Alaska's ferry system is in disarray with 10 of 12 vessels out of service for repair or lack of funds, leaving many communities without service for many months, but paying for major fixes to the aging ships could mean taking money away from road projects.
Righting the Alaska Marine Highway System is the top priority going in the Department of Transportation and Public Facilities, Commissioner John MacKinnon said in a March 9 interview. The current situation is underlain by the constant tension between many road-system Alaskans who feel the ferries cost too much to serve too few and the residents of 35 coastal communities, for whom ferry service is their road system.
Understanding the funding options available to the state requires a deep dive into the arcane world of federal transportation formula programs. Some of those formulas are so complex even career transportation officials -- state and federal alike -- cannot succinctly explain how the money the state receives from the federal government is calculated.
At the highest level, the State of Alaska typically receives between $550 million and $600 million per year in formula-driven federal funds for highway projects in its Surface Transportation Improvement Program, or STIP.
That money comes from up to 15 Federal Highway Administration, or FHWA, programs, but roughly $450 million of it is derived from the National Highway Performance and Surface Transportation Block Grant programs. And while many of the FHWA programs are dedicated to specific issues such as reducing road and rail intersections or metropolitan planning, that $450 million can be spent more generally on road construction or ferry projects, according to state DOT officials.
Alaska also receives $15 million to $20 million per year from the FHWA Ferry Boat Funding Program solely for vessel and terminal projects. This money is calculated based on ferry route miles and the number of passengers and vehicles carried by the Alaska Marine Highway System.
It can only be used on AMHS capital projects, such as vessel overhauls or shore side terminal improvements.
Nearly all federal transportation formula funding also requires a state match, which is often at least 10 percent. Ferry Boat Funding requires a 20 percent match, according to the STIP.
The National Highway Performance and Surface Transportation funds eligible for roads and ferries are largely calculated based on roads classified as part of the National Highway System by FHWA.
Ferry officials often tout that they operate approximately 3,500 miles of routes and those routes linking communities on the National Highway System -- Whittier-Valdez, Haines-Juneau, Homer-Kodiak and others -- are also part of the national system and can generate formula funding.
But DOT officials also point out that the National Highway Performance funds are partly derived from metrics meant for roads that simply don't work for ferry routes.
The current state of the ferries has led some system advocates to question why the state is laying up vessels and deferring repairs that have been deemed too costly as lawmakers continue to debate how to close a structural deficit of more than $1.5 billion per year.
Gov. Mike Dunleavy's first budget proposal released Feb. 14, 2019, largely panned by legislators, called for a 75 percent cut to the AMHS annual operating subsidy for this fiscal year, which would have shut the system down in October after three months of operations.
A compromise struck with legislative leaders kept funding in place to offer year-round service at significantly reduced levels, but unexpected maintenance issues with several ferries meant the system was ostensibly shut down for much of the winter outside of a daily shuttle route between Ketchikan and Metlakatla served exclusively by the small, purpose-built ferry Lituya.
As for funding ferry operations, Dunleavy and many other road system Republican lawmakers argue the ferry system's annual subsidy of $90 million to $100 million in recent years is just too much money for a network of vessels with declining ridership. The number of ferry passengers has fallen to about 250,000 per year after peaking at nearly 340,000 passengers in 2011 and 2012. The number of vehicles carried has remained relatively flat at about 100,000 per year over the same period.
System revenue from tickets, staterooms, and dining service among other fees has averaged about $50 million in recent years, for an annual cost recovery of about 35 percent.
Comparatively, the state's 8-cent per gallon gas tax on highway fuels has generated approximately $30 million per year of late. That money is the only state fee drivers pay for vehicle infrastructure and accordingly has traditionally been allocated for highway maintenance. DOT officials have also begun using about $30 million per year of FHWA capital funds for road maintenance as state oil revenues have dwindled.
The Alaska Senate on March 2 approved Senate Bill 115 to double the state's highway fuel tax, which is by far the lowest in the nation and hasn't been changed since 1970.
Robert Venables, executive director of the regional development nonprofit Southeast Conference, said in an interview that he feels up until this year state officials have allocated adequately balanced capital funds for roads and vessel repairs.
"It looks to be quite scaled back in terms of previous years," Venables said of the AMHS capital projects plan.
The state spent $277 million of federal capital funds on ferry projects from 2009 to 2019. Another $161 million of state general funds were spent on annual vessel overhauls over that same period, according to AMHS officials.
State funds in the range of $12 million to $16 million per year are used for vessel maintenance partly so the work can be done at a shipyard in Ketchikan rather than likely being done Outside under the procurement guidelines that come with federal money.
The STIP calls for spending roughly $35 million of combined Ferry Boat and state matching funds in the current 2020 state fiscal year, the vast majority of which is targeted for a major terminal overhaul in Skagway. Some of the $35 million total is also debited against federal funding anticipated next fiscal year.
None of the AMHS capital projects are scheduled to be funded by discretionary FHWA funds in 2020 or 2021 other than a plan to eventually replace the 56-year-old Tustumena ferry, a $238 million project, according to the STIP. The Tustumena, and its eventual replacement are specially designed for open ocean voyages to primarily serve Alaska Peninsula and Aleutian Island communities.
The Dunleavy administration did request an additional $5 million of state money for an unexpected steel repair for the ferry LeConte in the 2020 supplemental budget. That money was approved by the House and is under consideration by the Senate.
Venables emphasized that the problem is not so much funding in any given year, as it is not having a long-term vision for the system -- a common refrain among ferry stakeholders.
He pointed to the ferry Taku, which the state sold for scrap at a price of $171,000 just a couple years after an approximately $10 million overhaul.
"The real issue is not having the one, large strategic plan; not how much has been spent over the past 10 years," he said.
The Southeast Conference partnered with the Alaska DOT under former Gov. Bill Walker to commission a multi-year study aimed at finding ways the system could be transformed from a state agency subject to political influence to a more independent organization as a way to maximize operational efficiencies and implement a long-term strategy.
Dunleavy administration officials said the result of that work -- a recommendation to make the AMHS a public corporation with an expert board of directors -- did not do enough in their eyes to reduce the need for an annual state subsidy in the near-term.
A subsequent ferry reform study released in January concluded full privatization of the system is not feasible, but little more than that. Dunleavy has since formed a nine-member AMHS Working Group comprised of public members, lawmakers and state transportation advisors, including Venables, who also chairs the Marine Transportation Advisory Board.
MacKinnon, of DOT, said in an interview that there's simply more projects in need of funding than there is money to spend even with the large annual federal contribution.
"We've got a STIP that's significantly oversubscribed and when we have just $500 million a year coming into that through the federal program we have to go through the process of how we prioritize those," said MacKinnon, who is the former head of the Associated General Contractors of Alaska.
Prioritizing what projects are funded in what year and how is a multi-step process and a large part of that is just finding projects that are truly ready for construction, he said.
When it comes to balancing ferry and road projects he emphasized that there is a conversation about the benefit of each one -- similar to balancing competing projects of any type.
"I don't want to say we're picking this ferry project over that road project," MacKinnon said.
He added that in recent years the AMHS had typically operated three or four of its ferries in Southeast during the slower winter season and if not for one vessel dedicated to serving Prince Rupert, British Columbia -- service now suspended in part for customs issues -- it likely would have been just two vessels.
The ferry Tazlina joined the aforementioned Lituya as the two ferries currently operating system-wide when it returned to service March 5 following warranty repairs and inspections.
'Rusty Tusty' replacement paused
As for the aging Tustumena's long-awaited replacement, the project is paused as the state waits for a federal waiver from the Buy America Act for parts made outside of the U.S. But even if the waiver were granted soon, MacKinnon said he would be hesitant to approve it for construction at least until the AMHS Working Group issues its recommendations for ways to reform the system, which are expected next fall.
He also said it would be difficult to justify funding the Tustumena replacement via a single-year FHWA appropriation, regardless of the circumstance.
"That's almost half of our annual allocation from Federal Highways," he said. "If I were to do that in one chunk you'd hear a lot of screaming coming from the rest of the state; not just from communities that are looking for a (road project) for their community but you'd hear it from contractors who would go, 'There's no highway projects bidding this year.'"
Instead, MacKinnon would prefer selling guaranteed anticipation revenue vehicle, or GARVEE, bonds, that act as revenue bonds for reliable future federal funding and would allow the state to fund the Tustumena replacement in one year and repay the bonds over up to 10 years.
The state last used GARVEE bonds in 2002, according to MacKinnon.
"I think for an isolated project like the Tustumena (replacement) a GARVEE would make sense," he said.
Venables, in his capacity as head of the Southeast Conference, said the situation with the Tustumena exemplifies why a long-term strategy for the system is so badly needed.
AMHS General Manager Capt. John Falvey said during a January public meeting that repairs this winter to the Tustumena could keep it going for another 10 years barring major unforeseen problems.
Given that, Venables said the Tustumena's replacement "should move forward in an orderly fashion" so the vessel is ready for service before its predecessor is derelict.
Building the replacement vessel is expected to take close to five years, AMHS officials have said.