Reopening of a federal grant program could reduce, but not eliminate, a cash squeeze at the Alaska Marine Highway System this summer.
The months-long delay in the program jeopardized the ferry system’s operating budget for this summer. But, even with the reopening of the grant applications, the Marine Highway will need state funds to cover for the missing federal funds until the anticipated grant comes through.
Fear of a shutdown arose earlier this year after Alaska Department of Transportation officials said the ferry system was $77.9 million short of its budgeted needs for 2026 because of the delayed federal funds, which represented nearly half the Marine Highway’s annual operating budget.
Based on prior years, applications for 2026 federal ferry grants were expected to open mid-2025. But 2025 came and went, and no application period ever opened.
That left the ferry system with only enough money to operate through July, Department of Transportation budget manager Dom Pannone told state lawmakers this spring.
Though the state had not yet applied for the funding when the budget was written last year, it had an expectation of receiving funds based on the structure of the federal grant program and the fact that it had received the aid the previous three years.
Marine Highway reliance on federal funding has been the norm since the 2021 Infrastructure Investment and Jobs Act created a billion-dollar pot of rural ferry funding — widely credited to Sen. Lisa Murkowski. When the bill was passed, Congress appropriated money to fund the grant program through the 2026 fiscal year.
The vast majority of the millions released so far have gone to Alaska ferries, including roughly $150 million in operating funds, day-to-day costs like paying staff and keeping ferries fueled.
With no way to apply for the funds, and no public explanation from the federal government on why the application process had stopped, state transportation officials seemed to have few ideas for how to cope.
At a March legislative hearing, state senator Löki Tobin asked if the department had done any contingency planning. Pannone said the ferry system could offload the out-of-service M/V Matanuska, but otherwise offered few specifics: the department would “continue to work with the legislature on resolving (the funding gap),” he said, adding that they would pursue those discussions “before we’d consider reducing the schedule or canceling any sailings.”
At that hearing, Pannone also delivered hopeful news, saying federal officials at the Federal Transit Administration had “committed” to beginning the grant application process by the end of March.
Funding was then expected to be awarded in August or September, Pannone said.
As of this week, the federal government delivered on the first half of that commitment. On Monday, the Federal Transportation Administration announced backdated funding for the 2025 fiscal year and funding for the current 2026 fiscal year. The state will still have to apply for the funds, and until then won’t know how large its share will be. But the size of the total funding pot is comparable to, even slightly larger, than past years.
Even with the good news for the ferry system, issues still remain.
For one, the backdated funding, arriving nearly a year later than expected, isn’t expected to be delivered in time for the summer season. The ferry system expects to exhaust existing operating funds in July, and Pannone said last month he expects the federal infusion of cash to only come in August or September.
That would likely require the state to cover an increased share of expenses until then, after which federal funds could essentially pay the state back.
In her annual address to the state Legislature last week, Murkowski criticized the Dunleavy administration, calling the use of the funds on operating costs, rather than long-term investments, a “bad idea.”
“Federal funding is a lifeline, not an entitlement,” Murkowski said.
According to data from the Marine Highway, in the seven years before the Biden-era federal funding infusion, essentially all of the ferry system’s operating funds came from ticket revenue and state funds.
But as federal funding has increased, the governor has cut the state’s share, vetoing over $40 million in state funding to the Marine Highway since 2019.
Now, absent a new stream of federal assistance, the state will have to either increasing spending or make cuts.
Senate Finance Committee chair Bert Stedman told transportation officials in February that tight state budgets were “reducing the flexibility (the Senate Finance Committee) has to backfill some of these holes.”
There’s also a political challenge beyond just the total dollar figure.
Whereas the federal grants can only be spent on ferries, pulling in state general funds would come at the expense of some other program, potentially with a broader geographic reach.
“Beauty is in the eye of the beholder,” Stedman said. “If you use the Marine Highway it’s pretty sensitive, and if you’re an area that doesn’t use it, you’d rather have more potholes fixed.”
Potential new Lynn Canal ferry funded
Monday’s notice of available federal funds also included a large chunk of money that could build a new Lynn Canal ferry, contrary to the expectations of borough decision-makers.
The ferry system’s long-range plan includes two diesel-electric shuttle ferries, which would run frequent, short routes. One of those possible routes is between Haines and Skagway.
If the ferry is indeed constructed and assigned to the Lynn Canal, it would allow larger ferries to run directly between Auke Bay and either Haines or Skagway — likely alternating between the two. Stopping just once in the upper Lynn Canal would cut down on costs and increase sailing frequency, the Marine Highway’s long-range plan says.
Borough decision-makers in recent months have been pessimistic about the project, citing the Trump Administration’s slashing of renewable energy projects.
Assembly members Eben Sargent and Gabe Thomas said at an assembly meeting this winter that they thought funding for the hybrid ferry would be a casualty of those cuts.
“Electric stuff is not going anywhere right now,” Thomas said at a meeting in January.
In the Legislature, at least one lawmaker raised a similar concern at one of the Marine Highway hearings: Senate Finance member James Kaufman, an Anchorage Republican, asked Department of Transportation officials if the hybrid boats were linked to an “environmental agenda” that could cause “unstable funding” going forward.
The answer was largely no, from DOT Deputy Commissioner Katherine Keith, who said the new propulsion system had benefits outside of emissions reductions, including “significant operational savings.”
Keith also said that diesel-propulsion ferries were “outdated internationally.”
Despite concerns from assembly members and state lawmakers, Monday’s announcement continues Biden-era funding for the program. The program is expected to make $98 million available nationwide for low and no-emission ferry programs over two years.
That could help complete funding for the project, which received a $46 million grant from the program in 2022. The Marine Highway currently estimates the shuttle ferries to cost $59 million each.
Design of the hybrid ferries is nearing completion, and construction on one is planned to go out to bid at the end of the year, Marine Highway director Craig Tornga said last month. Construction of the boat is estimated to take another two and a half years, according to the Marine Highway long-range plan.
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