Highway Maintenance: The case for Outsourcing part 2

Competing for Highway Maintenance:
Lessons for Washington State-Part II


by Dennis Lisk
January 1999


I. Introduction

In Part I of Competing for Highway Maintenance: Lessons for Washington State, we examined five governments around North America who implemented competition from the private sector into their highway maintenance programs. For the most part, these governments learned that through competition from the private sector they could deliver public services at a lower cost with better quality.

In our earlier examination we laid out four concrete goals that all competitive governments should strive for:

Lower Costs: Private companies are disciplined to seek efficiencies through the need to operate at a profit while providing superior service at a competitive price. By employing the techniques of competition, governments force themselves to find efficiencies within their operations and lower their costs of performing a service.

Higher Service Levels: Monopolies – government or private – frequently lack the stimulus to innovate and improve service delivery. By opening themselves to the challenge of competition, governments can learn to upgrade their services within existing budgets and simultaneously achieve cost savings.

Better Management: Governments can streamline their operations by using the same accounting procedures and productivity measures that the private sector uses, which are more accurate and comprehensive than traditional government methods.

Changed Government Culture: When a government chooses competition over monopoly its culture changes – instead of performing more functions with less expertise, competitive governments liberate themselves to perform a smaller set of core functions better than ever before.

The purpose of Part II of our analysis will be to examine how these four goals can be applied to the provision of highway maintenance in Washington State.

II. Washington’s Highway Maintenance Program

Between 1997 and 1999 the State of Washington spent $248.6 million on highway maintenance. This is approximately nine percent of the state Department of Transportation’s total budget of $2.2 billion. During the 1997-1999 biennium, the state employed 1,427 full-time employees to maintain a network of 7,035 miles of roads and bridges.

During the last two years, the Washington State Department of Transportation (WSDOT) adopted a new method to manage the highway maintenance program called the Maintenance Accountability Process (MAP). This was done at the recommendation of the Dye Management consulting firm, which the state legislature hired in 1995 to answer questions about WSDOT’s performance, efficiency and management of highway maintenance. According to WSDOT, the purpose of MAP is "to provide a clear link between maintenance objectives, maintenance activities, maintenance service levels, the budget, and actual performance."

The state’s nearly 1,500 strong maintenance workforce performs a variety of functions. Using MAP, WSDOT divides its maintenance program into nine separate groups of activities and assigns a "level of service" rating for each. Below is a chart describing each activity and its level of service rating for fiscal year 1998. The rating system is like a report card, with an "A" given for services that are performed excellently, and an "F" for services that are performed poorly. The rating system also tells policy makers at what levels of funding WSDOT believes it would be necessary to achieve an "A" level of service rating for each activity.

Chart 1: FY 1998 Maintenance Accountability Process Level
of Service Ratings
Maintenance Category
Level of Service Rating

Roadway Maintenance & Operations

Pavement patching and repair B
Crack sealing B

Shoulder maintenance
C+
Sweeping and cleaning B
Safety patrol C

Drainage Maintenance & Slope Repair
Ditch cleaning B
Culvert maintenance F-
Storm drainage maintenance F
Silt drainage maintenance F+
Slope repair F+

Roadside & Landscape Maintenance
Litter pickup C-
Noxious weed control D+
Nuisance vegetation control D
Landscape maintenance C-

Bridge & Tunnel Maintenance
Repair of bridge decks and structures D
Bridge cleaning F
Urban tunnel maintenance B+
Operation of movable bridges C+

Snow & Ice Control

Response time to snow and ice on roadway, accumulation of snow on roadway, presence of sand and deicers,pass opening and closing dates of seasonal roadways.
C+

Traffic Services
Pavement striping B
Pavement marking F+
Repair/replacement of regulatory signs C
Repair/replacement of advisory signs B
Repair/replacement of guideposts D
Guardrail maintenance A
Traffic signal n/a
Highway lighting maintenance n/a
Issuance of oversize permits B-

Rest Area Maintenance

Cleanliness of building, appearance of landscaped areas, sidewalks, pavement.
B

Supervision, Training and Support Maintenance n/a
Third Party Damages and Disaster Maintenance n/a


Although the state has adopted Dye Management’s Maintenance Accountability Process, it has not taken any action yet on one of the firm’s other suggestions: that "WSDOT should have expanded ability to contract for routine maintenance." Dye Management said that without contracting "Washington is missing potential opportunities to reduce costs, improve quality, and flexibly manage maintenance." According to WSDOT however, "recommendations regarding changes to state statute (contracting out…) have been set aside for further Legislative policy discussions."

A 1998 audit of WSDOT for the legislature’s Joint Legislative Audit Review Committee said that Washington State spends about 18 percent more on highway maintenance than the national average. Subtracting the costs of snow removal, the state spends about 7 percent above the national average for maintenance. Clearly, there is reason to implement cost-saving procedures, but doing that requires committed political leadership. The first lesson of any successful competitive government, as outlined in Part I of Competing for Highway Maintenance, is that only with the commitment of elected officials and agency managers will competition work. Until the 1998 legislative session there had been no committed political leadership to make highway maintenance more competitive.

III. Maintenance Contracting in Washington State

Even though the state spends more than the national average to maintain its highways, it is unable to consider a successful alternative method to lower its costs: allowing the private sector to compete. Currently, Washington State contracts with the private sector for only 1.9 percent of highway maintenance service. Apart from states that do not contract out at all, that is one of the lowest percentages in the nation. The primary reason WSDOT is unable to contract out more work is because it is currently against the law for them to do so. Without legislative intervention, WSDOT is simply unable to take advantage of a nationally proven and successful method for saving money and improving service for taxpayers.

For the last decade, three separate studies commissioned by the state have recommended that Washington contract out highway maintenance work with the private sector. The most recent of these studies, the 1998 audit of WSDOT, summed up the issue clearly:

"…based upon the experiences of other states…we believe that when fully implemented, a new approach to maintenance contracting could result in real cost savings of 10 percent or more over current expenditures and at the same time improved service levels."

Until 1998, the state legislature took no action on the recommendations to contract out for highway maintenance.

IV. House Bill 2892

During the 1998 legislative session, State Representative Maryann Mitchell (R-Federal Way) introduced House Bill 2892 – to authorize the Washington State Department of Transportation (WSDOT) to contract with the private sector for highway maintenance. The bill, for the first time, would have exempted WSDOT from the provisions of the Spokane Community College case [Washington Federation of State Employees v. Spokane Community College, 90 Wash. 2d 698, 585 P. 2d 474 (1978) and codified by the legislature in RCW 41.06.380] which today prevents state agencies from instituting privatization policies of any sort. HB 2892 passed in the Legislative Transportation Committee by a vote of 17 to 10, but did not reach the full House in the 1998 session. Although the bill died with the end of the legislative session, highway maintenance will be part of the agenda in the 1999 session.

Pros and Cons

Proponents of HB 2892 argued that the state could lower costs and improve service if it were allowed to contract with the private sector for highway maintenance.

Not surprisingly, the main opponents of HB 2892 were state employees, who regularly oppose any form of privatization. In a "Fact Sheet" about the bill, the Washington Federation of State Employees set out four primary reasons why HB 2892 was "a bad idea":

The bill did not "create a level playing field" for competition between state workers and the private sector and it would not save money.

The bill failed to adjust the $30,000 bid limit past which the state must contract for services, implying that the limit should be raised to allow state employees to perform more work than they currently are able to do.

The bill "would create more unemployment in rural Washington," since "most of the maintenance employees live and work in small towns."

The Federation accused privatization of not being "the panacea you have been led to believe," citing a 1997 study by the Economic Policy Institute that said that "there is no evidence that contracting out saved money or improved service quality."

HB 2892 – What it Would Have Done

How would HB 2892 accomplished its goal of allowing the private sector to compete for highway maintenance service? The following is a list of the major provisions of HB 2892:

The first part of the bill stated that WSDOT "may purchase maintenance services by contract with individuals or business entities."

It directed the Transportation Secretary to notify the Department’s Maintenance Director and an appropriate labor representative when the Department would be purchasing maintenance services and grant them an opportunity to "offer an alternative competitive bid to the proposed contract." This alternative bid must have included the following: (1) the current prevailing wages; (2) an "overhead factor" of no less than 66% of the base prevailing wage; (3) equipment charges which reflect fair market values and; (4) the cost of sales tax and business and occupation taxes.

The bill directed WSDOT to submit an annual report to the Legislative Transportation Committee disclosing all maintenance contracts and their cost.

HB 2892 instructed WSDOT to first test the idea by conducting a three-year pilot project to begin on July 1, 1998 and end June 30, 2001.

All these provisions raise separate and unique issues which this paper will now examine in more detail.

Highway Maintenance Contracting and the Law

The first provision of House Bill 2892 was written to overcome the legal barriers that prevent the State of Washington from contracting with private businesses for provision of services, including highway maintenance. Under current law, WSDOT is barred from considering cost-effective alternatives to provide highway maintenance by the State Supreme Court decision in what has become known as the Spokane Community College case, Washington Federation of State Employees v. Spokane Community College.

This 1978 case involved Spokane Community College’s attempt to contract with a private firm for the janitorial services in a newly-constructed administration building. The contract would not have resulted in termination of employment for any public employees working as janitors for the rest of the college, and would have saved the college money. Nevertheless, the Court agreed with the state employees union when it ruled that the college had no legal authority to enter into a contract for new services that had "regularly and historically been provided, and could continue to be provided, by civil service employees."

To accommodate the Court’s decision, the state legislature enshrined into law the principle stated above. RCW 41.06.380 set forth the procedure by which state agencies may contract out services with private vendors. The law states that services provided by state employees before April 1979 must continue to be provided by state employees and that the state cannot enter into contracts with non-state employees that result in job loss for state employees.

The audit of WSDOT posed questions about the department’s legal standing to engage in contracting out of maintenance work. To answer these questions, the audit team asked the state Attorney General, "what are the specific legal restraints to privatizing highway maintenance services beyond the current levels?" Senior Assistant Attorney General William Williams answered that question by saying,

"The only legal restraint is state statute, as interpreted by the courts. To accomplish the outcome expressed in the question, legislation would be required to give the department clear, unambiguous authority to contract out maintenance work that is currently being performed by state employees. If the intent is that the department could have the discretion to either use state forces or contract out the work, and that the department could not bargain away its discretion, then legislation would have to be enacted to eliminate contracting out as a bargainable issue."

Today, only a specific action of the state legislature – like HB 2892 – to exempt certain programs or agencies from the law, or the law’s outright repeal, would allow state agencies the flexibility to take advantage of lower prices in the private sector.

Labor Relations

The next major section of HB 2892 dealt with a two-pronged issue: if the state allowed contracting out of highway maintenance, then how could they also involve in competitive bidding public employees currently performing highway maintenance? And, once the decision is made to involve public employees, how can a level playing field for competition between the public and private sectors be created? Essentially, the bill chose a managed competition approach, similar to the examples of Massachusetts and Indianapolis described in Part I of Competing for Highway Maintenance. The bill set up a process whereby private companies and public employees could compete for the same contracts.

The original version of HB 2892 did not include a section spelling out how to allow state maintenance workers to compete for contracted services. This prompted a letter from Governor Gary Locke’s office to Representative Mitchell, which said that "inherent in the notion of managed competition is collective bargaining on economic issues," currently unavailable to state workers. The Governor’s office also said that "we need to lay the groundwork to make managed competition successful for DOT," and that before the 1999 legislative session "relevant stakeholders should meet…to make recommendations for managed competition legislation…" After the Governor’s letter was published another version of HB 2892 was offered – this time with a provision allowing state employees the ability to compete for contracts, but also saying that contracting out of service would not be a bargainable issue if state workers were allowed to collectively bargain in the future.

Some argue that managed competition can only be effective in a fully unionized environment that includes collective bargaining. Others argue that it is the fact of employee involvement, not the specific structure, that is important. Managed competition champion and Indianapolis Mayor Stephen Goldsmith said that "you don’t have bad people working in…government. You have good people stuck in bad systems." His conclusion: if managed competition is to be effective, employees must be empowered to innovate in the way they organize to accomplish a task. One of the lessons of successful competitive governments like Indianapolis’ is that when freed of monopolistic barriers, government employees can be as creative as the private sector and will respond to competition with intelligent ways to save money, improve service and win contracts. Stephen Fantauzzo, a public employee union leader in Indianapolis, summed up competition best by saying that it "stops asking workers to park their brains at the door."

Washington does not now have collective bargaining for state employees. While collective bargaining may be a convenient method for management to deal with, in its absence, innovative management can still find appropriate structures – quality circles, bidding teams, or the like – to permit employees to prepare responsive bids. Effective public sector competition is as much a challenge to public managers as it is to public employees, which the substantial downsizing of management from the example of Indianapolis demonstrates.

Creating a Level Playing Field

One of the challenges to making managed competition work properly is creating a level playing field for competition. One of the lessons learned by competitive governments was the benefit of instituting accounting systems like Activity-Based Costing, which help them focus on finding efficiencies within their own operations while assuring accurate cost comparisons between the public and private sectors. Government accounting systems are not usually structured to measure all the costs that private companies bear in the marketplace. To compete fairly with the private sector, governments have to adopt an accounting system that calculates the total costs of providing services. According to studies on this topic by the Reason Foundation, this would include:

Direct Costs - Salaries and wages of employees working 100% on delivering the target service. Frequently overlooked are the health and retirement benefits the employees are earning. Also, the costs of supplies, materials, travel, printing, rent, utilities, and communications that go to 100% of delivering the target service.

Direct Costs Frequently Overlooked - Interest costs on capital items purchased for exclusive use of delivering the target service; pension costs of employees who work exclusively on target service; depreciation costs of facilities and capital equipment used to deliver the target service. For example, public sector agencies that own heavy machinery frequently do not budget for depreciation or amortization as private sector companies do. Yet, these remain true economic costs.

Overhead Costs - Indirect costs that benefit not only the target service, but at least one other government service. This would include all the direct costs mentioned above that would be incurred by other government services administering and supporting the target service delivery. For example, the salaries of job foremen responsible for managing several projects should be allocated among those projects

Cross Subsidization Costs - Sometimes in managed competition, only a portion of a department’s targeted service is contracted out, leaving other parts of a department protected from competition. Often, the portion of the department that must compete for a contract artificially lowers its bid by passing off actual, direct costs to other parts of the department that are protected from competition.

Taxes - The impact of taxes must be included: private contractors include in bids any applicable sales taxes imposed on them, as well as business and occupation taxes, personal property taxes and other taxes which are part of the cost of doing business.

House Bill 2892 made an attempt to deal with some of these issues, but not comprehensively enough. First, the bill stated that only current prevailing wages of maintenance workers be included as a direct cost, but there was no mention of how cost would be allocated for salaries of managers. Also, there was no inclusion of the costs of benefits for either salaried managers or wage-rate employees, and no mention of the costs of pensions for those workers. While the bill included the costs of equipment at fair market value, it did not specify what the word "equipment" included. Is "equipment" strictly the capital items used directly for highway maintenance work, or do other things fall under this broad category? The costs of communication, printing, rent and utilities should also be spelled out as costs for the government to include.

Many of the issues outlined above deal with how state workers would assemble an alternative bid on maintenance projects, one of the thorniest provisions of HB 2892. The bill stated that in calculating an alternative bid, state workers would have to include current prevailing wages and an "overhead factor" of no less than 66% of base prevailing wages. The reasoning behind these provisions was to provide simple and agreeable standards that would achieve equal costs between the private and public sector.

State workers objected to these provisions because they felt it would set up a situation that forced them to offer a bid that would be much higher than their current cost of doing business. As it stands now, private contractors who perform road construction for the state must pay their employees the current prevailing wage set by the state. In contrast, WSDOT employees performing highway maintenance are not paid prevailing wages (but do have 365-day a year jobs), creating a potential divergence in wages between private and public sectors. State workers also insist that their overhead costs do not equal 66% of prevailing wages. Furthermore, the state workforce pays lower finance charges on their equipment than private contractors, and does not pay sales tax or business and occupation taxes.

How can these difficult issues be solved? First, the state must decide its policy on prevailing wage. In order to create a level playing field, the state has three policy choices: first, raise state highway maintenance workers wages up to the prevailing wage; second, abolish the prevailing wage requirement altogether on jobs covered by HB 2892 – thereby liberating the market to decide wage rates; or third, add state employees’ current wages into the total labor pool, which would have the effect of lowering the prevailing wage level nearer to what state workers are earning currently.

Even more intricate problems face the state in trying to level the cost of overhead between public and private sectors. HB 2892 chose to solve these problems by arbitrarily setting the cost of overhead at no less than 66% of base prevailing wages. This figure was simply a rough estimate for the average amount of "overhead" a construction company charges for work on state highway projects. Choosing 66% may be a convenient legislative compromise but, before being adopted, should be subject to a careful study. Furthermore, adoption of a formula number minimizes opportunities for innovation that could redeem costs (as Indianapolis showed). A more analytical and precise bidding formula should serve the state better in the long run.

State workers insist that their overhead would be lower than 66% of the prevailing wage. That may or may not be true. The one method for establishing a fairer and more precise figure than 66% would be the establishment of a rigorous accounting system with features that include all the costs mentioned on the previous page. Using such a system, legislators and policymakers can know exactly what overhead is and how much it costs. Moreover, the workers and agency managers performing maintenance on a daily basis will gain a better understanding of areas in their own operations where they can save money. After going through such an exercise, state maintenance workers might find that they truly do have less overhead than 66%.

Such an exacting accounting standard, normal in the private sector, may be challenging to implement at first, but it can have a profound impact for the better on the culture of government. Public agencies would finally consider all the costs they incur to provide a service. Consequently, when external pressure from competitors in the marketplace grows there will be a sharper focus on driving down those costs to stay competitive.

HB 2892 also required the public employees’ alternative bid to include the costs of sales tax and business and occupation taxes, but there are other taxes and fees – like gas taxes – from which the government may be exempt, which private companies must still pay. The bill also dealt with another challenge to creating a level playing field by requiring the government offer to arrive as a sealed bid, a normal requirement private contractors must meet, but not always required of government bids.

Annual Report to the Legislature

The next part of the bill mandated WSDOT "to submit an annual report to the Legislative Transportation Committee…disclosing all the maintenance service contracts awarded during the prior fiscal year." The intent of this provision is to make WSDOT accountable for their decisions. A provision like this though, must be vigilantly followed up every year. In Texas, although an annual report on the status of contracted out maintenance was required, it was never actually submitted. The Texas legislature learned over time that adopting a general mandate for competition was not sufficient. To accomplish its goal it needed to require specific amounts of competition, starting low and increasing over time, in order to force the Texas Department of Transportation to change long-established ways of doing things.

Pilot Project

The final major section of HB 2892 instructed WSDOT to set up a three-year highway maintenance contracting-out pilot project. The question of whether or not to do pilot projects to test privatization policies is one that divides proponents of competitive government.

William Eggers, a leading privatization expert formerly with the Reason Foundation, argues in his book Revolution at the Roots that attempting a pilot project to introduce a competitive policy is a "failing strategy" and a "surefire way to stymie privatization and competition." He says that picking a pilot project is similar to adopting a strategy which has as its goal "avoiding failure," rather than "achieving success." Eggers’ main point is that once you start a competitive policy with no more than a pilot project, the "opponents of change will focus all available firepower on delaying, distracting, and derailing the effort."

Eggers points are valid and they do apply to Washington State, where competitive government policies have long-standing and entrenched opposition. Yet, it is precisely because the critics of competitive government in Washington State are so fixed that a pilot project must be attempted first. The most successful example of competitive road maintenance – Massachusetts – also faced stubborn political opposition, but one of the reasons they succeeded was because they began with small pilot projects with smaller margins for failure. Once the policies were tested and had succeeded opponents found that the sky was not falling, and the groundwork was laid for a wider implementation of a winning policy.

In their highway maintenance study, Dye Management provided several critical components of a successful pilot project:

Select for work by contractors two maintenance areas with diverse characteristics of climate, geography, and traffic volumes. As a control group, select two more maintenance areas with similar characteristics for work by State forces.

Seek and obtain lump-sum bids for maintenance of the contract sections that would include all maintenance work and provide for emergencies like floods and earthquakes. The contract would have to be worth at least $1 million annually for three years to entice qualified contractors to invest their talents.

Have an independent agent set a baseline level of service for all four maintenance areas. Also have that agent perform monitoring to compare the actual level of service results in each maintenance area to determine whether service improves or declines over time.

Measure actual costs in all four maintenance areas and establish a true measure of overhead costs for state workers.

HB 2892 adopted the three year term for a pilot project, but did not specifically address any of the other provisions above. Moreover, if it had passed it would have allowed only a few months for both the private and public sector to prepare. A longer period of time to inaugurate the pilot project would have been useful in helping such a project to succeed.

V. Washington’s Highway Maintenance Industry

Currently, WSDOT has a legally protected monopoly to provide almost all highway maintenance service. As we have seen, legal barriers in Washington prevent private contractors from competing for highway maintenance service. If those legal barriers were removed and private contractors were allowed to compete, Washington State could tap into an industry that is capable and willing to compete effectively for highway maintenance work.

By quickly glancing through the Maintenance Accountability Process’ list of maintenance activities, one can identify areas where the private sector is already performing in the private marketplace. For the purposes of this analysis we will not attempt to examine the private sector potential for all the different maintenance functions in the MAP. Instead we have chosen to concentrate on two maintenance functions with which drivers are familiar on a daily basis: road surface maintenance and landscape maintenance.

The quality of a road surface can determine more than just the pleasure of one’s driving experience, but also the cost of wear and tear on one’s automobile. The State of Washington has a monopoly on landscaping its roadways despite the fact that hundreds of skilled and successful landscape contractors in the state are ready, willing and capable of doing the work.

Road Surface Maintenance

One way the State of Washington could improve the quality of its road surfaces would be to take advantage of the choices offered by thriving, private industries in the state like the asphalt paving industry. Over 10,000 people working for an array of companies across the state have helped to make asphalt paving a $300 million industry in Washington.

There are almost 40 separate companies in the state offering asphalt paving services. About half of these companies both produce asphalt and provide paving services as well. The largest of these dual role businesses often have a network of plants around the state. In total, there are about 100 asphalt production plants spread among major population centers and along major highways in Washington. The other half of these 40 companies provide paving services alone. Asphalt production and paving companies in Washington range from multi-national corporations to small, mom-and-pop businesses. The largest companies employ between 3,000-4,000 people, bring in revenues of $100 million a year, and are publicly traded companies. Most of the other businesses bring in $10-100 million per year, depending on their size, and are privately held concerns.

The current state of the asphalt paving industry is generally healthy, following the general condition of the overall economy in the Northwest over the last few years. Much of the asphalt paving industry’s work is devoted to public projects – large road construction projects and smaller projects for municipalities. Other projects include parking lots at commercial centers and roads to new residential developments.

Landscape Maintenance

An informal survey of the Yellow Pages reveals that there over 220 separate companies in the Seattle area alone listed as "landscape contractors." This number does not include all the firms who are practicing landscape design and architecture. In Washington State there are currently about 5,000 firms performing all different kinds of landscaping services. The total size of this industry in terms of sales revenues is around $30 million per year.

The landscaping industry in Washington State is extensive, with companies of all sizes and types competing with each other. A rough estimate of the Washington Association of Landscape Professionals’ membership shows that nearly 16% are sole proprietors, employing only a handful of people, with gross annual revenues of up to $100,000. On the other end of the spectrum, around 17% are large, sometimes nation-wide, corporations with annual revenues in the millions of dollars and up, employing between 50-150 people. In between are a variety of companies of different sizes and types; most are privately held concerns.

Generally, these companies’ profitability tracks with the condition of the local economy. Currently, the economy is generally performing well, and profit margins of 25-35% are commonplace. In tighter economic times this can shrink to just 5%. In the economic climate the state has been experiencing there has bountiful work for landscape contractors. Despite this fact, contractors would not decline new opportunities to perform landscape maintenance on state highways.

VI. Conclusion

Today, traffic congestion in the Central Puget Sound corridor is now ranked near the worst in the nation, equivalent to the gridlock residents of Southern California suffer every day. The picture only worsens if estimates of traffic patterns for the next two decades prove to be correct. Millions more people everyday will be squeezing onto Washington’s already crowded highways. This will take a toll not only on those drivers, but increasingly on the roads and bridges bearing them.

It is imperative that the condition of Washington’s roads and bridges do not deteriorate under the coming onslaught of new drivers. Transportation policy makers have many enticing and crucial trade-offs to make in the next few years. One choice they should never forget is their responsibility to maintain existing roads and bridges in decent and safe working order. Maintaining current infrastructure is just as wise an investment as funding new roads and transit projects.

One way policy makers could afford more of these investments would be to embrace the innovation and energy of the private sector. Currently, funds from the state’s gas tax go toward both highway construction and maintenance. If, through private sector competition, the state was able to reduce the amount it spends on highway maintenance, it could reinvest the savings in doing what is necessary to solve traffic congestion: build more roads.

It is clear from our two reports that jurisdictions around the country have found ways to stretch limited transportation dollars further by using the private sector to assist them in maintaining their highways. If done correctly, competition from the private sector can not only lower costs while increasing levels of service, it also can instill a bright, new spirit in how government works.

Cheaper to pay each Light Rail Customer $100,000 to stay home!

Part I: The Cost of Sound Transit

Under its larger package, Sound Transit is planning to spend a combined $35.2 billion to move 351,000 people a day. It would be cheaper to pay the same people $100,000 each to stay home.

by Michael Ennis, Director, Center for Transportation Policy
06-17


In 2007, Sound Transit intends to ask residents in King, Pierce and Snohomish counties to pay for its second phase of public transportation projects. Commonly known as ST2, the package will expand on its first phase, which was approved in 1996. These new projects will include extending light rail, the Sounder rail and the ST Express bus systems.

Sound Transit, Phase 1

The first phase of Sound Transit was approved in 1996 and imposed a ten-year .4% sales and use tax and a .3% Motor Vehicle Excise Tax (MVET). In 1996, Sound Transit estimated the total phase would cost about $5 billion in year-of-expenditure (YOE) dollars and be completed by 2006.[1] Today, Sound Transit says the total cost of Phase 1 is about $15 billion and will not be finished until around 2020.[2] In other words, Phase 1 is about $10 billion over budget and 14 years late. In addition, Sound Transit will persist in collecting both the .4% sales tax and .3% MVET in perpetuity, even after the first phase is complete in 2020.

Sound Transit, Phase 2

Under Phase 2, Sound Transit is considering three options for new taxes in 2007. Option A would increase the sales tax by .3% and implement a series of projects that would cost about $7.6 billion. Option B would raise the sales tax by .4% and build about $9.4 billion worth of projects. Option C would raise the sales tax by .5% and, with a project package of about $11.6 billion, exhaust Sound Transit’s current taxing authority.[3]

However, Sound Transit’s figures are based on constant 2006 dollars and do not reflect inflationary adjustments as projects are completed in the future. In 2005, Sound Transit did calculate project costs adjusted for inflation. In 2005, Option A would have a total project cost of about $10.0 billion. Option B would have a total project cost of about $13.1 billion, and Option C would have a total project cost of about $17.1 billion.[4]

Unlike the constant-year figures, Sound Transit has not updated these year-of-expenditure (YOE) amounts since 2005. Applying the same assumptions Sound Transit used before, Option A would have a total project cost of about $12.2 billion. Option B would have a total project cost of about $15.9 billion, and Option C would have a total project cost of about $20.2 billion.[5]

To promote ST2, Sound Transit also provides estimates on system-wide ridership through 2030. If ST2 is approved, Sound Transit says Option A would generate about 303,000 passengers per day. The larger Option B would bring total daily ridership to about 344,000 passengers and Option C would carry about 351,000 passengers per day, system-wide.[6] The following table summarizes the three options Sound Transit is considering.







Projected Ridership, System-Wide


ST2 Cost (constant 2006 dollars)


ST2 Cost (year of expenditure dollars)





Sales Tax Increase



Project Name

Option A


Bus/Rail Extension


0.3%


302,000


$7.6


$12.2

Option B


Medium Rail Extension


0.4%


344,000


$9.4


$15.9

Option C


Maximized Rail Extension


0.5%


351,000


$11.6


$20.2









(Figures in billions)

Analysis

Comparing Sound Transit’s ridership projections with the total cost of both phases reveals that the cost to move one passenger from a private automobile to the Sound Transit system is relatively expensive. The following table illustrates this comparison between the first phase of Sound Transit and the three options of ST2.



Sound Transit 1 & 2 Cost (YOE$ billions)


Ridership Projections, system-wide by 2030




Cost per Person

Option A


$27.2


302,000


$90,066

Option B


$30.9


344,000


$89,826

Option C


$35.2


351,000


$100,285

Depending on which option the Sound Transit Board chooses, the combined cost of both phases would cost $27.2 billion, $30.9 billion or $35.2 billion, respectively. The cost for Sound Transit to pull the driver of one passenger vehicle off the existing roadway and into its public transportation system would range from $89,826 to $100,285.

To put this in perspective, King County proposed to expand its bus service through a recently passed ballot measure called Transit Now. The proposal estimated it would remove between 50,000 to 60,000 passenger vehicles from the roadways by adding 175 new buses. The expansion will cost taxpayers about $50 million by 2008.[7] Under Transit Now, the estimated cost to move one traveler to the public transportation system is between $833 and $1,000.

Compared to the potential benefits, the combined cost of Sound Transit is extremely expensive. It is unlikely that all of the 300,000 to 351,000 system-wide riders will translate to an equal number of vehicles removed from the roadway. Some of these riders already are in the public transportation system or simply do not have access to a passenger car.

Nevertheless, if the larger package is chosen and Sound Transit’s ridership estimates are correct, removing an estimated 351,000 vehicles from the roadways by 2030, for a combined cost of $35.2 billion is not an efficient use of taxpayer money. It would be cheaper for Sound Transit to pay these estimated 351,000 travelers $100,000 each to stay home or to not drive. These people could pocket the money and use the existing public transportation system. The effect on traffic congestion would be the same, we would not have to wait until 2030, and it would save taxpayers more than $100 million.

Compared to the projected system-wide ridership estimates, Sound Transit’s costs for ST2 are astoundingly high. Given that the Sound Transit Board will move forward with choosing a proposal, it appears that Option B will provide a greater benefit than either of the other two options once costs are factored in.

Since Sound Transit’s ridership estimates and projected costs were translated into a cost/benefit relationship, it becomes possible to compare the efficiency of the three options.

According to Sound Transit, Option B will generate about 42,000 more riders than Option A. This is not surprising because Option B proposes more transit capacity than the smaller Option A. But what is surprising is the cost-per-person for Option B, $89,826, is actually smaller than Option A, $90,066. This indicates that Option B is more efficient and provides a greater cost/benefit return than Option A.

Option C, the largest of the three proposals, will only increase ridership by 2% over Option B. But Option C will cost 14% more than Option B. Again, this indicates that Option C is not nearly as efficient as Option B.

These calculations imply that Sound Transit planners have made it virtually impossible for the Sound Transit Board to choose any other proposal than Option B. The cost-per-person is cheaper than Option A and Option C has seemingly crossed the point of diminishing returns.

Conclusion

Under both phases, Sound Transit claims spending a combined $27 billion to $35 billion to expand the region’s public transportation network is justified by the need to keep pace with the projected population increases and congestion relief. According to Sound Transit, 1.2 million more people will be living in this region by 2030.

Depending on which package is chosen, Sound Transit claims it can handle about 302,000 to 351,000 of these new travelers if ST2 passes.

But what about the remaining 850,000 others who will spill onto our already congested road system?

Public officials are trying to address this issue through a companion measure, the Regional Transportation Investment District (RTID). But RTID’s funding levels are far below those of Sound Transit.

Despite years of spending on public transit systems, congestion has and will continue to worsen. In fact, in its 2006 Congestion Relief Analysis, the Washington State Department of Transportation predicts that delay will rise 300% by 2025, despite a 90% increase in public transit service hours.[8]

Congestion is a result of policy choices, not an inevitable consequence of growth. Spending on transportation has tipped toward public transit but congestion is worsening. The region should shift its focus back to roads where there is a greater return on investment and spending has a measurable impact on congestion relief.

This is not to say the region should stop investing in public transportation; a multi-modal transportation system is valuable. But its impact on congestion relief is only successful at the margins. In the private sector, businesses make decisions based on cost and the expected return on those costs. Likewise, policymakers should make the same considerations.

Our roadways are already congested and growing worse. If the larger package is chosen, spending $35.2 billion to move less than 29% of the region’s projected population growth by 2030 is not only expensive, its benefits are not even enough to reduce today’s congestion at today’s current population.

Michael Ennis is Director of the Center for Transportation Policy at the Washington Policy Center . Nothing in this document should be construed as an attempt to aid or hinder any legislation before any legislative body. Contact Washington Policy Center at 206-937-9691 or washingtonpolicy.org. The Policy Note is available online at www.washingtonpolicy.org.


[1] Sound Move, The 10-Year Regional Transit System Plan, May 1996.

[2] Sound Transit, University Link Financial Plan, June 2006.

[3] The details of Sound Transit’s three options are available at: http://www.soundtransit.org/x1190.xml. Sound Transit updated these calculations from 2005 and assumed each option would climb by 22%, 21% and 18% respectively.

[4] Ibid.

[5] Under the three options, Sound Transit estimates the change in constant dollars between 2005 and 2006 is 22%, 21% and 18%, respectively.

[6] The details of Sound Transit’s three options are available at: http://www.soundtransit.org/x1190.xml.

[7] Guide to Transit Now, Washington Policy Center , September 2006. Available at: http://www.washingtonpolicy.org/Transportation/PB_EnnisTransitNow.htm.

[8] Congestion Relief Analysis, Central Puget Sound Area Report. Washington State Department of Transportation, March 2006. Available at http://www.wsdot.wa.gov/Mobility/4chapter2pugetsound.pdf.

Sound Transits Rising Costs Plague Light Rail

March 23-29, 2007

Sound Transit’s rising costs belie logic of light rail

By Michael Ennis
All sides can agree that the region’s transportation
system is woefully insufficient to handle the demand on
our road system. The state’s November Congestion
Report concludes that travel times increased on most
every major route monitored in the region. And
population estimates show the region will gain another
1.2 million more people in the next twenty years.
Elected leaders responded to this looming congestion crisis and urged the region to embark on expanding the public transportation system. In 1996, voters agreed to raise both the sales tax and the motor vehicle excise tax to fund the first phase of Sound Transit. Officials
promised it would cost $3.9 billion and take only 10 years to complete.
Today Sound Transit says it will cost up to $15 billion
and take until 2020 to complete the project — a total of
24 years. It says it will collect the 0.4 percent sales tax
forever, even after the first phase is complete in 2020.

In addition, Sound Transit officials are asking voters to increase the sales tax an additional 0.5 percent to raise up to another $20.2 billion to complete a second phase of projects, which would exhaust its current taxing
authority.

Combining both phases shows the total cost of Sound Transit would be $35.2 billion, taking inflation into account, according to my study of Sound Transit’s estimates. (Sound Transit hasn’t produced an updated inflation-adjusted estimate of total cost.)

It goes without saying that the proposed costs of Sound Transit are staggering. What does the public get for its $35.2 billion?
If Phase 2 is approved, Sound Transit predicts its total system would carry 351,000 riders a day by 2030.
This means Sound Transit will only capture about one in four of the predicted 1.2 million people that are expected to move into the region over the next twenty years. The remaining 850,000 people will spill onto our already
congested roadways.
Based on Sound Transit’s estimates, the cost to pull one
passenger vehicle off the existing roadway and into the

agency’s public transportation system is about $100,000
per person.

To put this in perspective, King County’s voter-approved
Transit Now initiative will remove an estimated 50,000
passenger vehicles from the roadways by adding 175
new buses. The expansion will cost taxpayers about $50 million by 2008. Under Transit Now, the estimated cost to move one traveler to the public transportation system is about $1,000 per person.

It would be cheaper for Sound Transit to pay these
people $100,000 each to stay home. The effect on
traffic congestion would be the same, we would not have
to wait until 2030, and it would save taxpayers more than
$100 million.

Traffic congestion is the result of policy choices, not an inevitable consequence of growth. Spending on transportation has tipped toward public transit, but congestion is worsening anyway.
Reverences to sound business principles free a
company from the pitfalls of failure and make long-term
sustainability more likely. If these values are violated,
the market will react and force more efficient decisions.
But in the public sector, when public money is at stake,
government officials poke at these time-tested values.
As a result, the public does not enjoy the protections of
the market and bad policy choices are allowed to live on.

Sound Transit’s plan to spend $35.2 billion to move less
than a quarter of the region’s projected population
growth by 2030 is not only expensive, it is not even
enough to reduce today’s congestion at today’s current
population. If Sound Transit’s second phase is
implemented, our daily commute will continue to get
longer.

Rather than pouring more money into light rail, we
should return to a policy of strategic increases in road
capacity, easing congestion and reducing travel times for
all citizens.
MICHAEL ENNIS is the Director of the Center for Transportation Policy at the Washington Policy Center, an independent research firm in Seattle.

Sound Transits Broken Promises

Undermining trust in government; Sound Transit’s failed promises


by Paul Guppy, Vice President of Research

June 28, 2006

As voters across Washington consider new proposals for major public works projects this fall, they would do well to consider the lessons of the biggest ongoing project in the state: Sound Transit.

In 1996 voters in parts of King, Pierce and Snohomish counties created a new transit agency, Sound Transit, and entrusted it with new tax revenues based on a detailed ten-year plan of what the agency would provide in that timeframe. A comparison of what was proposed and the reality ten years later shows Sound Transit has failed to build the system it promised.

Follow-up studies show that promoters of the ballot measure used overly-optimistic planning assumptions and inaccurate ridership figures, which made the project appear more acceptable to voters.

The cost figures given to voters turned out to be wrong. Today, the agency keeps its spending within its tax revenues only by drastically cutting back on promised services. In addition, operating costs for the system are much higher than voters were told they would be, and are higher than many transit services in other parts of the country.

Most importantly, Sound Transit leaders show little regard for what people think about the project. They say they will not hold a vote on whether they should collect taxes beyond the ten-year limit approved by voters. Sound Transit lawyers assert that the agency’s claim on taxes is not limited to ten years, but is permanent. According their interpretation, Sound Transit can collect taxes forever.

Comparing what voters were promised in 1996 with what has been delivered shows how far short Sound Transit is of meeting its original goals. (Quotes are from the voters’ pamphlet and from “YES RTA” campaign material.)

Promise: “Implement a 10-year regional transit system plan...”
Reality: Sound Transit is far short of providing the system plan promised in 1996. The agency cut back on several projects and unilaterally extended its program to at least 13 years.

Promise: “After 10 years, any addition to the system will have to be voter approved, assuring accountability and satisfaction.”
Reality: Sound Transit has significantly reduced its original plans while collecting full taxes. The agency says it has no plans to seek voter approval.

Promise: “Cost of the plan is $3.9 billion.”
Reality: The cost of Sound Transit today tops $4.7 billion and rising. Sound Transit supporters now say the costs they gave voters in 1996 were only “placeholder” figures.

Promise: “Public transportation will have the capacity to move 40% of the region’s commuters to their jobs”
Reality: Public transit is well below this capacity. Also, creating capacity is not the same as moving people. Today, 95% of daily trips are in private automobiles.

Promise: “53,000 cars out of rush hour traffic everyday.”
Reality: There are more cars in rush hour traffic today than in 1996. Annual traffic data does not show a reduction of 53,000 cars a day.

Promise: Upgrading Burlington Northern Santa Fe track for use by Sound Transit would be $470 million.
Reality: Today the cost estimate for track upgrades is $942 million.

Promise: A 21-mile light rail line for $2.3 billion in ten years.
Reality: Sound Transit is building a 14-mile line for $2.7 billion; the last mile will cost $225 million.

Promise: “40% of operating costs will be covered by fare revenues.” “Fares will cover a growing share of the operating costs.”
Reality: The opposite is happening. 2004 fare revenues covered 12% of operating costs. Sound Transit expects this figure to fall to 10.3% in 2006.

Voters have not received what Sound Transit promised. Instead, the agency unilaterally changes the definition of success, usually by cutting services, while continuing to collect full taxes.

Sound Transit’s current leaders might say they were not around in 1996. Such a view is short-sighted and shows a lack of respect for the people. Sound Transit leaders volunteered for their positions; they should know that means fulfilling the agency’s commitments to the public.

In order to have trust in government, people have to feel that public leaders, and their successors, will honor long-term commitments, especially for major public works projects that take years to complete. The Seattle Monorail couldn’t meet its promises, Sound Transit keeps changing what it will deliver, and elected leaders now want to put several new tax measures on the next ballot.

Given the track record of Sound Transit and the Monorail, it is not surprising that people are skeptical when asked to vote for new taxes to fund major projects for the next ten years.