Reshaping report highlights few good options for ferry system

  • The M/V Tustumena approaches the Kodiak Ferry Terminal. The Tustumena is one of several ferries currently laid up for repairs, adding to the challenges for a system struggling with budget cuts and declining ridership but remaining a crucial link for Alaska coastal communities. (Photo/Courtesy/Pacific Pile and Marine)

A much-anticipated draft report outlining ways the State of Alaska could overhaul its ferry system largely confirms what many stakeholders have long suspected: some combination of deep service cuts and fare hikes is the only way to drastically reduce the annual subsidy the system needs to operate.

The draft Alaska Marine Highway System reshaping study released by the state Department of Transportation Jan. 15 concludes that full privatization of the system is not feasible because private entities could not generate the return needed to offset the inherent risks of taking over a complex network of large, aging vessels that must adhere to strict federal safety requirements.

“The only buyer that might be willing to accept the assets would do so with the intent of reselling them for a profit (such as for scrap) rather than providing ferry service to AMHS communities,” the report states.

At the same time, shifting management of the ferries to a single public corporation that would not require certain investment returns or profits is not likely to change the system’s near-term financial situation either. According to the report, providing ferry service at roughly 2018 levels would still require a $68 million state General Fund contribution that is 40 percent greater than the current budget combined with an overall 25 percent increase in fares over 2018 rates.

Operationally, a move to a public corporation under the contemplated funding scenario would also necessitate system managers to focus on “day-boat” operations to reduce vessel staffing requirements and less service to small Southeast “feeder” communities.

The ferry system currently operates as a sub-agency of the Department of Transportation.

Former Gov. Bill Walker’s administration partnered with the nonprofit Southeast Conference on a two-year ferry reform study effort ending in early 2018 that recommended the system be shifted to a public corporation with a board of industry experts mirroring the Alaska Railroad Corp.

Transforming from an agency to a public corporation would allow the ferry board to make long-term decisions — on major issues such as fleet size and composition and service levels — that would translate eventually into much more efficient system operations. The move would also help insulate the system from the annual budget debates it is subject to as a state agency, according to the first ferry reform study.

Former Gov. Frank Murkowski, who Gov. Mike Dunleavy appointed to the Marine Transportation Advisory Board in August, is a strong supporter of the public corporation model. Murkowski established the board in 2003 through an administrative order.

DOT Commissioner John MacKinnon generally dismissed the public corporation concept in a prior interview with the Journal, contending it would help with long-term planning but would not change the more immediate budget problems facing system officials.

Changing the system’s operating structure in other ways, such as dividing it into multiple corporations, or local ferry authorities, or focusing service on the highest volume routes would also require a significant state subsidy above current levels in combination with some level of fare increase to maintain service, according to the report.

MacKinnon said during a Jan. 15 Marine Transportation Advisory Board meeting that DOT and ferry leaders need to examine all aspects of the system, including labor contracts, in order to reduce its annual subsidy to a sustainable level.

“We’re all working very hard to try and come up with a system that works well for everyone as best we can with the budget that’s there. We can sit back and point fingers and lay blame on all the things that have been done wrong in the past or we can learn from those mistakes; consider the current and the past service levels, demand, costs, the regional economic importance — all things to consider,” MacKinnon said, recognizing the sharp disagreements spawned by debates over the ferry system budget while the state is mired in $1 billion-plus annual deficits.

The Dunleavy administration commissioned the report conducted by the Anchorage research firm Northern Economics last spring following an initial proposal to cut the system’s General Fund subsidy by $64 million, or 75 percent, from 2019 levels. That cut would have shut the system down in October based on the Dunleavy’s original budget plan.

Administration officials eventually agreed to a $46 million General Fund budget for the ferry system after negotiating with legislative leaders who strongly objected to shutting down the system entirely without immediate alternative transportation services for impacted communities.

MacKinnon has said he hopes the reshaping study will serve as a template for system reforms that can be approved by the Legislature this session and implemented over the next couple of years.

Dunleavy has proposed a $50 million General Fund budget for the system in fiscal year 2021 to allow that process to play out without additional service disruptions.

On Jan. 17, Dunleavy issued an administrative order to establish the nine-member Alaska Marine Highway Reshaping Work Group with the aim of reducing the cost of the system to the state. The working group will consist of one member from each of the state’s Marine, Aviation and Highway advisory boards; a ferry union representative; two legislators; and three public members.

The governor is expected to announce the group members by mid-February and it will deliver recommendations to state officials by Sept. 30, according to a statement from DOT.

In recent years, the ferries have been operated on a roughly $140 million to $150 million all-in budget that is mostly a combination of state funding and operating revenue. Formula-driven federal funds are used for ferry and port maintenance.

Fare box revenue has provided for about 35 percent of the system’s overall budget of late, which most stakeholders acknowledge needs to be improved. Numerous legislators have said state officials should shoot for recovering at least 50 percent of the overall Alaska Marine Highway System budget from operations; that would be in line with historical rates prior to the mid-2000s when new vessels were added to the fleet service levels and correspondingly increased.

Deputy DOT Commissioner Mary Siroky characterized the roughly 50 percent cut to the state portion of the system budget this year as being a reduction the Legislature settled on during the MTAB meeting.

“That’s huge. That’s huge for any organization, any corporation, any business to sustain in a very short amount of time,” Siroky said.

That budget resulted in many of the 35 communities the system serves going without service for months or all winter, as is the case with Prince William Sound communities.

DOT on Jan. 21 published the first draft of the summer 2020 ferry schedule, which covers May through September. The proposed schedule is partially based on anticipated funding levels for the 2021 state fiscal year that begins July 1, according to DOT. A public comment period is set to end Feb. 3. The draft summer ferry schedule had been published in fall in prior years.

Siroky’s recollection of how lawmakers arrived at the current ferry budget did not sit well with Southeast Republican Sen. Bert Stedman, who co-chairs the Senate Finance Committee and has long advocated for a strong ferry system. Stedman said it was disappointing to here Siroky try to “pass the blame” for the system’s current problems — that include a lack of funding for vessel repairs in addition to service cuts — to the Legislature.

“The administration’s proposed budget for the current fiscal year would have stopped all service on Sept. 30, 2019,” Stedman said in a statement from his office. “This was an elimination budget that would have led to the system’s demise.”

MTAB chair and Southeast Conference Executive Director Robert Venables said in a brief interview that he hoped to see the study analyze more “creative” ways to generate revenue while passengers are on the ferries, rather than simply focusing on fares increases for passenger and vehicle transport.

Last spring DOT implemented a “dynamic pricing” system that increases ferry ticket rates as capacity is filled and a sailing date approaches. It’s unclear at this point exactly how much additional revenue has been generated by the change.

Elwood Brehmer can be reached at [email protected].

01/22/2020 - 9:33am