The last time many Seattle Public School parents were stuck driving their kids to school, the district tried to hold its bus contractor accountable. It was 2019, and the company, First Student, could have been on the hook for millions in damages, one analysis found, for late and missed routes.
Lawyers for First Student disputed the claims. With no other school bus providers to fall back on, Seattle Schools settled for a fraction of the cost. It also opted for a carrot instead of a stick approach — dropping its right to seek potentially millions in compensation going forward, and instead using an “incentive-based payment system.”
Two years later, those incentives are doing little to help the district’s unfolding transportation crisis. A nationwide bus driver shortage left First Student understaffed, leading to more than a month of severe delays in the beginning of the school year.
Then last week the district made the drastic move to cut 142 bus routes, leaving families with more predictability, but also more headaches.
As the district scrambles to find rides for kids, some major questions remain about the district’s $40 million annual contract with First Student.
Who will pay for the replacement transportation (one idea is to rent commuter vans and outsource non-bus drivers)? Will the district hold First Student liable for problems this year? Or will the company, which has gobbled up competitors, be able to fend off any charges again, because Seattle Schools has no other options for yellow buses?
“While we want to hold anybody we have a contract with accountable … to be successful with whoever is providing the Seattle bus service we really want to work in partnership,” said Fred Podesta, the district’s assistant superintendent of operations,
Greg Newman, the regional vice president for First Student, echoed the sentiment: “We’re partnering with the district on a regular basis to be sure we’re giving the best service.”
“Up or out” strategy
First Student bills itself as the largest provider of student transportation in North America, and has steadily overtaken the Washington state market. Out of the state’s 295 school districts, 15 outsource, with 11 served by First Student, according to state records. A decade ago, the company was in seven of 15 contract districts.
Seattle had another provider, Durham School Services, for a small portion of its routes, until its contract expired in 2020. Durham said it didn’t have the capacity to serve the district, Podesta said.
“Seattle Public Schools has gotten themselves into a hole over the years by being so dependent on First Student,” said Shannon McMinimee, an education attorney who formerly worked for the district. “If you get into a pissing match with your contract service provider, you end up with nothing. Seattle does not have the capacity to do bus service on its own.”
As First Student acquired more districts, it also pressured existing clients. The company’s negotiating strategy, described in corporate financial statements, is “up or out” — increase its rate of return with a school district or walk away from it. Seattle has twice agreed to raise rates since the First Student contract began in 2017.
Broadly, that strategy had borne fruit. By 2019, company statements show, First Student won price increases beyond the rising cost of employee wages and increased its market share. It acquired three companies the following year, bringing its fleet of school buses to 43,000 and reporting an annual operating profit of $205.9 million.
Then the COVID-19 pandemic struck.
All of the schools that First Student served closed by the end of March 2020, corporate records show. Many employees were furloughed. Some were laid off. Across North America, its average number of employees fell about 22% in a year.
The pandemic battered First Student’s bottom line, but the company remained profitable, helped by its ability to recover more than half of its expected revenue from school districts while saving on fewer employees and lower fuel costs.
In April, FirstGroup sold First Student to a Sweden-based private-equity firm, EQT AB.
No penalties
As the first day of school approached on Sept. 1, First Student had bad news for Seattle Schools. Reeling from the nationwide labor shortage, it couldn’t provide enough drivers.
That meant some drivers had to run their regular route, then turn around and cover an unfilled one, often an hour or two late. Some drivers also called in sick, and Gov. Jay Inslee’s COVID vaccine mandate was looming, prompting some drivers to quit.
The delays lasted for weeks. By Sept. 23, 60 routes were listed as late on the district website. Buses rolled through neighborhoods empty, as families found their own ways to campus.
Despite the gaffes, First Student will likely get full payment for running all those routes, district officials say.
The company has not yet submitted billing for September, but Podesta said the roughly month and a half of delays fall into a “neutral” period where the district doesn’t count tardiness against First Student.
Typically, the company is evaluated on safety, on-time arrivals and accurate counting of student riders. If First Student nails all three, it can bill an extra half percent a month. If it underperforms, it could be dinged half a percent — which might amount to $10,000 or more, an example in the contract shows.
However, for the first six weeks of the school year, the district is typically ironing out its own kinks with the routes, so it doesn’t enforce the incentives or penalties.
Under its pre-2019 contract, the district could have sought $800 in damages for each missed assignment, and $200 for each delay of 15 minutes or more. Those could add up: A KUOW analysis in January 2019 found the company owed an estimated $3.3 million in damages after a turbulent run of late and missed buses.
But Podesta said the district couldn’t hold First Student to the penalties because the district couldn’t prove it actually suffered that much of a monetary loss.
“I don’t believe they were collectible in the amount they were specified,” he said, “nor did they lead to good service.”
The district settled for about $500,000 and agreed to the new incentive structure, among other contract changes. Service improved in the 2019-2020 year, Podesta said, before the pandemic hit.
“There isn’t anybody else”
Facing the driver shortage this year, the district realized running busses hours late “just wasn’t a sustainable process,” Podesta said, leading to the slashing of 142 routes on October 18.
“People are really disappointed. They’re really upset,” said Mary Ellen Russell, a parent volunteer on the Seattle School Traffic Safety Committee. “But people have been very supportive of this change that allows them to provide good service for once.”
A provision in the current contract could allow the district to cancel the routes after a week of bad performance, and charge First Student at least some of the cost of another bus provider. Instead, Seattle Schools has indefinitely “suspended” the routes, with the hope of First Student bringing them back online.
“We don’t really see a reason to cancel the route and provide it to anybody else,” Podesta said, “because there isn’t anybody else.”
He expects to resume 10 routes on October 27, as First Student has trained and certified new drivers. Podesta estimates the company is losing about $30,000 a day in revenue because it can’t bill Seattle for the suspended bus routes.
Meanwhile, Seattle is looking for a temporary replacement. Podesta said it is considering renting King County Metro commuter vans idled during the pandemic, at a monthly cost of less than $500 each.
And the district is looking to hire companies that already operate passenger car services for students, such as Hop Skip Drive, and Zum. To drive a van they wouldn’t need a commercial driver’s license.
Under the contract, the district can charge First Student for replacement costs “if there is failure or refusal on the part of the contractor to furnish the services.” But Podesta said officials have not yet decided if they will ask First Student to cover costs of the vans.
Reporter Daniel Gilbert contributed to this story.
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