State finally releases ferry system study, finding privatization is ‘not feasible’

The Alaska Marine Highway System. (Photo by Gillfoto/Wikimedia Commons

The Department of Transportation today finally released a report examining options for the Alaska Marine Highways System to operate on less than 25 percent of the state funding it received before Gov. Mike Dunleavy took office.

The study, which was completed in October, was commissioned to examine what it would take for the Alaska Marine Highway System to operate on about $24 million in annual state funding, roughly similar to what Dunleavy proposed in his initial budget. It finds that efforts to privatize the ferry system, as the Dunleavy administration has proposed, is “not feasible if minimum levels of service are also stipulated.”

The Department of Transportation news release explains the delay in releasing the report as follows: “Due to the volume of data and complexity of the issues, DOT&PF and Northern Economics worked together to verify accuracy.”

It notes that private companies would not be likely to operate any of the existing routes at break-even levels. It notes that the Metlakatla run with the MV Lituya “comes closest to breaking even but would require a subsidy of more than approximately $370,000.”

It finds that the wholesale privatization of the Alaska Marine Highway System is not even close to being realistic due to the cost of operating and maintaining the ferries, noting that the most likely buyers of the ferries would be groups looking to scrap them.

“If the ferries and terminals were given to a private entity, those capital replacement costs, along with the property taxes that would be levied locally, would result in unsustainable losses. No business owner would accept all AMHS assets with the intent to provide services as the system currently operates, since it would not be able to do so and earn even a modest rate of return to account for the risk,” explains the report. “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 services to AMHS communities.”

The Alaska Marine Highway System received $86 million in state funding prior to Dunleavy. The Legislature opposed the deep cuts proposed by the governor, but ultimately approved a $40 million cut in state funding for the service that reduced state support to $46 million, leaving several coastal communities with months-long stretches without ferry service.

The report, done by Northern Economics, examined 11 different options that ranged from the full privatization to mixtures of private-public partnerships and public corporations. The report finds that further reducing annual state funding of the Alaska Marine Highway to $24 million while providing minimum levels of service will be “extremely difficult.”

It notes that simply raising fees and cutting costs would likely be counter productive to the end goal of making the ferry system sustainable on such little funding.

“Realistically it is more feasible to recognize that the significant cost reductions needed to reduce or eliminate the subsidy would also result in lower levels of services and lower levels of revenues,” it explains, adding that “The reality of AMHS’s financial situation is that it is highly unlikely that a single change to revenue or expenses, or a combination of smaller changes, will allow it to achieve the targeted subsidy.”

The only option examined by the group that meets the $24 million requirement that also provides minimum levels of services to “most (but not all) communities currently served by AMHS” calls for setting up two public corporations—one in Southeast Alaska and one in Southwest/Southcentral Alaska with the threat that if they cannot operate on the $24 million “all of the ferries would be sold or leased to private entities that do not have a vested interest in providing acceptable but minimal levels of service.”

It calls for a 25 percent increase to fares, an 8.7 percent cut to vessel-based wages from pre-Dunleavy levels and a renegotiation of union labor agreements. As far as service, “several route groups go without any service for extended periods of time.” The route changes are explained as follows (the full examination of this option is at the end of this article):

  • “Major cuts to mainline sailings to Bellingham and elimination of all trips to Prince Rupert.”
  • “Services to Bellingham would only be provided from June through August by the Kennicott, which would also provide Cross-Gulf services to Whittier as well as two trips out to Unalaska at the beginning and end of its service period—one in May and one in September.”
  • “Lynn Canal service originating in Auke Bay would be provided by the Tazlina, and service to Metlakatla by the Lituya would continue.”
  • “Service to Southeast Alaska communities including SE Feeder communities as well as Juneau, Kake, Sitka, Petersburg, Wrangell, and Ketchikan would be provided by the Aurora. The Aurora would operate as a 24-hour vessel with crew quarters and would run similar routes to those by Mainline vessels within Southeast Alaska. There would be a 10-week period beginning in late January with no service by the Aurora.”
  • “In the Prince William Sound and Homer-Kodiak route groups, day-boat service would be provided by the Hubbard and Tustumena with 14-week gaps in service from late December through late April.”

The proposed sailing schedule with $24 million in state funding.

Part of the benefit of transforming the Alaska Marine Highway System into a public corporation, according to the study, would be that it would help insulate the corporation from the political whims of each new administration. It would also have greater flexibility in adjusting how the ferry system is run.

“The AMHS mission is vulnerable to both political climate and availability of funding. AMHS reform argues that a public corporation with a board of directors that is not forced to reorganize with each administration could ensure that the AMHS mission had a real meaning and stability that would allow a long-term vision and strategic plan to develop,” explains the report.

The Marine Transportation Advisory Board heard a presentation on the report during its meeting today, but with the report being released just this morning, members reserved judgement on the proposals. Several of the proposals would require legislative intervention.

Department of Transportation Deputy Commissioner Mary Siroky told the board that no significant changes from the study are planned for 2020 or during the upcoming legislative session. Instead, she said that the report would influence the planning for the budget that would be approved in 2021.

“We’re not trying to short circuit any of those processes,” she said. “We’re looking at it, you’re looking at it, the Legislature is looking at it. We expect to be talking to them in a variety of venues and committee meetings about this topic. It’s going to take some time for everybody to think about this, digest this.”

Sirkoy also said the report was right to criticize the department for not having a long-term goal for the ferry system in mind. She said reaching an agreement on a long-term plan with the Legislature and communities will be a goal moving forward.

The recommended option to meet $24 million in state funding

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