The Office of Management and Budget (OMB) confirmed Wednesday, February 20, that Gov. Mike Dunleavy’s FY 2020 budget would end the Alaska Marine Highway System (AMHS) after this summer.

Dunleavy is proposing to cut AMHS by $98 million as part of a potential transition to a public/private partnership.

But in a hearing Wednesday, Senate Finance Co-chair Bert Stedman (R-Sitka) said, “Looking at the budget summation, it looks like a termination and liquidation.”

The Marine Vessel Fuel component of the budget is being cut by $16.6 million.

“That alone will terminate the existence of the marine highway,” Stedman said.

In addition, the $2 million budget of Reservations and Marketing is being cut by $1.3 million.

“That alone… tells me there is termination of the Alaska Marine Highway on October 1,” said Stedman.

Sen. Mike Shower (R-Wasilla) said an email he received Wednesday from the Department of Transportation & Public Facilities (DOT) reflects no AMHS sailings planned from October through June of 2020.

OMB Management Director Amanda Holland confirmed that the budget would result in reduced ferry service in September with no service in October or thereafter.

The AMHS website does not show any sailings for October or later.

According to the site, if this budget were to pass, the M/V Matanuska would pull into Prince Rupert, British Columbia, at 10:45pm on September 30, marking the last sailing of an Alaska State ferry.

Stedman prefaced the hearing by saying the committee is falling behind in its examination of the operating budget.  He encouraged members to confine questions of OMB to the budget.

“I think our patience will probably wear thin over the next few months.  Some of these decisions have significant impact to not only our districts, but our state,” he said.  “We’ll try to slow down on the pontificating and try to avoid the questions of if the presenter at the end of the table is going to quit beating their spouse or not in the budget and try to reword those questions to more of a financial question.”

Yet Stedman acknowledged that the AMHS proposal raised his blood pressure.  

Stedman recalled that one of the earliest statewide bonds was for implementation of AMHS.

“Termination of the Marine Highway is one of these policies that go back, frankly, into territorial days and almost 60 years thereafter,” he said.

Holland explained that while vehicle transportation on AMHS has remained flat, ridership has steadily declined.  Consequently, the farebox recovery ratio, the percentage of costs offset by collected fares, has also declined.

“Can we afford to keep the Alaska Marine Highway System in its current state with large vessels serving 35 communities year round?” Holland asked.

Stedman countered that the gross revenue of AMHS is $45-50 million per year, but the administration is not proposing to bring costs down to that number.

Instead, unrestricted general funds (UGF) would be cut to $21.8 million, a 75 percent reduction.

“It’s an elimination budget, in my opinion, of the marine highway.  That is a whole different discussion than bringing the GF [general fund] appropriation amount down to equal the farebox,” he said.

Sen. Bill Wielechowski (D-Anchorage) and Sen. Click Bishop (R-Fairbanks) both noted that members of the military rely on AMHS to move their families and belongings when transferring to and from Alaska.

“We have our economics at stake in coastal Alaska and around the state,” agreed Stedman.

Sen. Micciche: I Don’t Hear a Plan to Support Cuts

Despite the cuts, OMB shows that AMHS personnel will remain flat.  Stedman said that position count will be distorted in December if AMHS is shuttered.

“How do you rectify your position count with the termination of the employees?  That’s what on the budget in front of us today,” said Stedman.

Holland responded OMB does not know the number of positions AMHS will need after October 1.  It won’t know that number until a study is completed on August 1.

One day before the budget was released, Dunleavy sent a memo to Holland and DOT Policy Advisor Ben Stevens, directing them to contract a marine consultant who will conduct a study on possible privatization of AMHS. 

There is no money in the budget for the consultant or the study, and a request for proposal (RFP) to hire the consultant has not been drafted.

The study is due by August 1, a month after the start of the new fiscal year when the cuts would have gone into effect.

Stedman worried that the overlap will result in a special session for the legislature that will produce a large supplemental budget.

“If the analytics that are going to be run show that we’re better off to run it at a reduced service and maybe privatize some of the outlying smaller villages and feeder system or some slight modification, how do we get the system up and running when the legislature doesn’t reconvene until January, and it’s October 1?  I have trouble getting to that,” he said.

When asked if a supplemental will be necessary, Holland responded, “I would not rule out a possibility.”

“Why the rush?” asked Senate Finance Co-chair Natasha von Imhof (R-Anchorage).  “Why are you cutting tens of millions of dollars in one year, a short period of time, versus over the course of a couple years, particularly to allow this consultant to finish his or her work?  Why are we just game over as of the end of October?” 

Stedman noted that every governor seems to spend money on a study evaluating AMHS.  Those studies are still on file.

“Did you use any portions of these studies to help guide your decision to reduce the Alaska Marine Highway?  And if you didn’t use these studies, what did you use?” von Imhof asked.

Holland said DOT officials would be better able to answer that question.  Holland also deferred to DOT on questions about whether the budget presented to them would allow limited service beyond September or whether AMHS will have to issue refunds for sailings after that date.

DOT wasn’t present to ask, von Imhof noted.

Holland’s answers highlight a fundamental flaw in the Dunleavy administration’s approach to budgeting. 

Personnel who would previously have worked within the departments to build their budgets were moved to OMB.  Consequently, there has been little indication that departments were able to provide feedback on the impacts of budgets OMB has built for them.

“I feel like we’re on hold.  I want to support dramatic reductions in this budget, but I feel like in the effort to eliminate the cost of parachutes, we didn’t evaluate other methods of getting to the ground before we left the plane without one,” said Sen. Peter Micciche (R-Sotdotna).  “There’s so much more information I need in supporting some of the reductions.  I feel a little bit hogtied in understanding how we get from here to there with these reductions without a plan.  And I don’t hear one.”

Sen. Stedman Concerned About Federal Funds, Ketchikan Shipyard

Stedman worried about the impact of shuttering AMHS on Southeast’s shipbuilding industry, which he said has existed since Russian ownership of Alaska.

The Ketchikan Shipyard is a project owned by the Alaska Industrial Development and Export Authority (AIDEA) and operated by private company Vigor Alaska.  

A McDowell Group report shows that the shipyard is Ketchikan’s third-largest industry, with 157 average jobs in 2015.  There is a $5 million impact on Ketchikan businesses and a $500,000 impact on local taxes.

The Ketchikan Shipyard built Alaska’s two newest ferries, the M/V Tazlina and the M/V Hubbard.

Holland told Stedman that she is not aware of any conversations DOT has had with AIDEA or the Ketchikan Shipyard regarding the budget.

Dunleavy’s budget proposes to pay $254 million in oil tax credits from AIDEA funds.

In addition to the potential impact on the Ketchikan economy, Stedman wondered about the loss of federal funds from ending ferry service.

The State built ferry terminals in Coffman Cove and South Mitkof Island using $15 million in federal funds, KTOO reported.

When the State canceled ferry service between Petersburg and Coffman Cove, the federal government threatened to recall that $15 million, forcing the State to offer infrequent service on the route so the money wouldn’t be pulled from state highway funding, Stedman recalled.

“When we shut this down on October 1, what is the budgetary impact on return requests of federal funds to the feds for ceasing the operation of these ships?” he asked.  “That is, in fact, what’s in the middle of the table.” 

“As long as the vessels are in the possession of the State of Alaska, it is my understanding that there is no federal payback required at that time,” Holland replied, employing multiple qualifiers.

Sen. Shower: “You Are Potentially Strangling Those Communities”

The private Inter-Island Ferry Authority has stepped in to operate several small routes in Southeast, Stedman noted, even though it has occasionally needed State support.  He hinted that expansion of that model could be a way forward for AMHS.

However, planning would take time.

“You can run a reduced schedule, keeping the operational integrity of the facility intact, keeping the maintenance of the vessels and the certification intact, while you go through the analytical process of trying to decide the policy move to either divest the Marine Highway and its terminals, which is a direct quote out of the budget documents,” Stedman advised OMB.  “That would allow us, then, to operate this facility while we get it restructured.” 

The language section of Dunleavy’s capital budget (SSSB 19) pulls $15.2 million out of the AMHS Fund for divestiture of ferries and terminals.  It also shifts $25 million, set aside for replacement of the F/V Tustumena, to federal highway matching funds.

Stedman slyly said he would probably make a “slight tweak of the budget” so that AMHS can operate a reduced schedule, rather than stopping completely.

Shower said a Federal Emergency Management Agency (FEMA) exercise in which he participated in the Air Force taught him that Alaska needs its ports to survive.  The air support necessary to compensate for loss of Alaska ports would be three times that of the Berlin Air-lift of 1948-1949, he estimated.

“You cannot survive with just the airports.  You can’t do it.  You can’t possibly bring in enough aircraft,” Shower declared.

Shower, a retired fighter pilot, worried about the closure of AMHS in conjunction with a $47,000 proposal to study rural airports for potential divestiture.  He recommended that rural communities be involved so a compromise can be reached before simply closing rural airports.

“One of the things that seems crystal clear to me from my experience doing this is that you cannot keep a community alive without that heavy transport, ferry system coming through.  If we shut them down for the winter time, we are literally, in a way, stranding them,” Shower told OMB.  “If you shut down ferry operations, I hate to say it, but you are potentially strangling those communities because they may not make it through the winter without that if the airports can’t support them, and my guess is they can’t.  I don’t think that infrastructure’s there.”

Senate Finance will examine the departments of Fish & Game, Natural Resources, and Environmental Conservation on Thursday before digging into the massive Department of Health & Social Services (DHSS) on Friday.  Dunleavy has proposed over $250 million in cuts to Medicaid in the DHSS budget.

OMB Economist Ed King will be before the committee in a couple weeks, Stedman announced, pointedly adding, “I want him to be prepared because I think the committee is going to have a litany of questions for multiple departments.”  

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