In December 1994, San Diego City Schools' (California) Board of Education voted to discontinue competitive contracting for busing and expand its in-house transportation department, believing the new arrangement would save money. This report argues that the decision was based on a flawed financial analysis prepared by the district's in-house transportation department. Instead of looking at total cost, the analysis considered only the marginal cost of expanding in-house services. The report argues that in-house costs for school-bus service were 80 percent higher than private-contract providers. The district incurred higher costs in the areas of labor costs, utilization of resources, and fleet acquisition and owning costs. Private contractors operated more efficiently than the Transportation Services Department in three areas: lower labor costs, better utilization of vehicles over useful life, and lower vehicle purchase price. By eliminating contract service, the school board gave the Transportation Services Department (TSD) little incentive to control costs. The report recommends that the San Diego Board of Education: (1) halt further expansion plans until costs are fully identified; (2) invite an independent auditor to evaluate total costs of the TSD and the cost of service alternatives; and (3) implement fully allocated costing methods into the district's accounting system. Six tables and two figures are included. Appendices contain cost-analysis strategies, definitions, a list of recommended reading, tips for creating a competitive environment for transportation services, and discussion of the continuous-improvement strategy. (LMI)