The city's first major foray into privatizing services — contracting with international giant Serco Inc. to oversee the city's 3,800-vehicle fleet — has hit a chuckhole that could drive costs up or even derail the contract.
The United Kingdom-based firm is demanding a 22 percent price increase for 2017, the fourth year of a five-year deal, saying it's lost money in the first three years. If granted, the hike would drive the price to nearly $8.2 million by adding $1.4 million over the city's 2016 cost — a move that would squeeze the city's already tight budget.
The city maintains the contract dictates that any price increases in the fourth and fifth years be tied to an inflation factor, which would limit the rise this year to 2.6 percent.
That's quite a big gap between Serco's and the city's figures, so it's not surprising the standoff has led Serco to District Court where it's filed suit and asked the judge to declare "the agreement is void and unenforceable as to years 4 and 5."
The worst case scenario would see the city and Serco part ways, but then what? The city's 60 fleet workers who repaired and maintained the city's vehicles — from police cruisers to snowplows — are long gone.
The city declined to comment, citing pending litigation, and a Serco spokesperson doesn't seem to think it will come to that.
"We are confident that we will reach a reasonable resolution that will allow us to continue to partner with the City into the future," Alan Hill, Serco's vice president of corporate communications and government relations, says via email.
Privatizing public services is one way to stretch taxpayer dollars, some believe, including former Mayor Steve Bach, who engineered the Serco contract to offload city workers, including their costly pension obligations.
On Oct. 30, 2013, the city issued a news release announcing it had signed a five-year contract with Serco starting Jan. 1, 2014. The release estimated the contract would save the city "more than $4 million" during its five-year life, despite the city paying $700,000 in severance pay to sideline its fleet workers.
The deal required Serco to provide maintenance and repairs to about 3,800 city and Utilities vehicles; the Fire Department's heavy trucks are not included.
In the release, then-Chief of Staff Laura Neumann said, "Although the city's fleet management program has consistently earned high marks for performance, the decision to outsource the program was part of the city's reorganization efforts to provide cost-savings that would allow enhanced city services with direct impact to our citizens. We look forward to Serco providing the same great quality service while improving government efficiency."
But the City Auditor's Office found that the contract had actually cost the city $112,199 more in 2014 than it did using an in-house operation in 2013. (It's difficult to compare Serco's costs to city costs year-to-year, because the city's fleet budget included fuel, fire truck work and other things Serco's does not.)
Those results came in late August 2015, three months after Bach, who didn't seek a second term, turned things over to his successor, John Suthers. At the time, the city's contract administrator said the city hoped to achieve the original estimated savings in coming years.
As for how Serco has performed, documents obtained by the Independent through an open records request show the city has imposed at least $65,000 in penalties on Serco for performance-related issues in the last three years, such as turnaround times for vehicle repairs.
In early 2014, Serco met or exceeded turnaround times by completing repairs on vehicles within 24 hours at least 80 percent of the time. It also met the 90 percent requirement for completing repairs within 48 hours.
But in early 2015, Serco slipped to 88 percent on the 48-hour standard, and last autumn fell below the 24-hour standard for two months running.
Other penalties are noted in city documents, but are simply labeled "unit availability" and "performance penalty" without elaborating.
Serco's Hill says the company has "maintained an outstanding standard of performance and safety."
Bid documents show that Serco, which operates in 30 countries with 100 North American locations, including sites here for Army and Air Force contracts, proposed by far the lowest price among the four firms that bid.
Serco's bid totaled about $19.25 million for the first three years, while other companies, based in California, Ohio and North Carolina, bid amounts that ranged from about $24.6 million to $31.3 million.
Although the request for proposals contained no pricing for years four and five, it stated the parties would agree on a pricing index to be applied, if necessary, at the end of the third year.
When city officials negotiated the contract with Serco in 2013, the company suggested using the Denver-Boulder-Greeley Consumer Price Index as a price escalator in years four and five, because it is "standard Serco practice," according to a March 6 overview of the dispute by the city. The overview was sent to members of a review panel charged with interpreting contract provisions. It's comprised of a Utilities official, a city official and a representative of the City Attorney's Office.
The city also noted, "Serco representatives explained to the City that Serco would be able to propose a lower price to the City for years 4 and 5 of the Contract — likely lower than year 3 pricing — if the Parties left the determination of those prices to the end of year 3."
But now, Serco says it's losing money. Its attorney John Wilburn, with a Tysons, Virginia, firm, said in a March 3 statement to the review panel that the company "cannot sustain its continuing losses on the Agreement, which exceed $1.4 million to date."
Moreover, Wilburn wrote, Serco's $8.2 million contract price for 2017 was based on "key factors," noting, "Serco made clear that its costs had increased significantly over the life of the Agreement, due in large part to the City's aging fleet of vehicles."
In an effort to end the stalemate, the city offered to increase the 2017 contract price by 6.5 percent pending the outcome of the dispute, but Serco has rejected that, sticking with its $8.2-million figure.
Also in dispute is how the disagreement will be resolved. Serco contends the review panel will be biased, because the panel members "suffer from conflicts of interest and the appearance of partiality, given their employment and/or association with Defendants [the city]," the Serco lawsuit states.
The panel won't rule on what the increase will be, the city notes, but whether the CPI factor is to be used to determine contract prices in the fourth and fifth years.
Worth noting, the city argues, is that Serco "voluntarily entered into the contract," which contained the provision for the review panel and its composition. And, the city adds, the city, at Serco's request, has replaced City Attorney Wynetta Massey on the panel with an outside attorney.
"We would hope Serco clarifies which attorney it prefers to serve on the Review Panel prior to the hearing, rather than merely engaging in what appear to be obstructionist tactics," the city wrote, referring to the March 7 review panel hearing.
Serco filed suit on March 6, and, according to city spokesperson Kim Melchor, the panel has not yet made a decision. Suthers didn't respond to questions about what happens if the contract ends. Meantime, the city is due to file a response to Serco's lawsuit on April 19.
The Auditor's Office's 2017 audit plan says it will revisit the contract's first three years "to verify the savings that have resulted from Fleet Maintenance being outsourced."