Tight budgets are prompting many public agencies to consider competitive contracting for support services. To make an informed decision about competitive contracting, public officials must first identify the total cost of in-house service.
Public agencies routinely underestimate their true costs by as much as 30 percent. Common mistakes in estimating total costs include: cross-subsidizing, failing to allocate overhead, improperly depreciating capital assets, ignoring cost of capital, and excluding or underestimating costs such as pension plans, legal fees, insurance, and administration.
The San Diego City Schools encountered many of these public-costing problems. In December 1994, the district’s Board of Education voted to discontinue competitive contracting for busing and expand its in-house transportation department believing the new arrangement would save money.
Its decision, however, was based on a flawed financial analysis prepared by the district’s in-house transportation department. The district’s analysis of expansion costs ignored key cost categories, ranging from property acquisition to office supplies. Moreover, instead of looking at total cost, the analysis only considered the marginal cost of expanding in-house services. By doing so, the analysis sidestepped the more important consideration of overall cost efficiency.
A thorough analysis of the district’s costs is beyond the scope of this policy paper, but a preliminary review of state and district-expenditure data show that private contract carriers currently operate pupiltransportation services at a lower total cost than the district’s in-house transportation provider in San Diego.
Expressed in terms of spending per bus, the cost of operating district-owned buses is 83 percent higher than the cost of operating contractor buses. In several areas, the district incurs higher costs. These include labor costs, utilization of resources, and fleet acquisition and owning costs.
By eliminating competitive contract service, the school board has placed itself in a weaker bargaining position with respect to its employee-labor union because it no longer has alternative providers. Under these conditions, the transportation services department will have little incentive to control costs.
Although cost savings should not be the only consideration in the decision of how to provide services, it was the key argument advanced by the district’s transportation department in favor of expanding its own operations. This study is devoted to the subject of public-sector costing.