Finding Value for School Buses

By Julie Metea | Contributing Editor

Superintendent Ed Luick and the School Board of Lakewood Public Schools in New Jersey are critically reviewing the school transportation's operations and finances.

With a consultant, the district pinpointed several areas where they could increase the value of transporting 13,000 students with an $11 million budget. Among the recommendations is a goal to renegotiate operating contracts and finances.

"We have to reduce our costs. We're looking at many solutions, and we're approaching the state for flexibility (on bidding policies) to change our approach," said Luick.

His team is looking at a contractor that brokerages tax-exempt lease-purchase agreements for school buses and then operates those vehicles. In other words, buy the bus, but hire someone else to manage loan payments and operate the fleet.

"It's a combination that works for school districts, if they're willing to own the fleet. It's very transparent, and it gives them a total lower cost. It has been a very hard sell because it's new to the school bus industry," said Denis Gallagher, chief executive officer, Student Transportation of America.

The school district is realizing that it has bargaining power among financial services companies and bus operators. It can obtain new buses and flexible service due to its tax exempt privileges and guaranteed cash flow from tax payers.

Lakewood school representatives aim to bring those bargaining chips to the marketplace in its mission to drive down costs and increase value.

Tax Advantages Create Financial Opportunities

The concept is based on municipal lease-purchase agreements. School districts can get banks or bus manufacturers to provide low-interest loans and front the initial heavy investment for school buses. Without intensive capital expenditures, school districts could lighten their budgets.

U.S. public entities, such as school districts, are entitled to tax breaks when financing equipment. Unlike a person or company, a school district can get a lower interest rate (as much as two points) on a vehicle purchase.

"There's a lack of awareness. Districts may think in the (retail or commercial) model of vehicle sales. It doesn't have to work like that," said Tony Sellier, director of financial services, Blue Bird.

Several financial services companies and manufacturers are willing to pass along the savings of a municipal lease-purchase agreement, in order to get the loan origination. One big reason: the company gets tax credits on revenue generated from municipal customers.

School bus contractors are not privy to the same financing deal, but some are starting to leverage municipal lease-purchase agreements to create savings for school districts and attract new business for themselves.

Bus Operator Leverages Low Cost Financing

As a bus operator, Student Transportation of America (STA) is implementing the concept. Through Managed Service Contracts for school districts, STA arranges low-cost, third-party financing for bus ownership and attaches its own operating services, including drivers, training, maintenance, insurance, routing and scheduling.

"It's our secret sauce," said Gallagher. "We've seen it in municipalities with fire trucks and sanitation trucks. They've been doing this for a long time. We thought it was time for school buses."

Companies like Aramark (food services) and Service Master (janitorial services) provide outsourcing of non-educational services within school-owned property. STA is showing that school districts can outsource transportation services in the same model.

"Once these districts realize they have the ability to own a new fleet with little money down and hire an efficient operator, they see a compelling deal," said Gallagher.

STA now owns 84 percent of the vehicles they operate for school districts. The other 16 percent of buses are owned by school districts and operated by STA. The company is targeting southeastern and southwestern states to increase its share of Managed Service Contracts because several districts in those regions own the fleets.

Lowering the Cost of Capital

STA partners with commercial lending institutions that offer municipal financial services, including GE Public Finance, Citibank, Bank One, Bank of America and Key Finance. When setting up a deal, STA helps the school district shop for interest rates from several institutions. Once the financing is decided, they work on the operations deal.

However, these same financers - on their own -- actively pursue school districts, often with unsolicited proposals. With large scale, they often can beat rates from manufacturers. They are able to help school districts purchase anywhere from one bus to an entire fleet, and flexible payment plans can be negotiated.

"We want customers to have value, and we want to be a trusted advisor. There are no hidden 'gotchas.' It's clean, easy to understand and predictable," said Greg Bohan, general manager, Key Government Finance.

Key Government Finance wins one out of every four municipal proposals, according to Bohan. The bank currently has 5,000 lease-purchase agreement contracts, and its role after the deal is simply to collect.

While banks allow any bus brand purchase, manufacturers' finance arms can offer competitive interest rates plus added service, if the customer can agree to one brand.

"The sole reason I exist is to sell buses," said Sellier. "We don't do low rate chasing. We're not a profit center. We're a sales tool."

The manufacturer distributors help customers bargain rates, set the payment terms, choose product (new or used) and agree on service. And manufacturers allow customers to trade vehicles in and out of their fleets with relative ease.

"They get the bus they want -- the way they want it," said Greg Bryson, principal, Bryson Sales and Service in Bountiful , Utah . His company is a Blue Bird distributor.

Bryson explained that with help from Blue Bird, he's able to provide zero percent interest deferred payments. If a school district needs a bus before the fiscal budget begins, he can allow the customer to drive the bus for months before beginning to pay for it.

Other manufacturers have their own corporate financial arms through parent or affiliated companies (International/Navistar Financial, Blue Bird Financial Services and DaimlerChrysler Financial), while some companies allow their distributors set up third-party financing under their own brand (Collins Bus/Mid-Bus and U.S. Bus). Even companies with only school bus components are finding ways to provide flexible financing.

"We want to follow the tax exempt business. We don't think the competition is keeping us out of it," said Colin Martin, CAT Financial. The company temporarily stepped out of the market, but it's aiming to jump back in.

Contractor Value Contested

In an effort to push sales, financial services companies may tell customers that bus operators (that own the fleets) pass on their higher financing costs to them. However, several contractors - small and large -- respond by saying they provide added value to customers who don't want to own their own fleets.

"In volume, we can actually lower costs. We often absorb the cost of facilities, fuel, training, insurance and service. If you don't break out and review the costs, you may not realize the value we provide," said John Corr, owner of the Trans Group and president of NSTA.

Laidlaw Communications Director Tiffini Bloniarz explains that large school bus contractors have strong purchasing power that often allows them to save money. And lean maintenance programs reduce expensive downtime.

Source: School Transportation News, April 2006. All rights reserved.