Ferry system under fire seeks sustainable solution
Gov. Michael J. Dunleavy’s administration is moving ahead with its investigation into overhauling the state’s ferry system.
The Department of Transportation on April 10 issued a public notice announcing its intent to award a consulting contract for up to $250,000 to the Anchorage-based firm Northern Economics to examine structural changes to Alaska Marine Highway System operations with the end goal of drastically reducing the cost to the state of running the ferries.
Dunleavy proposed a $65 million cut to the ferry system’s General Fund subsidy in his fiscal year 2020 budget plan released in February. The governor’s cut would amount to roughly a 75 percent reduction in the system’s budget and ferry operations.
The $21.8 million unrestricted General Fund appropriation Dunleavy put forth would allow for ferry service to continue through September before the vessels would be laid up for the remaining nine months of the state fiscal year, which begins July 1, according to DOT officials.
AMHS advocates stress that major cuts to service would severely damage the 33 coastal Alaska communities the system serves as it not only provides reliable, affordable transportation, but is also used by businesses to move goods such as commercially harvested salmon regularly moved via ferry each summer.
The current fiscal year 2019 budget allocates $86 million in unrestricted general funds to the ferry system to support an overall budget of $140 million. The state money fills the budget gap left after fare revenues are accounted for. The AMHS also collects roughly $17 million in formula-driven federal funds, which are usually used for large vessel maintenance projects.
Deputy DOT Commissioner Mary Siroky told Senate Finance Committee members April 10 that the department chose to keep its published summer schedule intact and end service in October rather than spread the funding out over the entire year with drastically reduced service to meet reservations already made for summer travel “in order to maintain the system’s credibility.”
DOT’s reduced budget plan would focus service on Southeast Alaska; there would be no September ferry service to Homer, Kodiak, Prince William Sound or Alaska Peninsula-Aleutian communities.
Concurrently, the department plans to evaluate and implement a wholly new configuration for operating the state ferries, which will presumably be based on the conclusions of Northern Economics’ analysis.
DOT’s request for proposals contemplates several options for full or partial Alaska Marine Highway System privatization; transforming it from a state agency to a public corporation, outsourcing portions of current service; increasing fares; and renegotiating AMHS union labor contracts to reduce operating costs.
The consultant study is expected to be done by mid-October in order to give DOT time to implement its recommendations in time for restarting the system July 1, 2020, based on the administration’s plan.
However, that work has already been done.
In May 2016, former Gov. Bill Walker signed a memorandum of understanding with the Southeast Conference — a community development group originally formed in 1958 to advance a transportation network that became the ferry system — directing DOT to partner with the nonprofit in addressing the system’s mission statement, governance structure, operations, revenue opportunities and other potential partnerships that could support major changes to the system.
DOT also sponsored part of the ferry reform evaluation, though Southeast local governments, nonprofits and businesses paid for most of it.
The original AMHS operational and business plan reform initiative resulted in two reports drafted by the Alaska research firm McDowell Group and the Seattle-based marine engineering and consultant firm Elliot Bay Design Group.
The first report evaluated a suite of six potential operating structures the state could employ, from full privatization to remaining as a state agency, in part by studying other ferry operations in the Lower 48, Canada and Europe.
That report concluded that a public corporation — similar to the Alaska Railroad Corp. — with an expert-filled board of directors would be the best option for Alaska’s ferries.
The public corporation model would provide stability in management and board oversight that could translate into the long range planning that is needed to maximize efficiencies available in vessel operations and overall fleet management, according to the report.
While it would not eliminate the need for an ongoing state subsidy, a public corporation ferry system also would at least be partially insulated from political influence, which has led to shifting priorities and continual budget debates.
Year-to-year budget uncertainty translates directly to schedule uncertainty and has prevented ferry managers from maximizing revenue opportunities, many ferry stakeholders insist.
State General Fund support of the ferries has fallen from a high of $123 million in 2013 to the current $86 million.
The “Phase 2” ferry reform report analyzed current ferry operations and opportunities for increasing revenue. It concluded that forward funding the system would go a long way towards improving its ability to capture revenue.
Historically, roughly 40 percent of ferry riders have been non-residents, according to the AMHS. The system is often marketed as an alternative to traditional cruise ships, particularly in Southeast Alaska.
However, seasonal ferry schedules are finalized just a few months prior to implementation because the system budget is not known each year until the overall state budget is approved.
To the contrary, prospective visitors often book their trips more than a year in advance, which can preclude the ferry system from being an option for them, said, Robert Venables, the Southeast Conference executive director and chair of the state Marine Transportation Advisory Board.
“The revenue for next year is now in question as the whole existence of the Marine Highway System is one big question mark and folks choose to make other arrangements for that component of travel within Alaska,” Venables said.
The report also contends that increasing passenger fares significantly would impact ridership to a point that it would negate the desired revenue benefits. Conversely, lowering fares would not attract enough new riders to offset the lost per-passenger revenue.
It does suggest the AMHS employ demand management strategies as a way to grow freight revenue, which is currently about $2 million per year.
Continuing service to Bellingham, Wash., is imperative to a successful ferry system, as it accounts for 44 percent of operating revenue, according to the report. Military personnel moving to and from Alaska, as well as tourists often utilize the Bellingham route.
Standardization of the ferry fleet to the extent possible and replacing the most expensive ferries to operate will in the long run significantly save money, according to the report; and utilizing modern automated ferries could reduce on-vessel labor by up to 10 percent.
Ferries for sale
To that end, DOT recently put its “fast ferries,” the Chenega and Fairweather, up for sale as the twin 280-foot Tazlina and Hubbard “day boats” are prepped for service in Lynn Canal.
The Tazlina is set to enter service in May with the Hubbard coming later.
The 235-foot catamaran-style fast ferries are two of the newest ferries in the 10-vessel fleet, having entered service in 2004-05. However, they have proved to be expensive to run — favoring speed over fuel efficiency — and have been plagued by engine problems and hull cracking.
DOT sold the 55-year old ferry Taku in January 2018 to a Dubai-based company for $171,000.
The past AMHS reform work did result in House Bill 412, which would have transformed the system to the public corporation model. The bill was introduced by the House Transportation Committee late last session and was expected to be a priority for coastal lawmakers this year, but it hasn’t yet been resubmitted for consideration as legislators and staff continue to refine the major bill, which started at 53 pages.
The version of the operating budget that passed the House April 9 cut the AMHS appropriation by about $10 million.
Senate Finance co-chair Bert Stedman, R-Sitka, has said maintaining some level of year-round ferry service is a top priority for the committee.
“We’re trying to come up with something that will work for the citizens of Alaska and for the budget. Of lesser concern is the administration and the employees,” Stedman said April 10. “First priority here is transportation to the citizens.”
DOT’s Siroky said in an interview that current leadership at DOT is certainly aware of the existing ferry studies commissioned by the Southeast Conference, but said in her opinion the public corporation model would not result in significant cost savings.
“We’re in a budget crisis, no? So the governor directed us to look at something that speaks to the cost right away, not just the political vagaries that AMHS may have responded to,” Siroky said of the public corporation model, adding that there should be a balance between cost and service.
“I think it’s certainly worth us finding out if there’s people who can provide services cheaper than we can.”
Seeking stability and savings
McDowell Group principal Susan Bell said DOT’s move to largely repeat the work done over the past three years lends credence to the AMHS reform report conclusions.
“That stability between changes in administration, the longer planning horizon — I think in some ways what’s happened in this last year helps show the value of the public corporation (model),” Bell said in an interview.
McDowell Group did not bid on the latest AMHS reform contract.
Northern Economics representatives could not be reached for comment in time for this story.
Venables said administration officials did not consult with Southeast Conference officials before choosing to do their own study, but he noted that both reports and related documents are readily available for anyone to review.
Bell added that former legislator and current policy advisor to the governor Ben Stevens spent several hours at a December joint MTAB-AMHS Steering Committee meeting in Anchorage.
Siroky told Senate Finance that DOT officials are looking into outsourcing routes to some small Southeast communities as part of an alternative to completely shutting down service come October.
According to the contracts the state has with ferry labor unions, service to Angoon, Gustavus, Kake, Hoonah, Tenakee and Pelican could be outsourced to another operator.
That operator would bring their own vessels and employees and would not be required to use union labor, Siroky said.
The concept would require nearly doubling Dunleavy’s proposed AMHS General Fund appropriation to $41.6 million and would provide 288 weeks of service. DOT also projects it would generate a fare box recovery rate of 50 percent.
The long-term decline in AMHS fare box recovery is at the heart of efforts to improve, or reduce, service and what it costs.
For many years fares from passenger, vehicle and freight service provided 50 percent to 60 percent of the system’s overall operating budget until the mid-2000s when the fast ferries and the Lituya —dedicated to serving Metlakatla south of Ketchikan — were added to the ferry fleet.
Fare box recovery since 2007 has stabilized in 30 percent to 35 percent range of overall costs.
Siroky said the change is primarily due to more reliable air service in rural Alaska.
“People love to ride the ferry for that once or twice a year when they have it planned as part of a trip but for routine work transport, people fly,” she said.
Siroky said she doesn’t know of a ferry system anywhere that fully covers its expenses with fare box revenue, but DOT is looking for someone to develop a more short-term plan to change the system and minimize its subsidy, ideally within three years.
“We really look forward to somebody taking a really holistic look and saying, ‘This is what really makes sense and this is where you can look to outsourcing or look to have industry come in and help,’” Siroky said.
She added that businesses using the ferry for commercial purposes could be displacing barge service, while some Southeast business owners say they rely on the more affordable transportation the system provides.
Ridership has declined over the past 20-plus years from about 350,000 ferry passengers in 1998 to 251,000 passengers in 2018. Recent ridership declines also correspond to a roughly 25 percent reduction in service since 2012, according to AMHS figures.
At the same time, vehicle transport has remained steady at about 100,000 car, truck and van shipments per year.
Despite the challenging passenger numbers, DOT Commissioner John MacKinnon noted in the system’s fiscal 2018 financial report that revenues per vessel operating week were the highest in the history of the Marine Highway in 2018.
Venables said declining fare box recovery rates are the result of “a perfect storm” of additional vessels in the fleet and service to new, small communities without the ability to maximize efficiencies in utilizing the added ferries.
Additionally, the major contractions of Southeast’s former flagship industry, timber, and more recent commercial fisheries declines, have challenged the ferry system, according to Venables.
Siroky acknowledged DOT officials have not discussed what it would take to restart the system in July 2020 if the Legislature were to approve the governor’s AMHS budget plan, but said, “it would be a challenge.”
“Until we knew what that budget was we wouldn’t have an idea where to even begin,” she said.
Venables said the lack of a plan is somewhat concerning — a point echoed by stakeholders to other parts of the Dunleavy administration’s budget proposal — as is the idea of cutting service to smaller communities that are more expensive to serve on the hope the private sector will fill the void.
Still, he said the Southeast Conference is ready to help in any way it can to find a long-term solution for the ferry system.
“Hopefully at the end of the day we’ll be better off and still have a Marine Highway System that can be healthy and vibrant as possible with more certainty,” Venables said.
Elwood Brehmer can be reached at [email protected].