State will not receive as much federal money for ferry system as expected

The state will receive about $36 million less in federal funding than expected for this year’s Alaska Marine Highway System operating budget, requiring the use of state dollars to cover the gap.

No reduction in service is expected because of the budget shuffle, state officials said. But it could mean that legislators next year will need to approve additional state funds to fully make up for the loss of federal aid, exposing the ferries to another vote in the political process.

The governor had looked to federal infrastructure money to replace most of the state dollars in the ferry system budget. The more federal money, the less the state would have to spend on the service for coastal communities.

But legislators this year were hesitant to rely on federal aid as heavily as Gov. Mike Dunleavy wanted in his budget, and they cut back the federal infrastructure dollars to less than 60% of the ferry system operating budget from the 96% proposed by the governor.

However, the Federal Transit Administration, which released its funding rules last month, significantly reduced what the state will receive, even below what lawmakers had counted on.

The Infrastructure Investment and Jobs Act of 2021 allocated $200 million for ferry systems around the country, though essentially only Alaska met the qualifications. And although the state had expected few limitations on receiving the money, the Federal Transit Administration’s rules restrict funding to 50% of a ferry system’s operating costs not covered by revenues.

In Alaska’s case, the ferry system budget is $143.8 million for this year, with about $50 million expected to come from passenger and vehicle fares. Of the $93.8 million not covered by revenues, the transit administration grant would be limited to half, or $46.9 million.

The state budget had counted on $83.8 million in federal aid, leaving the system short about $36 million.

“That was not something on our radar at all,” Alexei Painter, head of the Legislative Finance Division, said last week of the 50% rule.

“We’re pretty aghast,” said Rob Carpenter, deputy commissioner at the Alaska Department of Transportation. He called the transit administration’s actions “pretty creative.”

The 50% limit on funding net of revenues “doesn’t appear anywhere in the bill,” Painter said. Such agency rulemaking is not unusual, he said. “That’s always an issue we have.”’

As a contingency, the budget approved by legislators and signed by the governor in June includes a $20 million appropriation of state dollars for the ferry system to cover any shortfall in federal money. That leaves the Alaska Marine Highway System short $16 million if the Federal Transit Administration does not change its rule.

The $16 million could be covered in the annual supplemental budget bill used to fill holes in the state spending plan when legislators return for next year’s session.

The state’s application for the federal money is due Sept. 6, Carpenter said. In addition to requesting infrastructure money for the system’s operating budget, the state will apply for funding for new ships and other improvements. “We’re going after all of it,” he said of the $200 million.

The federal grant funding can go to building new ships, though such projects require a 20% state match, Painter said. That’s double the 10% match rate normally required to obtain federal funding for highway projects.

The state in the years ahead expects it will need to replace at least the Columbia and possibly another of its decades-old ships.

The Infrastructure Act authorizes five years of funding at $200 million a year for ferry systems. “It’s written so that only Alaska is eligible” for the money, Painter said. The program is open to ferry systems that operated between 2015 and 2020, with routes at least 50 miles in length that serve rural areas — eliminating commuter ferries.

The governor had looked at the years of federal aid as an opportunity to cut state funding to the Alaska Marine Highway, but that drew opposition from legislators representing coastal communities.

“Those federal dollars were meant to augment state money, not replace it,” House Speaker Louise Stutes, of Kodiak, said this past spring.


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