Bill Manzi.com

The Pioneer Institute has put out a new policy paper, written by former Massachusetts Inspector General Greg Sullivan, that highlights the issue of higher than average labor costs contributing to the ongoing fiscal problems at the MBTA. Sullivan, who stepped down as I.G. after ten years at the helm, also highlights the ongoing procurement difficulties as the MBTA seeks competitive bids for its commuter rail service. Sullivan is uniquely positioned to talk about procurement, as the Office of the Inspector General deals with procurement issues throughout Massachusetts. Let us start with the procurement issue.

The MBTA does not run its commuter rail system, but outsources that service. The incumbent company is Massachusetts Bay Commuter Rail, Inc (MBCR). The MBTA just put this contract out to bid, and despite initial interest shown by over twenty firms ultimately only one bid (beyond the existing company) was received. This process has highlighted some of the ties that exist between the T and MBCR, which has caused some concern about the bidding process itself. Former Inspector General Sullivan, in his report, says:

In my previous 10-year service as state Inspector General, one of thestatutory functions of my office was to assure that the procurement ofpublic contracts was being conducted on a level playing field, with full and fair competition. These are the essential elements of project procurements that provide best value for taxpayers. The MBTA commuter rail contract is a case study for how not to generate competition for a large contract.

The difficulties associated with the necessary transfer of data from the existing company to all bidders has also created problems for the new bidder, as MBCR has refused to give data on labor costs and other critical data that is necessary for a company looking to enter a bid. I do believe that issue to be resolved, but that dispute lasted much longer than it needed to last, casting some doubt on the process itself.

It is especiallyconcerning that the information MBCR has yet to provide relates to labor expenses and benefits,which represent more than 70 percent of commuter rail system costs. It is also worth noting that that 10
gigabytes of data fits on a $14.99 USB flash drive.

Former Inspector General Sullivan does a good job laying out some of the perceived difficulties in procurement. Such an enormous contract, in terms of cost, should not be restricted to two bidders. More on that later, as we look at the three options for procurement that were examined by the Patrick Administration.

Former Inspector General Sullivan also highlights the labor cost disparity between MBTA workers, and state workers. He highlights some of those in the report, making the argument that this disparity costs the MBTA upwards of $50 million annually.(Mr. Sullivan quoted that number to me in a radio interview with him on this report)

The Patrick administration’s commuter rail procurement strategy deliberations about selecting a vendor had a lot to do with a big issue that is not being addressed in the ongoing transportation financing debate: how to bring excessive MBTA labor costs in line with those of regular state employees. Since 70 percent of the T’s costs are attributable to labor, addressing that issue head-on obviously represents one of the biggest and most essential opportunities for long-term cost containment. Even if compensation and benefit reforms only apply to new hires, the potential for long-term savings is significant.

The report gives some examples of the labor cost differential.

For example, painters for the MBTA make an average of $79,279 per year; painters in regular state government earn an average of $46,742, according to the Boston Herald’s “Your Tax Dollars at Work” on-line utility. MBTA customer service employees are paid between $53,854 and $61,110 per year; customer service employees for the Massachusetts Registry of Motor Vehicles are paid between $34,843 and $45,117. An assistant general counsel at the MBTA makes an average salary of approximately $85,000; at the Massachusetts Attorney General’s Office, Assistant Attorneys General earn an average salary of approximately $65,000.

The data cited certainly show a disparity, but a deeper study would need to be done to confirm the $50 million figure. Certainly the MBTA has had, over the years, substantially better benefits by way of health care and pensions, than standard state workers. It is not surprising that some of the pay scales are better as well. But with the MBTA running big annual deficits that are causing tax increases I can imagine that those disparities will be drawing more scrutiny.Pioneer promises more on this issue in a forthcoming report.

So back to the procurement on the commuter rail. The report identifies three options considered by the Patrick Administration.

The Patrick administration and the MBTA considered at least three options before deciding to re-bid the current commuter rail contract for another five-year term. One was to bring commuter rail operations in-house to be run by MBTA employees, which is how the other six largest commuter rail systems in the U.S. are operated. Some of those systems outsource elements of commuter rail operations, however, including maintenance and cleaning.
Another option was to procure an operator in a long-term public-private partnership of up to 30 years that would have included requirements for the operator to finance and carry out large-scale capital improvements. In light of the ongoing debate on Beacon Hill about the extent to which new tax dollars should be raised to finance MBTA capital improvements, this long-term public-private financing option, which would include purchase of replacement locomotives and coaches for our aging commuter rail fleet, is worthy of reconsideration. The final option, and the one the administration chose, was simply to seek an operator for another five-year term, deferring effective reform.

Pioneer obviously looks favorably on the long term option, as it could entail some mandatory capital expenditures by the vendor. As they point out, in light of the overwhelming capital needs of the system, that option certainly has some potential.

It does not appear to me that a procurement of this magnitude should proceed with only two bidders. Regardless of what you might think of the labor costs part of the Pioneer analysis their recommendations on this very large procurement seem quite sound, and designed to produce the greatest value for the taxpayers of Massachusetts. They recommend starting from scratch, and I do believe they are correct.

The MBTA should immediately halt the commuter rail procurement and start over using a process designed to maximize competition. Such a process would include making all pertinent labor cost information to bidders at the outset of the process;

The MBTA should conduct a survey of the 23 companies that submitted statements of interest to ascertain why they opted out of the bidding process; and

Any new transportation funding legislation should include an initiative designed to bring MBTA and commuter rail compensation in line with that of regular state employees.

The podcast of my interview with Greg Sullivan is below, and I thank him for taking the time to come on the show.

http://yourlisten.com/swf/Player.swf?id=16974168