Southeast Conference to review ferry sustainability fixes

When Southeast Conference meets for its annual Mid-Session Summit in Juneau later this month, among the items high on its list for discussion is the structural reform of Alaska's ferry system.

Southeast Alaskans have become dependent on the state's Marine Highway System since its establishment in 1959, essentially becoming their road network into and out of the region. It is a significant economic driver for the coastal communities it services as well, with an estimated impact of just over $103 million in direct and induced influence in 2014. Though figures for 2016 are still being prepared, the service estimates it transported 288,133 passengers, 100,547 vehicles, and 3,688 vans through 2015.

Faced with multibillion-dollar deficits to reduce the past several fiscal years, the state Legislature has taken big bites out of agency funding across the board, which has been affecting the ferry system's operations.

For FY2017, the AMHS budget for marine operations was at $140 million, including fuel costs, management, marketing and other costs. That comes to close to a quarter of the Department of Transportation and Public Facilities operating budget, according to Office of Management and Budget totals. That total is also comparable to the entire Highways, Aviation and Facilities budget, at just over $159 million.

The 2018 fiscal year budget draft put forward by Gov. Bill Walker's office has called for an additional operational reduction of 1.2 weeks from the current year, bringing the system down to 334 weeks overall. Under the proposal, the Taku and Chenega would be under layup, including the 177 vessel positions that would otherwise be needed to run them.

The latest cuts would represent a 17.3-percent reduction since FY2013, and the resulting schedule is about equal to that of a decade earlier, when the system ran two fewer ships. Overall though, the governor's budget would only be a $2.5 million decrease from the previous year. What the final week count will actually be is still in the air, as the Alaska Senate and House each work on versions of their own budget.

Falling revenues for the state in recent years and a multibillion-dollar budget deficit has caught up with more than a decade where the ferry system has failed to cover at least half its operating costs through collected fares. With the exception of a sharp uptick in operating costs in 2001, up until 2004 AMHS was recouping at least half its operating costs. Those costs began rising the next year, spiking sharply in 2006 and rising further in 2011.

While annual revenues through fares also rose, the change was slight compared to the added costs. The report highlights the 12-year period from FY95 to FY07, where the system experienced a 96-percent growth in operational expenses with only a 15-percent growth in revenue, resulting in a 340-percent increase in state subsidies. The disparity was tolerable while the state brought in regular budget surpluses, which after a high of $10 billion for FY12 over a $5.8 billion operating budget, began to reverse dramatically in subsequent years.

In light of this, last May the office of Gov. Bill Walker tasked SEC with revitalizing the state's maritime transportation network, the first part of a two-phase process to chart the future course of AMHS. A committee was formed and consultants taken on in order to develop a sustainable operational model for the system, while minimizing the impacts of budget cuts to the service.

A final draft report prepared ahead of the upcoming March 14 meeting was released in November last year, and looks at both the service's organizational structure and business model. The report was developed by consultancies Elliott Bay Design Group in Seattle and Juneau's McDowell Group.

"There's a lot of moving parts and pieces to consider," explained Shelly Wright, SEC executive director.

To start with, the AMHS reform study report looked at some of the systemic problems affecting the ferry network. Conferring with system employees, its authors found some complaints with its current governance model. These include schedule instability from funding uncertainty, caused by legislative jockeying during budget season. Scheduling is made even more precarious by a diverse and aging fleet.

"The biggest issue with AMHS is the schedule instability caused by funding uncertainty," the report's authors reiterated. Without stable funding sources, it becomes difficult to schedule routes, prepare for disruptions, and plan for the system's long-term operation and capital needs.

More than its budget, the report found political influence on the ferry system's management to be disruptive as well, leading to frequent turnover in important leadership positions. Given greater authority and responsibility, the report concludes management would be better able to conduct the business of a multimillion-dollar agency. Allowing AMHS to directly negotiate with workers unions would also be of help. Currently, negotiations are undertaken by the Department of Administration as a third-party.

One of the report's recommendations would be fewer political appointments, leading to greater consistency in management. At most it allowed for an appointed deputy commissioner that is separate from a general manager.

The report's composing team looked at six basic governance models that would be applicable to AMHS: the line agency (how it has been run since 1983), shared public/private corporation, public authority, public corporation, private corporation, and transportation district. Each of these approaches have strengths and weaknesses to them, and the report's composing team managed to hone in on three more detailed case studies for the purpose of comparison: the British Columbia Ferry System, Massachusetts Steamship Authority, and Caledonian MacBrayne in Scotland.

Comparing their example to the opportunities available to Alaska, the project team suggested the following three governance actions:

• Create a Public Corporation. Advantages of transitioning AMHS to a public corporation model include a businesslike approach to running the system and the inclusion of private sector expertise, leadership and accountability. This model has the greatest degree of support and suitability, although it will take additional time and resources to explore the operational details, establish the legislative framework, and transition to the new structure.

• Continue State Ownership of Assets. State ownership of the assets – terminals, vessels, and support facilities – would allow continued access to federal and state funding for capital and maintenance expenses. The state could coordinate AMHS capital requirements with other transportation projects, through the Alaska Statewide Transportation Improvement Program.

• Interim Enhancement as a Line Agency of State Government. Until the public corporation has been established, AMHS would benefit financially by some key changes to its role as a line agency. The recommended changes include forward funding for predictability of service levels, direct control over labor negotiations, and increasing use of revenue management tools.

These in mind, the report recommended the Alaska Legislature consider as a first step separation of AMHS into two entities. The first would be a public corporation owned by the state, operating the sytem's vessels and terminals. The second would be an asset management group contained within a state line agency, such as ADOT&PF.

Until these could be implemented, the report recommends forward-funding the system from 12 to 18 months in advance, granting AMHS management direct control over the system's sizable labor costs by transferring human resource activities from DOA to AMHS, and allowing management flexibility "to grow revenue through dynamic pricing and partnering with other tourism businesses."

To be hammered out yet, Wright explained the second phase of the AMHS reform project will be considerably more complex, involving a variety of technical committees.

"It'll be a bigger, broader process with more people contributing directly," she said. Their task will be development of strategic business and operational plans based on the aforementioned governance structure changes.

Before SEC members head to Petersburg next weekend for its Mid-Session Summit, members of the public still have an opportunity to review and comment on the proposal. The report and link to comment are both available online at http://www.seconference.org/amhs-updates/seeking-input-draft-amhs-governance-report.