Legal Aspects Relevant to Outsourcing Transit Functions Not Traditionally Outsourced (2011)

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3 LEGAL ASPECTS RELEVANT TO OUTSOURCING TRANSIT FUNCTIONS NOT TRADITIONALLY OUTSOURCED By Daniel Duff, Jane Sutter Starke, and G. Kent Woodman Thompson Coburn LLP INTRODUCTION “Outsourcing” involves the transfer of the manage- ment and/or day-to-day performance of a business func- tion to an outside service provider. It is common in the commercial world where business entities seek to save costs or focus on core functions by contracting out cer- tain functions to others. Outsourcing is increasingly popular among public transport entities in Britain, Europe, and Asia. As for transit systems in the United States, outsourcing is quite common and is likely to be undertaken more often as transit systems continue to face very difficult budg- etary environments. In the transportation sector, “…budgetary pressures have made public officials more receptive to private sector participation in transporta- tion, while the long-term effects of the recession have intensified officials’ interest in private sector innova- tions in transportation and other areas of the economy that could spur the nation’s growth.”1 Indeed, according to the most recently available data from the Federal Transit Administration’s (FTA) National Transit Data- base (NTD), transit systems spent some $2.3 billion in 2008 on “Services”; the NTD defines “Services” as [t]he labor and other work provided by outside organiza- tions for fees and related expenses. In most instances, services from an outside organization are procured as a substitute for in-house employee labor, except in the case of independent audits, which could not be performed by employees in the first place. The substitution is usually made because the skills offered by the outside organiza- tion are needed for only a short period of time or are bet- ter than internally available skills. The charge for these services is usually based on the labor hours invested in performing the service. Services include management ser- vice fees, advertising fees, professional and technical ser- vices, temporary help, contract maintenance services, cus- todial services and security services.2 (Emphasis supplied.) There thus already is significant outsourcing in the U.S. transit industry—often for paratransit operations or, in some cases, all transit operational activities, or for more limited professional and technical services. This is likely to increase. A 2009 article in the Wall 1 CLIFFORD WINSTON, LAST EXIT: PRIVATIZATION AND DEREGULATION OF THE U.S. TRANSPORTATION INDUSTRY 15 (Brookings Institution Press 2010). 2 FED. TRANSIT ADMIN., U.S. DEP’T OF TRANSP., NATIONAL TRANSIT DATABASE, NTD Glossary, 2010, available at http://www.ntdprogram.gov/ntdprogram/Glossary.htm. Street Journal notes that a number of transit systems outsource nearly every aspect of their operations. Across the country, the traditional revenue streams that transit agencies rely on are declining, but interest in bus and rail service is growing. Faced with a budget crunch, an increasing number of cities may join New Orleans in seeking to curb costs by turning operations over to private companies that can potentially run systems more effi- ciently.3 The purpose of this digest is to focus on the legal as- pects relevant to outsourcing transit functions that are not traditionally outsourced. Presumably revenue op- erations and paratransit services are considered “tradi- tionally” outsourced transit functions. “Nontraditional,” then, may be seen to cover all other activities, from out- sourcing maintenance services, architectural and engi- neering work, custodial services, security services, hu- man resources, information technology, call center services, and marketing and advertising, to a variety of others. Before any decision to outsource is made, a U.S. pub- lic transit system should review applicable collective bargaining agreements or federal transit law labor pro- tection provisions to determine what labor obligations may or may not apply and to assess how the agency should position itself in the event of disputes. Section I addresses those issues. Once a decision to outsource is made, designing and drafting procurement documents is important, and Sec- tion II discusses procurement methods and related con- siderations in that regard. A number of legal considerations come into play as well once a decision to outsource has been made. We presume that a public transit agency involved in out- sourcing is a recipient of federal funds from the FTA, in which case any outsourcing contract must include terms and conditions that protect the federal interest in the matters outsourced. Section III discusses those is- sues. Of course, an outsourcing must do more than include terms and conditions protecting the federal interest, and Section IV covers a range of key terms and condi- tions that should be considered for inclusion in any out- sourcing agreement. 3 Christopher Conkey, Strapped Cities Outsource Transit Lines, WALL ST. J. Online, July 13, 2009, available at http://online.wsj.com/article/SB124743906572829605.html.