Defending Contractors, Part 2: The History of Contracting and Brokerage

In Part 1 of this series, I explained the relationships among operating companies, lead agencies and brokers. I began the discussion about how operating companies are victimized by lead agencies and brokers, whose ignorance and impunity often create operating environments which make it impossible to provide service safely or profitably. And I introduced the core goal of this series: How to defend operating companies from liability exposure related to incidents caused largely or solely by negligence committed by the lead agencies or brokers who “make the rules.”

The rules matter.

Most “lead” agencies (those public agencies which receive the funding) create the routes and schedules, select the stops (or at least their robots do). And they establish many other critical parameters of service – such as on-time performance targets and penalties for failing to meet them. In the more than 650 lawsuits in which  I have served as an expert, I found that the vehicles were running behind schedule in more than half the incidents. In many cases, the negligence of lead agencies and brokers are the principal proximate causes of an incident; in some cases, it comprises the sole proximate causes. For this reason, understanding the dynamics among these three entities – private operating companies, lead agencies and brokers — is the key to defending private contractors. In facilitating this understanding, a brief history of how these entities and relationships came about is helpful.

Origins, Omens and Enigmas

In those modes requiring no subsidies (e.g., taxis, limousines, hotel and airport shuttles, motorcoaches providing charter, tour and intercity/scheduled service), contracting is moot. Regulatory agencies define some parameters of service and may provide some degree of oversight. Those modes whose capital and operating costs cannot (or can no longer) be covered by passenger fares require funding assistance from public sources – in most cases a combination of Federal, State and local funds.

Contracting has been around for a long time in certain modes:

  • In pupil transportation (or schoolbus) service, about a third of all services were contracted out as early as the 1980s (some before then); this percentage has remained pretty much constant.
  • Paratransit service was contracted out by some municipalities when it emerged in the 1970s. Most of it was contracted out the moment the ADA was promulgated in 1990. This practice reflects the relative complexity of demand-responsive services, and the ADA’s mandatory application to every disabled individual of any age. (The major exceptions were non-disabled elderly individuals usually transported by pre-ADA systems, and “special needs” students of school age transported by schoolbuses.) Paratransit services provided by adult day care centers, social service agencies and to other “niche” subpopulations were usually provided by in-house staff and vehicles when the service was on a small sale, while larger operations were typically contracted out.
  • Fixed route transit services were rarely contracted out before the 1990s – even while there were calls for “privatization” in the 1980s (early advocates for it in Los Angeles referred to a combination of publicly- and privately-provided service as “mixed mode”). The exception was the use of motorcoaches deployed in commuter/express service: Because the FTA’s predecessor, UMTA (Urban Mass Transportation Administration) began paying for 80% of capital costs since 1964, transit agencies commonly purchased the vehicles and leased them to contractors for $1/year – a practice which now applies to cases where contractors deploy buses in other types of transit service (e.g., local and regional service).
  • Non-emergency services — such as those for non-emergency medical transportation (NEMT), and similar services for non-school-age Medicaid recipients and Veterans Administration funding recipients – were almost always contracted out from the inception of the programs created to provide and fund them.

As noted, the principal incentives for contracting out service, or “privatization,” have been (a) cost-savings and (b) public agencies shedding the responsibility for designing and operating demand-responsive services, which were exponentially more complex to operate (particularly where they were not designed at all, as most were not). The latter of these reasons was a bad omen: It established precedents for increasingly dangerous and inefficient services. And when brokers became more common (particularly for non-emergency services), these trends expanded into extraordinary fraud and waste.

Finally, the emergence of routing, scheduling and stop selection software added a peculiar dimension to these trends, particularly where contractors were providing the service: Lead agencies demanded that service be as efficient as possible, often selected software developers on the perceived basis of their ability to provide it, and demanded they employ “algorhythms” to facilitate efficiency. As a consequence, contractors were forced to operate according to schedules which were increasingly impossible to adhere to without committing a variety of safety compromises (see ). When brokers were later inserted between lead agencies and their contractors, these problems were compounded by fraud and waste from the incompetence and indifference of both lead agencies and their brokers. After all, if a lead agency required a broker because it could not control its service providers (or make them efficient), how could one expect them to do monitor or control their brokers – who obviously do not work on some “honor system?”

History and Socioeconomics

To understand contracting, one must understand public transportation and its curious history. Those alive then, or who may have read about it, know that fixed route transit service practically collapsed in the 1960s. Transit systems were either reduced to a skeleton of routes or disappeared entirely. The last to go was New Jersey Transit, which nearly disappeared in 1969.

A number of dynamics led to this collapse. Most important of them was the explosion of suburbanization unleashed by the Defense Highway Act of 1953 and the creation of the Mortgage Guarantee Insurance Corporation (MGIC) in 1957. The Defense Highway Act lead to the creation of 49,500 miles of mostly toll-free freeways which radically restructured the distribution of the U.S. population. The MGIC made the Federal government the sole provider of mortgage insurance, universally stabilizing investments in newly-purchased housing throughout the country. The MGIC program allowed many or most “qualified” homeowners to purchase homes almost anywhere, and insured the first $100,000 of their mortgages.[1]

Before this suburbanization, when farming and other industries were booming in rural areas, most of the non-rural population was concentrated in cities of various sizes – typically one major urban area surrounded by a small cluster of medium-sized cities and large townships. With this structure, the handful of cities in each subregion were easily connected by a mix of fixed route bus and rail services. Because most of the passengers resided and/or worked in these cities, ridership levels were high on both services between these cities and within them. And routes were not fragmented to provide service to the low density areas in between (other than at some stops “along the way”). So thick was the ridership on these services that intercity bus routes were referred to as “trunk lines.” Within the cities themselves, their dense populations were served primarily by a network of buses and streetcars – both of which enjoyed heavy ridership.

Suburbanization ended this neat, simple and efficient framework. When our population began to spread out, it became impossible to support the “intermediate areas” and their lower ridership with farebox revenue – just like it was always impossible to serve every nook and cranny of our rural population with any form of public transportation. At the same time, the cities expanded into “metropolitan areas,” as the cities became ringed with suburbs, which over time, included enclaves further and further away from the city. The ability to serve these growing enclaves with buses became increasingly impossible. And as urban populations began to spread out, the streetcar networks began to vanish. Only a handful – like those of San Francisco – remain today, even while 40 years ago “light rail” services were reintroduced to replace them – often with low ridership, and requiring extraordinary subsidies to cover the balance of operating costs not paid for by the riders. The “alternatives analysis” process introduced by the Ford Administration in 1975 was designed to put a stop to the light and heavy rail “new starts” – largely in places where bus ridership was thin. But it failed. Otherwise, suburbanization effectively killed self-supporting transit service.

Social Programs and Structural Changes

The collapse of urban transit services also coincided with a huge influx of lower-paid wage earners, replacing and exceeding the higher-wage earners who abandoned the cities for the suburbs.[2] The result was a severe deterioration of urban areas – even while many or most cities still maintained some “high-end” neighborhoods. Accompanying the collapse of transit was an explosion in traffic, as many employment centers remained in the “inner cities.” On roadways connecting the suburbs to the cities, traffic expanded to intolerable levels. The response was to build more and more roadways. In many cities, 80% of the land was paved with a combination of roadways, freeway interchanges and parking lots.

To address the overall deterioration of our urban areas, former President Johnson created the Model Cities Program in 1964, a program within the Department of Housing and Urban Development (HUD).[3] A major component of this Program was the creation of the Urban Mass Transportation Administration (UMTA). UMTA’s major thrust was to pay for 80% of the cost of buses (and other capital items) purchased by transit agencies or municipalities, resuscitating these agencies. However, in 1967, when Johnson created USDOT, he immediately moved UMTA from HUD to USDOT. And he created operating assistance. (Some grants were “block” grants while others [called “formula” grants] reflected demographics and other factors.) A decade later, 50% of transit operating costs were provided by some combination of Federal, state and local funds. But sixty-two percent of these funds translated immediately into wage increases. Regardless, transit funds flowed from a transportation bureaucracy at the Federal level to a transportation bureaucracy at the municipal or subregional level.[4] (In oddball cases like Rhode Island, which has a statewide transit system, the funds still flowed to a state transportation bureaucracy.)

A year later, in 1965, President Johnson also created MediCare, which contained a transportation component (non-emergency medical transportation [NEMT] service). Soon after came Medicaid and its transportation component. However, by 1965, Johnson was increasingly being lied to about our failures in Vietnam by former Secretary of Defense Robert McNamara. Perhaps so preoccupied with this situation, he never managed to shift NEMT service into USDOT. So still today, NEMT service remains a part of the Department of Health and Human Services. As a consequence, transportation funds for MediCare, Medicaid and VA transportation flow from a healthcare bureaucracy in Washington, D.C.  to a healthcare bureaucracy at the state, county or municipal level.

While much criticism can be, and has been, leveled about efficiency and waste in public transit (and especially in complementary paratransit service), at least those in charge, at all levels, are “in the field.” The exact opposite is true of non-emergency transportation services (NEMT, Medicaid and VA services).[5] This distinction is compounded by the fact that all non-emergency services are door-to-door or curb-to-curb “demand-responsive” services – exponentially more complex to operate, particular where there is no coherent system design (see As noted, this complexity encouraged most transit agencies to contract out their version of these services (complementary paratransit service) the instant the ADA required all of them to provide it. That many or most disabled individuals were eligible for both complementary paratransit and NEMT service only made the complexity worse. Regardless, if the transit industries’ alleged “professionals” could not handle the operation of such services, it is hardly a wonder why healthcare agency professionals – even genuine professionals in their field – could not begin to. The consequences of this failure should be obvious: Envision placing your city’s transit agency or state DOT in charge of the ballet.

The next installment in this series will explain how the non-emergency transportation sector’s decades of failure in the provision of its services led to the profusion of brokers. And it will explain how the infusion and expansion of brokers led to hundreds of billions of dollars a year of taxpayers’ money squandered by fraud and waste.

This sad tale may represent the worst that contracting can be. But it will also illustrate how much of the carnage is not the fault of the victimized private companies which provide the actual service in many of the modes listed above. And readers will begin to understand how to defend them when they are blamed for it.

[1] This amount was later increased to $250,000.

[2] This trend partly reversed itself decades later as “gentrification” poured more high wage-earners into the most-convenient parts of the “inner city.” But the rates of transit-dependence of this wave of upper-class residents was lower.

[3] As a footnote, HUD and the Department of Health, Education and Welfare (HEW) were merged in the mid-1970s, although HUD reemerged as a separate agency only recently. [CHECK history].

[4] In 1975, former President Ford created the requirement for funds to flow to a Metropolitan Planning Organization (MPO) in every city’s metropolitan area, rather than simply to every city’s “Tammany Hall.”

[5] A considerable part of Medicaid funds are provided to states, counties and municipalities for pupil transportation services – where their glaring problems reflect this same chain-of-command.

Publications: National Bus Trader.