Ferry reform package presented as budget snafu threatens summer service

At Southeast Conference last week in Haines, Alaska Marine Highway Reform Initiative presented its draft report assessing the state ferry system

SEC had been tasked by the governor's office in May 2016 with organizing a statewide planning process to improve the ferry service's long-term viability. The 12-person steering committee subsequently formed to direct that effort has since moved into its second phase, preparation of a proposed organizational model which would better meet the state's transportation needs in the longer term.

The report was prepared for the committee by consultancies McDowell Group and Elliott Bay Design Group, and first presented on September 12. One of the report's key findings was that a public corporation might make a good business model for the system. A public corporation is a government-created institution which operates much like a private company would, such as a municipal utility provider.

Such a move would maintain some existing benefits, allowing AMHS continued access to federal funding and shared state services while allowing it to address existing limitations, including indirect labor negotiations, a short-term scope for operations and political influence. The expectation is that the new mode of governance would allow the ferry system to reduce labor costs, better incorporate the expertise of its board, and operate in a more businesslike manner. Becoming a public corporation would also enable the service to issue revenue bonds, leveraging its fares and other revenue.

Under the proposed structure, a seven-member board would be proposed, appointed by the state governor and confirmed by legislators. Its membership would consist of five people with expertise in business operations, transportation, finance and economic development, a member of the employees union, and a DOT commissioner or designee. The setup would continue to seek public input through annual budget and legislative processes, as well as through the corporation's board and various other public meetings.

A major part of the reform initiative is finding a balance for the system's finances while maintaining its services. The ferry system currently operates nine vessels and 37 terminals, with service schedules varying throughout the year to accommodate maintenance needs and respond to seasonal demand. Operationally, the fleet is set back by funding uncertainties for planning, scheduling and marketing. To address these, the committee's recommendation for promoting revenue growth would be through advance budgetary planning, forward-funding by about 18 to 24 months rather than being tied so closely to legislative budget cycles as done currently.

The report found costs to the fleet are largely personnel driven, with staff and travel accounting for 69 percent of operating expenses and 54 percent of overall expenditure. Capital improvements on facilities and maintenance for the aging fleet account for another 16 percent of operating expenses, while fuel amounts to 14 percent.

In its revenue findings, the report found AMHS has limited maneuverability. The system lately generates around $50M in revenue each year, 44 percent of which is accounted for through the ferry's Bellingham service. Non-resident travel accounts for 42 percent of the system's revenues, and continuing service to ports in Canada and Washington are an important component of the service's viability. Lowering fares is not expected to garner new ridership in sufficient numbers to compensate for the loss in revenue. Raising fares strategically could conversely bring in more revenue, while lowering overall traffic. But the ferry system's revenues by any estimation cannot cover its own costs, and at present it receives considerable support from the state general fund. $89M was allotted to the system for the 2017 fiscal year, while cuts to that over the past five years have come to a 28-percent reduction overall, or a loss of $35M.

The report compares the "baseline" or current business model to the public corporation in terms of service weeks and cost. The latter model factors in the same 350-week service schedule, but with the different governance model and replacement of all current vessels with a mixed-use fleet. This would consist of three mainline vessels to facilitate the Gulf, continental and Southeast routes, three day boats, two 24/7 feeder vessels, and one ocean-going vessel. The crew costs would be scaled down to suit the new fleet, and while overhead would be slightly higher vessel maintenance costs would be lower.

Comparing the two models, the report anticipates the new governance and vessels would save just under 24 percent of costs from the system's general fund needs, bringing them down to $81M. A third, pared down model operating just seven new vessels on 282 service weeks would bring that down even further, to $60.6M.

The committee's next steps will be to prepare a document and transition plan for consideration by the state, and to prepare an actionable plan that could be taken up by the State Legislature.

"We ask folks to give comment," said Robert Venables, SEC executive director and member of the reform committee.

A complete overview of the second phase report and reform initiative timeline is available online at http://www.AMHSreform.com. There is also a tab through which feedback can be provided. A comment deadline on the new draft has been set for October 6.

Finding a solution to AMHS' budget uncertainties has taken on renewed urgency, with the Office of Management and Budget issuing a letter last week warning that an oversight in the state's adopted supplemental budget meant the ferry system would lose $30M from its allocated budget.

"There was a legislative mistake," explained Aurah Landau, public information officer for AMHS Southcoast.

For the past two years the Legislature has been shifting spending from upcoming budget cycles to the prior year, in order to make spending cuts appear to be greater. A supplementary budget adopted by the Legislature then retroactively covers money already spent by drawing money from state savings.

"This year's supplemental budget had some language that if the budget needed more than $100M from the Congressional Budget Reserve the ferry system would be the first thing cut," said Landau. As this had been the case, the allocation to AMHS would be forgone.

"Nobody caught the problem before the budget was signed into law," she continued. Gov. Bill Walker is expected to expedite the issue in the special session expected next month. If the funds are not restored, the ferry system will run out of funds before the fiscal year is through, with April a best guess.

"The question of when the ferry system would run out of money depends on a variety of factors, like fare revenues that aren't down. We know that there's not enough through the end of the fiscal year, but we don't know exactly how long they will last," Landau explained. The likely effect would be disruption to statewide service, which given the timing, could play havoc with the summer season.

"Certainly the summer is a time when we have a lot of passengers, a lot of revenue generated, a lot of cargo moving, and we're well aware that people are relying on the ferry system for businesses, for families moving, for tourists moving through Alaska," Landau said. "It's an absolutely essential bit of transportation. It would be like digging up the Seward Highway."