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Commuter rail won bonuses as riders fumed

Penalties for running late were slashed by the T, saving the operator millions. Can it surprise that service is so poor?

By Sean P. Murphy and Scott Allen
Globe Staff / May 15, 2011

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Time and again, state transportation officials have blamed bad weather and old trains for most of the commuter rail delays that made tens of thousands of people late to work through much of last winter.

But a three-month Globe investigation suggests another contributing cause for the commuter rail system’s chronic tardiness: the well-connected company that runs the railroad collects millions in bonuses for “on-time performance’’ even when the system’s overall service is lousy.

In a series of contract changes that were never discussed at MBTA board meetings, the T eliminated and altered penalty provisions that would have cost the Massachusetts Bay Commuter Railroad Company an estimated $32.6 million for late trains and bad customer service from 2003 to the present, according to a Globe analysis. One 2004 change lowered the fine for being at least five minutes late at rush hour from $500 per train to $100; another capped the total penalty for late or canceled trains at $28,125 per month.

Then, in 2007, the MBTA added contract language that effectively offset the penalties and the T began paying Mass Bay about $2 million a year in bonuses for trains that did arrive on time, even as customers were complaining that an increasing number of trains were arriving late or not at all.

“It has been two weeks in a row that the train out of Forge Park hasn’t shown up,’’ complained commuter Henry Savelli of Milford in an e-mail to Mass Bay in November 2008, a month when the company received $345,000 in bonuses for on-time performance on other lines. “Must be nice knowing you have a somewhat captive audience.’’

The state auditor warned the MBTA early this year that the contract changes were sending “the wrong message’’ to Mass Bay about its responsibilities — giving the company an “unjust reward’’ for its mistakes — but it was already too late.

By the time a February storm nearly paralyzed the railroad, turning a routine ride from Boston to Worcester into a four-hour ordeal, the company had presided over eight years of declining performance, records show. Only 8 percent of its trains were late from 2004 to 2006, records show, but that tardiness rate has doubled in years since. During only two months since Mass Bay took over the railroad has it achieved its goal of 95 percent of trains arriving on time.

Yet, as performance declined, the MBTA has been anything but adversarial toward its largest contractor, Mass Bay, founded by former T general manager James O’Leary. The senior T officials who selected his firm in 2002 to run the commuter railroad — after they disqualified the lowest bidder on a technicality — had once worked for him. Today, the T and Mass Bay seem connected by a revolving door: current T General Manager Richard Davey had the general manager’s job at Mass Bay until last year, while two of Mass Bay’s senior executives have come over from the T since 2000. Mass Bay officials insist that they haven’t received special treatment, but the firm’s service contract has been handled in unusual fashion. At least three contract amendments favorable to the company — ones that cost the T millions of dollars in penalty payments — never came up for a vote of the board of directors despite a rule that anything costing more than $500,000 normally requires board approval.

Just before leaving office in January, Auditor A. Joseph DeNucci said that the T staff avoided board scrutiny of the amendments by giving no estimate of their cost.

The original contract was “clearly intended to benefit riders and taxpayers,’’ said Suzanne M. Bump, who succeeded DeNucci. “The MBTA’s actions in amending the provisions undercuts those goals.’’

T and commuter rail officials argue that the original penalties Mass Bay faced were much larger than they expected and could have bankrupted Mass Bay if the MBTA hadn’t provided relief. In 2006, for instance, contract changes reduced Mass Bay’s penalty payments from a possible $17.3 million — bigger than the company’s projected profit for the year — to a more manageable $1.9 million.

O’Leary said the reduction in penalties didn’t affect the way he ran the railroad. “We’ve always sought the best service we can,’’ he said in an interview.

On the other hand, Mass Bay officials say the millions in bonuses that Mass Bay received for on-time performance in 2009 and 2010 gave the company a financial incentive to meet efficiency goals.

“These incentives were earned and nobody is going to apologize for taking them,’’ said Mass Bay spokesman Scott Farmelant.

Sharing the blame
MBTA officials insist that equipment problems — such as the critical breakdown at rush hour on Wednesday that triggered a chain reaction that delayed 40 commuter trains departing from South Station — are the major cause of delays and that low penalties for late trains are beside the point. In fact, MBTA officials say they deserve some blame because they reneged on a promise to buy 20 new locomotives for the commuter rail system, leaving them dependent on trains that are, on average, 21 years old.

“Lack of investment is the root of the problem,’’ insisted Davey at a legislative hearing last month on the commuter rail’s woes.

In an interview yesterday, Davey acknowledged that, even allowing for old equipment and harsh weather, Mass Bay has failed to deliver the service it promised. Yet, he defended the T’s lucrative incentive payments to Mass Bay.

“The stick is there,’’ he said. “Certainly we got Mass Bay’s attention in January and February with significant penalties.’’

Mass Bay paid $451,000 in penalties for the first two months of 2011, when 23.5 percent of trains ran late, the first time they had paid penalties since early 2008.

When Mass Bay was pursuing the rail contract in 2002, its executives were clearly concerned about the system of penalties for service delays, asking more written questions about the penalty structure during the bidding than the other bidders combined. Then, almost as soon as Mass Bay took over the system, they began lobbying the T to cap and reduce the late penalties.

By contrast, the MBTA rejected a rival bidder whose offer was not only lower, but whose leaders were confident they could run an on-time railroad with the existing trains — and without reducing late penalties. Officials from Missouri-based Transit America said they based this assessment on the fact they were already running commuter rail systems in Dallas-Fort Worth and San Diego at high on-time efficiency.

“Penalties [for late trains] were not a major issue,’’ recalled Raymond V. Lanman, point man for Transit America’s 2002 bid. “We did a lot of analysis. . . . We were confident in what we could do.’’

T, Mass Bay connections
Commuter rail in Boston is big business. Massachusetts Bay Commuter Railroad receives more than $250 million a year to manage the nation’s fifth largest commuter system, carrying 70,000 commuters daily from as far away as Rockport, Worcester, and Providence to Boston and back. In 2002, the year Mass Bay won the management contract, commuter rail was in the midst of a renaissance, with a growing ridership and the promise of more to come when the state finally finished the new, $500 million Greenbush line into the South Shore.

Sixteen companies from all over the world expressed interest in the five-year commuter rail contract, but at least one other bidder came to believe that O’Leary’s group, with offices just a five-minute walk from T headquarters, seemed to have the inside track.

O’Leary had been a boy wonder at the T, becoming general manager in 1981 at the age of 32 and leaving eight years later to start his own consulting firm with other senior T officials. Energetic and ambitious, O’Leary won praise for overseeing major extensions of the subway system — and for having the integrity to report his boss, his predecessor as general manager, for receiving kickbacks.

But during his time at the MBTA, O’Leary also forged valuable alliances that would serve him well in the commuter rail bidding: he repeatedly promoted a young T employee, James Scanlon, who rose to chairman of the MBTA board by 2002. O’Leary also supervised Michael Mulhern, a West Roxbury native like O’Leary who was named general manager in February 2002. In putting together Mass Bay, O’Leary further strengthened his MBTA ties by recruiting two of the T’s major contractors, HNTB and Keville, as business partners. The consortium also included the Canadian company Bombardier, which had manufactured 40 percent of the MBTA’s coaches.

Mass Bay “had a bunch of insiders running them,’’ recalled David L. Gunn, former president and chief executive of Amtrak, which had managed the commuter rail system until 2002. The MBTA named Amtrak as one of the final four bidders in April 2002, but Gunn said, after years of strained relations, the MBTA didn’t want his services: “They wanted to get us out of there.’’ Amtrak dropped out before the final bids were due in October.

That left three bidders for what may be the biggest contract ever awarded by the MBTA, although one of them, the Boston & Maine Railroad, was a long shot that wanted twice as much money in management fees as the others.

Transit America actually submitted the lowest bid — seeking $192.7 million a year to run the railroad, compared to Mass Bay’s $210 million — but the group had a technical problem. Company officials didn’t include the cost of liability insurance in their bid — something that would likely add several million dollars to annual costs — or profit. Transit America officials said they needed to know more about the liability risks they would be facing before they could finalize their bid.

However, when Lanman’s group requested a meeting to discuss the insurance issue, T officials declined, saying it would be unfair to “other proposers,’’ meaning Mass Bay and Boston & Maine. Instead, the MBTA disqualified Transit America, never knowing if the company could have devised a complete bid that was lower than Mass Bay’s.

MBTA board chairman Scanlon said at the time that the selection process had been the best he had witnessed in almost 25 years at the MBTA.

“Everyone did a great job,’’ Scanlon said then.

Penalties scaled back
Mass Bay inherited 86 locomotives with a history of fewer than 10 percent arriving late, a record that Mass Bay promised to improve upon. Under the contract, in fact, Mass Bay had to improve on Amtrak’s efficiency or face an array of penalties. In addition to the $500 fines for late rush-hour trains, Mass Bay would be docked $2,000 for trains that didn’t show up for more than 35 minutes, and similar amounts for everything from dirty restrooms to faulty train air conditioning. In all, the MBTA predicted that Mass Bay would pay about $7.3 million in penalties during the five-year contract unless service markedly improved.

But the MBTA began scaling back the penalties even before Mass Bay got to work. In late September 2002 — after months of discussion with the three remaining finalists — general manager Mulhern approved the first reduction, agreeing that, no matter how poorly the winner performed, penalties would not exceed $1.5 million for the first two years combined, with a $1.5 million cap each year after that — though penalties could grow if performance was poor in two straight years. By itself, the penalty cap would save Mass Bay as much as $65 million from 2004 to today, though this contract change would have benefited whoever won the contract, the Globe analysis found.

Then in April 2004, Mulhern approved more changes in the penalty schedule, this time agreeing that late penalties could account for no more than 45 percent of all penalties levied against Mass Bay for poor performance — even though late trains were a common complaint. This effectively limited tardiness penalties to $337,500 a year.

Even with the reductions, Mass Bay started racking up penalties at a faster pace than it or the MBTA had expected. With trains arriving on time 91 to 93 percent of the time over the first two years, the T charged Mass Bay $750,000 in 2004 and $750,000 in 2005 for late trains and other customer service violations. More ominous for Mass Bay was the contract language calling for a dramatic increase in the cap on penalties if Mass Bay had two straight years of poor performance. As a result, Mass Bay feared they could face penalties of up to $17.3 million in 2006, more than offsetting the company’s annual profit.

“We basically made the case to the T it was too onerous,’’ explained O’Leary. “We thought the penalty regime was unfair and unreasonable and unexpected.’’

In April 2005, Mulhern again approved reductions in the penalties, slashing the penalty for each late or canceled train by up to 80 percent. Once again, Mulhern did not seek board approval, even though the change saved Mass Bay considerably more than $500,000. Looking back, Mulhern could not recall why he didn’t go to the board, but said it did not seem to be important at the time.

The combined effect of the contract changes — done with little public scrutiny — had reduced the penalties against Mass Bay during its first four years of operation from $40.8 million to $3.4, according to the Globe analysis. For awhile, Mass Bay’s on-time performance stayed about the same, but then, in 2007, the number of late and canceled trains more than doubled to 17 percent, a jump Mass Bay blamed on labor unrest and schedule conflicts with freight lines that use the same railroad tracks. The railroad never fully recovered.

“We had some difficulties in 2007,’’ acknowledged O’Leary.

In the midst of one of Mass Bay’s worst years, the MBTA granted the company a contract extension that would make penalty payments all but disappear. The company could receive up to $3,000 for every day trains on each one of its 14 lines exceeded on-time goals — a potential of $1.2 million monthly. In practice, Mass Bay hit on-time goals frequently enough to more than offset penalties for overall poor performance.

Mass Bay’s punctuality continued to decline, with 11 percent of all trains late in 2009. Rather than facing punishments, however, Mass Bay received $2.5 million for on-time performance for the year, more than offsetting the $84,650 it was charged in penalties.

Contract changes ahead?
Publicly, the MBTA seldom spoke a critical word about Mass Bay. Behind the scenes, Republican Governor Mitt Romney’s appointee to run the T, Daniel Grabauskas, pushed to include tougher penalties in Mass Bay’s 2007 contact extension.

“The idea was to build a contract that recognized good performance, not reward bad performance,’’ he said in an interview.

But as soon as Grabauskas left, the T extended still more benefits to Mass Bay with scant public input, approving a two-year, $550 million contract extension as a surprise agenda item at the end of a January 2010 board meeting.

Even when this year’s unusually harsh winter made commuter rail delays a major issue — 24 percent of trains were late in January and February — MBTA officials still found it difficult to criticize. At a February board meeting, the T’s chief of railroad operations said Mass Bay deserves sympathy.

“They could have done better, but we didn’t provide the equipment that we said we would provide. . . . I think there is culpability on our side,’’ said John D. Ray.

Today, O’Leary declines to comment on his company’s profits, except to say they made less than the $63 million over five years that had been hoped for. However, Mass Bay has already made it clear it wants to keep running the railroad when the MBTA puts the contract out for bid next year.

Davey, the T general manager, said there is little he can do now to toughen the penalties in Mass Bay’s contract. But it could happen in the next contract, which is to begin in July 2013.

“Would we modify penalties in the next contract? Everything is on the table,’’ he said.

Sean Murphy can be reached at smurphy@globe.com. Scott Allen can get reached at allen@globe.com