Anchorage, railroad clash over split of federal funds

  • The Alaska Railroad and the Municipality of Anchorage are clashing over a split of $15 million in federal funding. The railroad has historically received $11 million of the annual appropriation, but Mayor Ethan Berkowitz’s administration wants to negotiate a new deal. The holdup over splitting the money sent the railroad to a net income loss in 2016, according to the company President Bill O’Leary. (Photo/Andrew Jensen/AJOC)

Anchorage Mayor Ethan Berkowitz and the Alaska Railroad Corp. are at odds over a longstanding stream of federal transportation grants that neither side will receive until the dispute is resolved.

The railroad took a $7.4 million loss in 2016 that CEO Bill O’Leary says is directly attributable to Berkowitz’s refusal to sign a joint letter the Anchorage mayor and railroad head must send to the Federal Transit Administration before $15.3 million in 2016 formula grant funds is released.

It is the first annual loss the Alaska Railroad has posted since 1999.

The “split letter” is the FTA’s assurance that both groups agree to the amount of funding each will get from the lump sum meant for public transportation in Anchorage through the Section 5307 Urbanized Area Formula Funding program.

The two entities must settle on how the funds are apportioned because the Municipality of Anchorage, which has bus service, and the state-owned Alaska Railroad, which has year-round scheduled passenger service, are the two public transportation entities in the city.

While the whole pot of Section 5307 funds is meant to benefit public transportation in Anchorage in general, its total amount is determined by formulas that tally how much is generated by the municipality’s People Mover bus line and how much the railroad generates.

Those formulas are based on route and passenger ridership miles for bus service, and similarly revenue track and route miles for the railroad, as well as population density in the areas served by each.

The need for the letter is the Federal Transit Administration’s way of providing local control over how the money is spent.

Historically, getting the letter signed has been little more than a formality, according to O’Leary.

“The way it has always been split, since time began pretty much, was rail for rail and bus for bus — not the way they want to do it right now,” O’Leary said in an interview with the Journal.

According to the railroad, of the $15.3 million meant for Anchorage in 2016, just more than $11 million was generated by the railroad and $4.3 million was attributable to municipal bus service. Another roughly $8 million is up in the air for the first part of 2017.

Berkowitz said he has offered to split the roughly 70 percent of the funds the sides agree on, giving the municipality its formula share and the railroad a portion of its until a final deal is reached as “a gesture of good will and fairness.”

O’Leary said the city officials want a 50-50 split of the 5307 funds, which the railroad cannot agree to.

The Alaska Railroad would have posted about a $3 million profit had it not been for the Section 5307 funding fight, according to O’Leary, because the railroad had to expend internal funds in-lieu of the federal grant.

“Over $23 million is sitting in the federal treasury right now and can’t be deployed in Alaska,” O’Leary asserted.

The formula grants are available for five years; they are absorbed back into federal coffers if they aren’t claimed in that timeframe.

O’Leary said the railroad, which has significant land holdings across Alaska, also offered to sell the municipality a parcel city officials had previously wanted “at a significant haircut to the railroad, a discounted price,” in exchange for certainty on future split letters.

“They came back with, ‘We’ll do that for one year and we’ll talk about what you can give us the next year,’” O’Leary said.

Berkowitz said in an April 3 interview that the municipality agreed to buy the parcel at its appraised value, but couldn’t agree to the formula-driven split for the remainder of his term, which runs through 2018.

Berkowitz signed the split letter in September 2015, just a couple months into his term as Anchorage mayor, but said he told railroad officials at the time a new division of the funds would have to be worked out going forward.

“This money is intended to serve transportation needs and particularly the transportation needs of this area,” Berkowitz said. “Now, the railroad doesn’t serve a lot of passengers in Anchorage; our transit department does and we wanted to make sure that there was an allocation that reflected the needs of the community that was consistent with what the federal monies were intended to do.”

Anchorage has offered to generate shared services and support the railroad other ways in exchange for the federal change, according to Berkowitz, but railroad leadership has been steadfast in its demand for maintaining the status quo.

War of words

The share-split is the way the vast majority of locales with multiple Section 5307-eligible transportation services divvy up the money, O’Leary contends, noting the railroad’s money would not be available for the city to demand if the railroad were to stop passenger service.

“If a series of meteorite strikes came in and obliterated the Alaska Railroad, no more 5307 money would go to the municipality as a result of that,” O’Leary stressed. “That’s a point that doesn’t seem to resonate with them.”

To that, Berkowitz said: “The problem with their rhetorical posture is I can turn it around entirely. If it weren’t for Anchorage they wouldn’t get any of this money either so it’s a sophomoric discussion.”

The municipality also doesn’t buy the assertion that the 5307 funds are usually split according to who “earned” them, at least among cities with metropolitan planning organization such as Anchorage’s local transportation committee known as AMATS.

Anchorage officials contend a 2014 nationwide study of 5307 funds sponsored by the FTA found 55 percent of cities with a transit planning group instead used a local approach to allocate the funds. That same study concluded that 81 percent of public transportation operators — absent a planning group — allocated the funds based on the FTA formulas.

Nationwide, the FTA dispersed more than $4.5 billion in Section 5307 grants in federal fiscal year 2016, which ended last Sept. 30.

Those funds are expected to increase to nearly $4.9 billion by fiscal year 2020 under the FAST Act, the five-year transportation funding legislation Congress passed in 2015.

The formerly federally-owned Alaska Railroad has repeatedly come under scrutiny in Congress for the federal funding it receives based on its regular passenger service. The State of Alaska bought the railroad from the federal government for $22.3 million in 1984.

In 2016, it received $46.9 million in various federal grants — more than 30 percent of the railroad’s total operating revenue for the year.

The formula grant programs were primarily designed to support public commuter transit in urban areas, which critics of the Alaska Railroad’s federal support in Congress, and now in the city where the railroad is headquartered, have pointed out is not what the Alaska Railroad actually does.

The state-owned Alaska Railroad receives significant federal support, but no state money to sustain its operations.

The municipality’s case

A Nov. 21, 2016, letter from Anchorage Municipal Manager Mike Abbott to then-acting FTA Administrator Carolyn Flowers lays out the Berkowitz administration’s stance.

It notes that a lengthy FTA advisory circular outlining how the Section 5307 funds should be administered between multiple entities for one urban area states the allocations should be determined “fairly and rationally through a process based on local needs and agreeable to the designated recipients. A sub-allocation that is based on predetermined fixed percentages, for example, may not adequately represent the needs of transit systems in the (urban area).”

Abbott’s letter was in response to the railroad’s request for an administrative ruling from FTA leadership on the matter.

He wrote that the railroad’s request “is but the latest of (the railroad’s) extraordinary attempts to avoid serious engagement with the question of how federal transit funds should be put to use to their highest and best use to most effectively address Anchorage’s local transit needs.”

The Alaska Railroad’s funding has been targeted because “we don’t look like some other recipients,” O’Leary responded.

His railroad’s eligibility for the transit funds was determined and “locked in” about 10 years ago, he said.

Adding another layer to the standoff is the fact that the railroad sold $37 million in capital grant receipt bonds in 2015 — a move approved by the Legislature and Gov. Bill Walker — to help pay for installment of the roughly $160 million federally-mandated but unfunded Positive Train Control safety system required by the FTA’s sister Transportation agency the Federal Railway Administration.

Those bonds were sold on the expectation the railroad would continue to receive a steady stream of 5307 formula funds, O’Leary said.

“Our bond covenants do not permit us to just willingly give up this money,” he described.

Those monies are spoken for for debt service through 2023.

A small portion of the 5307 funds is left over after the bond payments are made and that goes towards infrastructure projects.

“There are lots and lots and lots of capital needs on this railroad and giving up $3.5 million per year of federal money to meet those capital needs is just something we cannot do,” O’Leary said.

The Berkowitz administration disagrees. Abbott wrote further in his letter from last November that the railroad is painting a “false picture” regarding its bond commitments.

He noted that the railroad also receives Section 5337 rail-specific formula grant funds that totaled $41.2 million over the past two years, which was more than enough to cover the $31.5 million in total debt service the railroad had for both its 5307- and 5337-related bonds, Abbott contended.

The railroad’s bond obligations include debt from bonds sold and approved by the Legislature in 2006 for general capital improvements.

“(The Alaska Railroad’s) claims that it has painted itself into a financial corner by pledging its anticipated receipt of 5307 funds to certain debt service should not change this conclusion: 5307 (funds) are not split according to a designated recipient’s questionable financial decisions and, even if they were, there is no evidence that the split of 5307 funds sought by the municipality will impair (the railroad’s) ability to pay its bonds.”

Berkowitz said he just wants his city and its taxpayers to get the public transit funds it is “entitled to,” regardless of the railroad’s financial situation.

“How do they justify taking a disproportionate share even though they’re not carrying any passengers, which is what this money is supposed to go to?”

Congressional delegation weighs in

The railroad carried nearly 500,000 passengers in 2016; however, many of those individuals were tourists and Alaskans on weekend trips. The Alaska Railroad does not provide traditional commuter rail service.

Because the split letter is an advisory agreement, not a requirement codified in federal law, the railroad and Alaska’s congressional delegation has asked FTA leaders to step in and make a final determination on the matter.

Railroad officials said about a half-dozen meetings with municipal leaders didn’t go far. Berkowitz said the railroad brass cut off negotiations.

Attempts at mediation with an FTA representative also yielded little.

“When they walked away from discussion because they didn’t get what they want — I didn’t understand that kind of petulance,” Berkowitz said.

“We have put a number of proposals on the table and have not received a response.”

Additionally, the mayor said he was called “a terrorist” for standing up for a position on behalf of his constituents.

In December, Alaska Sens. Dan Sullivan and Lisa Murkowski wrote to Flowers, requesting she make a determination to distribute the funds. The senators stopped short of advocating for the railroad in the single-page letter; however, it states: “The dominant approach used across the country has been to split the 5307 funds to rail according to rail factors and bus according to bus factors. Historically, this 5307 split method has been the approach for the Anchorage (urbanized area) recipients.”

Flowers wrote to O’Leary and Abbott in separate but similar letters Jan. 18 that without the split letter the FTA does not have the authority to resolve the dispute with an administrative determination.

O’Leary said in an interview that he believes that was Flowers’ way of deflecting responsibility in her last days with the agency as part of former President Barack Obama’s administration.

On March 22, Sullivan tried again, this time with a letter to new Transportation Secretary Elaine Chao, asking her to review if it is within FTA’s purview to rule on the 5307 funds.

“Otherwise, this may become a matter of who blinks first and Congress certainly did not intend that brinksmanship would drive how these funds are split,” Sullivan wrote. “A fair default method may be exactly what is needed for the parties to ultimately have a true meeting of the minds over a better long-term approach.”

To that end, Berkowitz said his city, with about a $500 million budget and many revenue streams, doesn’t really miss the money in the short-term.

“We’re OK for the time being. We’re not the ones who basically securitized this funding stream without consulting their partners in it. They’re the ones who banked on the municipality without consulting with the municipality and without compensating the municipality; that’s their decision,” he said.

O’Leary conceded the municipality can “wait us out,” given the entities’ respective financials.

“They’ve got to negotiate like neighbors, not like bullies,” Berkowitz said. “They’ve got to negotiate based on the realities of the situation they’re in rather than the conditions they wish they had.”

In June of last year, Rep. Don Young wrote to Berkowitz asking him to “continue following the many years of precedent on how FTA bus funds are used for buses and FTA passenger rail funds are used for passenger rail.”

If it were strictly a dispute between the city and the railroad, he would not get involved, Young wrote. However, he cited the railroad’s bond repayment obligation and a worry that not splitting the funds per how they are generated “could significantly erode support and justification for continued FTA funding in Congress among members from other areas of the country.”

When the mayoral administration did not oblige, Young also wrote to Flowers in late October. His letter to the FTA leader explicitly supported the railroad’s position.

Local leaders of the five labor unions that represent Alaska Railroad workers also sent joint letters to Berkowitz and Gov. Walker, asking Anchorage honor “the longstanding tradition of dividing the 5307 money according to which entity’s formula generated the funds.”

The quarrel with the Municipality of Anchorage just adds to the Alaska Railroad’s recent troubles. The 2014 closure of the Flint Hills North Pole oil refinery — from which the railroad hauled jet fuel and other products — along with recent collapses in world coal and oil markets have led to a 44 percent drop in annual freight volumes over the past decade.

Alaska’s resurgent tourism industry has helped grow its passenger service over the past few years, but passenger revenue still only accounted for 21 percent of the railroad’s total operating revenue in 2016, even after the drastic downturn in its freight business.

In February the Alaska Railroad announced it would cut 49 positions, or about 8 percent of its full-time workforce, which is expected to save $4.7 million annually.

Since 2008 the railroad has eliminated more than 300 year-round positions.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
04/10/2017 - 10:11am

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