its enactment in 1971, TDA has undergone many changes that, along with other state legislation, have affected the amount and methods of funding for public transit in the state. Because of these changes, TDA’s effect on transit service contracting in California has fluctuated during the past three decades. It is not possible to recount all the legislative changes and their nuances here. The main point is that state laws and policies have long had a large effect on the amount and pattern of transit service contracting in California, especially in rural areas. 9.   In 59 FR 21890 (Final Notice of Recision of Private Enterprise Participation Guidance), FTA explains its rationale for the recision and summarizes comments received from parties favoring and objecting to the change.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience References ABBREVIATIONS APTA American Public Transportation Association FTA Federal Transit Administration TRB Transportation Research Board Altshuler, A., J.P.Womack, and J.R.Pucher. 1979. The Urban Transportation System: Politics and Policy Innovation, MIT Press, Cambridge, Mass. APTA. Selected years. Transit Fact Book. Washington, D.C. Black, A. 1991. Privatization of Urban Transit: A Different Perspective. In Transportation Research Record 1297, pp. 69–75. Cervero, R. 1983. Cost and Performance Effects of Transit Operating Subsidies in the United States. International Journal of Transport Economics 10, 3:535–562. Cervero, R. 1988. Transit Service Contracting: Cream-Skimming or Deficit-Skimming? Report DOT-T-89–13, Urban Mass Transportation Administration, Washington, D.C. FTA. 1994. National Transit Database (data runs provided by Volpe Transportation Systems Center). Foster, M.S. 1981. From Streetcar to Super Highway; American City Planners and Urban Transportation, 1900–1940. Temple University Press, Philadelphia, Pa. Gómez-Ibáñez, J.A., and J.R.Meyer. 1987. Going Private: The International Experience-with Transport Privatization. The Brookings Institution, Washington, D.C. Giuliano, G., and R.Teal. 1985. Privately Provided Commuter Bus Services: Experiences, Problems, and Prospects. In Urban Transit: The Private Challenge to Public Transportation (C.A.Lave, ed.), Pacific Institute for Public Policy Research, San Francisco, Calif., pp. 49–78. Hilton, G.W. 1985. The Rise and Fall of Monopolized Transit. In Urban Transit: The Private Challenge to Public Transportation (C.A.Lave, ed.), Pacific Institute for Public Policy Research, San Francisco, Calif. Jacobson, C.D., and J.A.Tarr. 1996. Patterns and Policy choices in Infrastructure History: The United States, France, and Great Britain. Public Works Management and Policy, Vol. 1, July, pp. 60–75. Jones, D.W. 1985. Urban Transit Policy: An Economic and Political History. Prentice-Hall, Inc., Englewood Cliffs, N.J. Lave, C.A. 1985. Urban Transit: The Private Challenge to Public Transportation. Pacific Institute for Public Policy Research, San Francisco, Calif. Lave, C. 1991. Measuring the Decline in Transit Productivity in the United States. Transportation Planning and Technology. Vol. 15, No. 2/4, pp. 115–124. Levinson, H. 1996. Cities, Transportation, and Change. Transportation Quarterly. Vol. 50, No. 4. Levinson, H.S., and F.H.Wynn. 1963. Effects of Density on Urban Transportation Requirements. In Highway Research Record 2, Highway Research Board, National Research Council, Washington, D.C., pp. 38–64.

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Contracting for Bus and Demand-Responsive Transit Services: A Survey of U.S. Practice and Experience McKay, J.P. 1988. Comparative Perspectives on Transit in Europe and the United States, 1850–1914. In Technology and the Rise of the Networked City in Europe and North America (J.A.Tarr and G.Dupuy, eds.), Temple University Press, Philadelphia, Pa, pp. 3–21. Meyer, J.R., M.J.Peck, J.Stenason, and C.Zwick. 1959. The Economics of Competition in the Transportation Industries. Harvard University Press, Cambridge, Mass. Meyer, J.R., and J.A.Gómez-Ibáñez. 1981. Autos, Transit, and Cities. Harvard University Press, Cambridge, Mass. Meyer, J.R., J.F.Kain, and M.Wohl. 1965. The Urban Transportation Problem. Harvard University Press, Cambridge, Mass. Middleton, W.D. 1987. The Time of the Trolley: The Street Railway from Horsecar to Light Rail. Golden West Books, San Marino, Calif. Morlok, E.K., and P.T.Harker. 1988. Privatization of Public Transit: Final Report. Report UMTA-PA-11–0032–88–1, Urban Mass Transportation Administration, Washington, D.C, p. 95. Pickrell, D. 1983. The Causes of Rising Transit Operating Deficits. Urban Mass Transportation Administration, Washington, D.C. Pucher, J., A.Markstedt, and I.Hirschman. 1983. Impacts of Subsidies on the Costs of Urban Public Transport. Journal of Transport Economics and Policy 17, 2: 155–176. Pushkarev, B.S., and J.M.Zupan. 1977. Public Transportation and Land Use Policy. Indiana University Press, Bloomington. Pushkarev, B.S., J.M.Zupan, and R.S.Cumella. 1982. Urban Rail in America. Indiana University Press, Bloomington. Roy P.Drachman Institute. 1994. The Impact of ADA on Special Services Provided by Urban Transit Systems. Federal Transit Administration, Washington, D.C. Saltzman, A. 1992. Public Transportation in the 20th Century. In Public Transportation, 2nd edition (G.E.Gray and L.A.Hoel, eds.), Prentice Hall, Englewood Cliffs, N.J., pp. 24–45. Schrag, Z.M. 2000. The Bus Is Young and Honest: Transportation Politics, Technical Choice, and the Motorization of Manhattan Surface Transit, 1919–1936. Technology and Culture, Vol. 41, No. 1. Smerk, G.M. 1986. Urban Mass Transportation: From Private to Public to Privatization. Transportation Journal, Vol. 26, No. 1. Fall 1986, pp. 83–91. Smerk, G.M. 1992. Public Transportation and the City. In Public Transportation, 2nd edition (G.E.Gray and L.A.Hoel, eds.), Prentice Hall, Englewood Cliffs, N.J., pp. 3–23. St. Clair, D.J. 1986. The Motorization of American Cities. Praeger, New York. Tarr, J.A., and G.Dupuy. 1988. Technology and the Rise of the Networked City in Europe and America. Temple University Press, Philadelphia, Pa. Teal, R.F. 1987. Transportation Privatization: Experience and Issues. Urban Resources, Vol. 4, No. 1, pp. 7–12. Teal, R.F., G.Giuliano, E.K.Morlok, and J.M.Golob. 1987. Estimating the Cost Impacts of Transit Service Contracting. Report UMTA-CA-06–0220–1, Urban Mass Transportation Administration, Washington, D.C.

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