State policies strongly influence the way that local governments adjust the provision of critical services during periods of fiscal stress. California today is in just such a period of fiscal crisis. The State of California has been facing unprecedented fiscal challenges since 2001: the State’s budget shortfalls for the two consecutive fiscal years 2002-2004 total more than $30 billion (California Department of Finance 2003). One common response to falling revenues is to privatize public services. This research examines the causes, consequences, and cost-effectiveness of privatization in the case of public transit service in response to declining resources. The causes and effects of privatized public transit services are not well understood by state and local officials, many of whom are currently looking for ways to stretch public dollars during a period of prolonged economic recession. The findings of the research presented in this report will help state legislators, transit agency policymakers, and transit mangers and directors improve cost effectiveness, make the best use of tax money, and be more accountable to the public.