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The Alaska Marine Lifeline

by Jun 3, 2019Government, Magazine, Tourism, Transportation

Connecting businesses and communities along the coast

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So—the Alaska Marine Highway. Sometimes when I start researching an article, the challenge is finding good sources of information. Is there data available, and is that data public? Who’s involved, and will they talk to me? I’ve accepted the assignment, so if I’m in for weeks of begging and borrowing to get the information I need, that’s the game. And then I started making calls about the Alaska Marine Highway System (AMHS), and for the first time in my career as I sit down to write I am at an absolute loss: we have mountains of data, piles of studies, hundreds of voices, passionate communities, involved business leaders, apparently engaged politicians… and yet somehow the AMHS is apparently an unresolved—or unresolvable—problem.

Of course, the current conversation Alaskans are having was spurred by Governor Mike Dunleavy’s initial budget proposal for 2020, which would cut funding to the AMHS by 75 percent and essentially end most operations by October.

An Honest Budget Fiscal Year 2020, released by the governor’s office, states, “The AMHS is heavily subsidized by State of Alaska General Funds; its fare box recovery rate in FY2018 was 33.3 percent. Ridership is trending down; 2018 capacity was 42.6 percent and vehicle capacity was 51.6 percent. The department will work with a marine consultant to investigate options available for moving the AMHS towards privatized service or service provided by public/private partnership, with the intent of reducing the State’s financial obligation and/or liability.” To summarize: we’re losing money on a system fewer people are using.

To the first point, fare box recovery rate is the portion of operating expenses that are met by the fares charged, so in 2018 only a third of the cost of operating the AMHS was directly funded by the people and organizations that utilize ferry services. According to a March article by Mollie Barnes published in the Juneau Empire, the AMHS’s recovery rate has hovered between 30 percent and 35 percent from 2007 through 2018.

The Alaska Department of Transportation & Public Facilities (DOT&PF) presented in March the Alaska Marine Highway System (AMHS) Overview, in which it is explained that the governor’s budget proposal released in February would end all ferry service from October through June, scale down services in September, and operate the system’s currently published schedule in July and August. The total expenditure authorization for the AMHS would be $45 million, and with expected generated revenue of nearly $18 million, the “net deficit” amount is reduced to approximately $27 million, putting fare box recovery at a rate of about 40 percent. Alternative scenarios would provide some service to some ports year-round to varying degrees, with recovery rates ranging from 45 percent to 50 percent and the “net deficit” peaking at $52 million.

Dunleavy has directed the AMHS to hire a marine consultant to examine the ferry system and determine a plan to scale back the state’s fiscal obligation. The AMHS issued a request for proposals and received one, which it rejected because it didn’t allow sufficient time or budget for the work, AMHS Public Information Officer Aurah Landau told KHNS in March. It’s projected to cost up to $250,000, which will be paid for out of the marine highway’s budget.

Why, though?

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October 2019

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Dave Kensinger, owner of Chelan Produce (a seasonal provider of fresh produce in Petersburg and Sitka), was one of twelve members of the AMHS Reform Statewide Steering Committee, which worked with Southeast Conference, the Office of the Governor and Lieutenant Governor, and contractors Elliott Bay Design Group, McDowell Group, and KPFF Consulting Engineers on the AMHS Reform Project, which published its Strategic Business and Operational Plan in September 2017. Less than two years ago.

“We just got finished with a two-year reform project, which is itself similar to a process from 2003, where we went through and evaluated what other places in the world do: how they’re structured and financed,” Kensinger says. “People have offered solutions many times, and we don’t need another.”

That plan, which is certainly available to the governor, created a strategic plan for the AMHS “to provide financially sustainable ferry service that meets the needs of Alaskans.” Phase I of the project was to determine mission, goals, and government recommendations, while Phase II was to identify a strategic operational and business plan.

In Phase I the project considered several governance models: line agency of state government, private corporation, public-private corporation, public authority, public corporation, and transportation district. It recommended transitioning the AMHS to a public corporation, which maintains the existing benefits of intradepartmental coordination, public purpose, access to federal funding, and access to shared services with DOT&PF, the Department of Administration, and the Department of Law. It also would address the issues of frequent turnover in senior leadership, indirect labor negotiations, a short-term planning horizon, and political influence over operational decisions.

“Instead of having the system run as a line agency out of the governor’s office, we came up with a seven member board because it’s small enough to work effectively,” Kensinger explains. “The idea would be to have a cross section of people who know what’s going on: business people, labor representatives, etc.”

This recommendation would not eliminate state fiscal obligations. The report concluded, “[the] AMHS will always require some level of General Fund support,” also stating “governance changes are required to realize operational efficiencies; fleet standardization will have significant positive effects; and the linkage to a southern terminus in Bellingham is critical.” The plan rather optimistically outlined a timeline in which the transition and capital planning could have begun in November 2017. That didn’t happen.

Instead, “every time we get a new governor, they want to do a new study,” Kensinger says. “It’s just silly. There’s so much information out there.”

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Integral to Business

Kensinger has used the marine highway for forty-one years. “Years ago I was on and off the ferry one hundred times a year; it was integral to our business,” he says. At one time the business used the ferry system to ship produce into Wrangell, Kake, Sitka, and Petersburg. “About ten years ago it became really hard for us to get to Wrangell and Kake and back, so we stopped going there.” Because of changes in the ferry system, Kensinger now primarily uses barges and air services to travel back and forth and ship produce among the islands. “I can make it work [financially] because I’m at a point where I don’t need as much money as I used to, so I keep on doing it because I enjoy the business and I enjoy providing a service and my customers appreciate it. If I’m only making 60 percent of what I used to, I’ll keep doing it until I can’t.” But while Kensinger can make it work, he acknowledges that it’s unlikely someone else would be able to. “Because of all the changes [to the marine highway], even though it’s a good, viable business, I can’t give it to anyone else.”

Kensinger’s gradual disuse of the ferry system speaks to the governor’s assertion that ridership is in decline. It’s certainly not untrue, but one contributing factor seems to be that the system is not performing optimally. It’s hard not to conclude that Alaska’s leadership has allowed or contributed to the decline of the AMHS over the years—changing leadership regularly, providing uncertain funding, delaying investment in new ferries, allowing political agendas to overshadow the needs of the AMHS—and now would like to use that as a reason to defund it further.

Kensinger’s not the only one frustrated with the mismanagement of this essential service. Scott Hursey owns and operates Alaska Passages Adventure out of Petersburg and has done so for twenty-nine years. The company offers whale watching and glacier tours. He says a high percentage of his customers travel to Petersburg via the AMHS. The other option is flying on an Alaska Airlines flight, but “frankly a lot of [my customers] wouldn’t come without the highway,” Hursey says. “People come on the ferry because they can travel to [Petersburg] easily and see the sights along the way; it’s a much more pleasant experience and they can get off and spend time in each town they want to spend time in.”

Recently, potential customers have communicated to Hursey that they’d like to book his services, but are unable to. One group from Australia books tours up to a year in advance; but the AMHS in recent years often doesn’t regularly publish a schedule that early, so the group either has to hope the schedule will accommodate them or move on to a vendor in an area with more reliable transportation. “They’ve taken money away and away from the ferry system, and it’s become less and less dependable,” he says.

In fact, he and other local vendors have had customers that booked a tour that depended on a scheduled ferry run, paid a deposit, and then found out the ferry wouldn’t be running as planned. “Now that they’re talking about shutting it down in October—even the fact that they’re talking about it—we’ve already lost customers,” he reports. “Just this conversation [about the AMHS] has been disruptive to my business.”

Hursey has lived in Southeast for forty-six years and says the ferry system was “vibrant in the days before we had oil money, so it’s just not true that we can’t support the ferry system.” He notes that today service has declined, schedules are published late, ferry maintenance is poor, and because of that there’s often disruption in service as the ferries break down.

Southeast Conference’s publication The Value of Alaska’s Marine Highway in 25 Stories relates this account from Clay Koplin, CEO of Cordova Electric Cooperative:

There is a small spring bottom fishery in Cordova that generally starts in February and ends in March. One spring the Aurora had to cancel service and go into layup. The three-week cancellation of ferry service cost the processors and fishermen $1,000,000 or roughly $1 per pound of product value… When [the] AMHS cancelled bookings on the FVF Chenega to Cordova, one business providing accommodations and visitor related activities lost 1,000 bookings for their 2015-2017 seasons in one month. Most of these visitors cancelled their Alaska visit all together.

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AMHS, Tourism, and Community Ties

As the executive director of Discover Kodiak, Aimee Williams is keenly aware of how ferry service aids—or disrupts—tourism-related activities. “The ferry allows people to come [to Kodiak] with bikes, motorcycles, and RVs and travel how they’d be able to on mainland Alaska; it allows people to continue their adventure. Without the ferry it’s not practical to get here.”

Of course, if someone is determined to get an RV to Kodiak, there are options, but those can take weeks and “I can’t imagine what the cost would be,” Williams says. Plus, on a barge, vehicles aren’t protected from the salt water like they are on one of the ferries, passengers can’t ride with them and therefore don’t have access to them, and—unlike on a ferry—there’s no option to keep tabs on a pet or items stored in the vehicle as it travels.

Barging is essential in Alaska, as is air travel—but neither is capable of replacing the services a ferry provides. Beyond that, the ferry system is part of the community. “The vessels are not just transportation, they’re community members. Every one of us has a story. They’ve become fixtures, and it doesn’t matter which ship is serving, it’s a lifeline.”

In more practical terms, “once you start closing the doors on the ways to get people to Kodiak, that’s going to hurt all kinds of businesses,” Williams says. “Tourism is one of those industries that is a tide that raises all ships.”

Sarah Phillips, director of community relations for the Kodiak Chamber of Commerce, has very down-to-earth figures in that regard. Every year the Kodiak Chamber of Commerce hosts the Crab Festival, which is almost a week filled with rides, food, merchandise, and activities. Phillips describes the festival as the “centerpiece of the current culture of the island,” continuing to say:

The rides are contracted through Golden Wheel Amusements who, due to exposure issues, can only transport rides on the ferry system. The rides consistently provide revenue of approximately $10,000 per year. Additionally, approximately 30 percent of our vendors each year come from off island and utilize the ferry service for transportation to and from the event. While air travel is a possibility for some vendors, the most highly anticipated merchants of Crab Festival for the community are those that supply food. The remote nature of Kodiak reduces the restaurant options; Crab Festival is when the island has the greatest selection and variety of food, a real treat to Kodiak! Off island vendors add additional revenue of between $5,000 and $8,000 directly to the Kodiak Chamber of Commerce. Without ferry service, many of the tourists—and the money they spend to stimulate the Kodiak economy—will not be able to come during Crab Festival, further eroding the profits the event sees each year. Without ferry service, the Chamber of Commerce will lose between $15,000 and $20,000 in revenue, significantly reducing the ability of the Chamber to continue its core purpose of educating, supporting, and growing Kodiak and its business community.

And that’s just one annual event. Phillips adds, “Without the ferry, our entire way of life is crippled and can spell economic disaster for the entire Kodiak region, reverberating throughout the Chain and state.”

“But it’s costing us money,” one might continue to say.

Well, yes—infrastructure does that.

“Highways aren’t meant to provide income to the state,” Phillips states. “At their best, highways fuel the economic development of areas by providing access to residents and tourists; this basic right should not be removed from businesses and Alaskans.”

Carrie Starkey, executive director of the Ketchikan Chamber of Commerce, says, “In every state, a state highway—unless designated as a toll road—does not pay for itself. They are a transportation option provided for and maintained solely by the government. It services the state’s communities, the government, private businesses, and tourism. In Alaska, the AMHS is the only highway that connects the communities of the Southeast to the larger portions of Alaska. This service is used by our state’s communities, the government, private businesses, and tourism—just like any other state.”

That sentiment is echoed by Pennelope Goforth, an author and marine historian who first came to Alaska in 1979 and spent many years living in Southeast and Southwest Alaska and now resides in Anchorage. “The role of government is to provide infrastructure so that businesses can have a shot at making a profit and people can have a shot at getting the services they need at a price they can afford,” she says. “I’m not sure that dismantling the ferry system is going to benefit anyone in the long run.”

In fairness, the governor’s plan is not to completely dismantle the system. He has stated that he anticipates that the private sector will step in to fill service gaps that cutting government funding will create. Mouhcine Guettabi, economist at the Institute of Social and Economic Research at the University of Alaska Anchorage, questioned the likelihood of that outcome during an editorial board at Northrim Bank in April. “What’s the mechanism?” he asked. “There are no incentives in place. It’s not like there is a cut to government but there is [also] a massive tax cut to a particular industry or that we are changing the rules significantly in a way that’s going to unleash this investment, or there is evidence that there was investment that was sitting on the sidelines either, considering we’ve been in recession for three years.”

Paying for a Lifeline

Without incentives for private investment, cuts to the ferry system may make it even more difficult for a private entity to step in. “If there is no mechanism, and now you’re negatively influencing the quality of the workforce or quality of schools, then attraction and retention of quality workers becomes a problem, which affects the private sector,” Guettabi said.

Ketchikan’s Chamber of Commerce Starkey explains, “We have to look outside of transportation to how it affects the business of the shipyard [or] the housing market if people lose their jobs and need to relocate. Particularly when you consider that the bulk of Vigor’s business has been through [the] AMHS, and that we house the AMHS administration offices, the loss of the ferry service would be felt community wide in more arenas than just transportation.”

In Southeast and Southwest Alaska, the ferry system isn’t just transportation. It’s how people access medical attention or dental appointments, visit family and friends, and shop and attend community events. “The ferry affects a lot more than my business; it’s a lifeline,” Hursey says.

Jaime Cabral is the dean of students and athletic director for the Petersburg School District, which uses the ferry system to transport students to and from other communities for school activities and sport competitions. “We also send school vehicles with our teams on the ferry in order to save on costs for transporting our students in other communities for the weekend,” Cabral states. Without the AMHS, the district would need to fly or charter a smaller vessel, either of which eliminates the option of transporting a vehicle. And more, losing ferry services “would be devastating to our programs as we would have to cut entire programs for students… I believe there would also be a domino effect that would result from the ferry service ceasing to exist… For example, Petersburg was host to one of the High School Cross Country meets last fall. We had 200 students from across Southeast Alaska arrive in Petersburg from Thursday through Saturday evening along with approximately 20 coaches and chaperones. Also in attendance were the families of these athletes, coming to watch their children participate. Those students and families brought an economic rush into our small community for two days. The Alaska Marine Highway System was crucial in transporting over 70 percent of the students that came to Petersburg that weekend,” Cabral says.

This story is not unique to Petersburg. The AMHS connects more than thirty ports to each other, the rest of Alaska, and the Lower 48.

“A loss of [the] AMHS would affect more than just Southeast; it would reverberate through the state as a whole,” Starkey says.

Cuts to the system will affect all of Alaska, and the conversation about making cuts is a reflection of a bigger, state-wide tension.

The AMHS “problem” isn’t entirely about the ferry system; it’s an unfortunate reflection of Alaska’s bigger, ongoing, and deeply concerning problem that as a state we can no longer function under the premise that there will always be oil money to pay for everything. Our years of easy money are over. And maybe the continuing inability of our governing bodies to make and implement actual decisions at a state level is a reflection of the hard reality that we—we Alaskans, citizens, residents—will need to pay for government services.

Some have lauded Dunleavy for engaging in the “hard conversation” of budget concerns; but reductions to the AMHS isn’t the hard conversation, it’s the easy one. Better to just cut off the Panhandle and Aleutian Chain rather than seriously talk about how Alaska needs to leverage the permanent fund differently or the fact that Alaska is the only state in the nation that does not collect an income or sales tax of any kind (New Hampshire does not collect individual earned income or sales tax, but does tax dividends and interest) at the state level.

The conversation about cutting or reducing AMHS services is easy on another level: it’s vital infrastructure for many of our Alaskan neighbors and we already have study on top of study detailing how we can make it work better for all of us. Let’s just talk about how to do that.

“If government empowered the communities, the businesses in the region the marine highway serves, we can fix it and make it easier to operate. If they don’t do that, there’s no future for the system,” Kensinger says.

Alaska Business Magazine October 2019

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