Washington State Ferries 2015-17 Projected Budget Shortfall Ferries Operating Program (Program X) July 13, 2016 DRAFT FOR INTERNAL DISCUSSION ONLY Issue The program’s expenditures are currently exceeding the available budget. Washington State Ferries (WSF) has taken a number of actions to mitigate the shortfall but, even with these actions, the gap in available state appropriation authority is projected to be up to $4.8 million for the biennium. The projection is based on a review of FY16 expenditures, projected to be up to $3.0 million over budget, and an estimate of FY17 expenditures which are projected to be up to $1.8 million over budget. This paper provides background on the budget, information about the major contributors to the shortfall, the actions taken to-date, and discussion of how to address the shortfall. Background The enacted WSF operating budget of $484,348,000 includes $478,319,000 in state spending authority; $5,908,000 federal; and $121,000 local. The $5.9 million in federal authority was newly appropriated in the 2016 session with the understanding that certain vessel maintenance costs would be eligible to be covered with Federal Transit Administration (FTA) funds. Of the state authority, $78,306,000 is solely for fuel, by proviso, so any under-expenditures in costs due to lower-than-forecasted per-gallon prices or consumption savings cannot be used to balance other state overruns without legislative action. The remaining approximately $400 million in state funds is the focus of this briefing. Ferries-Operating: Enacted Budget State Funds • Dollars in Thousands Ferry Operations & Maintenance Ferry Vessel Operating Fuel Total State Operating Appropriation 2015-17 400,013 78,306 $478,319 At the outset of the 2015-17 biennium, there were several areas of particular budget concern in Program X and for which the department requested adjustments in the 2016 supplemental. Some, but not all, of the budget requests were approved. 1 Budget Items Requested but Not Received: (Dollars in Thousands) WSF Move/Remodel Cost Recovery Reservation System Operations Retain an E-State Class Vessel as Standby Retain Second E-State Class Vessel through mid-Nov. 2015 Passenger Counting Agency Governor's Enacted Request Budget Budget 848 848 0 1,151 751 400 1,591 809 809 652 0 0 2,422 0 0 6,664 2,408 1,209 Enacted v. Agency Request (848) (751) (782) (652) (2,422) (5,455) In addition to the requested, but not approved, budget relief, several other variables have contributed to the current projected shortfall. These include an extraordinary number of emergency repairs during the first months of the biennium, resulting in a ripple effect on the operating side due to the costs of moving boats, paying additional labor, and travel costs. These costs are difficult to capture due to the resulting cascade of boat moves among routes that occurs every time a vessel requires unplanned maintenance and repairs. We have no reason to believe this level of unplanned maintenance will not continue for the remainder of the biennium. If a similar level of emergency repairs and associated boat moves continues in the second half of the biennium, the projected shortfall will be greater than the current estimate. In addition, there have been challenges accessing the federal FTA funds that were expected to help cover vessel maintenance costs. In FY 2016 there was maintenance activity on at least four vessels where federal funding was assumed but was not available and this contributed to FY 2016 overruns in state funds. Federal funding is available and is planned to be used in FY 2017. The availability of federal funds will reduce pressure on the vessel maintenance budget and will help cover costs for maintenance that is not part of the base vessel maintenance budget. What Has Been Done So Far WSF has taken a number of actions to mitigate the shortfall: 1) Move/remodel costs. The program, at the direction of OFM and the Legislature, consolidated office space in downtown Seattle – which reduced space and resulted in ongoing lease cost savings. In so doing, costs were incurred to pay for the associated reconfiguration and remodel. The department requested the first biennium’s savings be retained to pay the ~$2 million in costs. The enacted budget provided the capital dollars but not the $848,000 in operating. As a result, the program has charged the $848,000 to the capital budget as well (since they are facilities’ costs). 2) Passenger counting. When the Governor’s budget staff indicated there would not be support for this expenditure, the Assistant Secretary dismantled the additional activity – thus minimizing the 2015-17 unfunded expenditure. 3) Summer schedule delay. WSF decided in May to delay the start of the summer 2017 schedule by two weeks. This means it will take effect on June 25th instead of June 11th. This primarily impacts the San Juan Islands, Sidney and Vashon Island routes and will save a total of $186,000 in non-fuel deck labor and terminal contract staff. 4) A number of administrative reductions were put into place in January 2015 that are expected to yield the following savings: 2 Reduce set-aside budget in CEO/Finance Director areas Reduce terminal maintenance budget Close sundeck on MV Samish* Assumed credit card savings Reduce printing budgets Eliminate Senior Shoreside Manager position Reduce advertising and marketing budget Reduce Director of Operations areas Reduce training budget to all but critical requirements Reduce consultant budget (Planning Department) FY16 200 145 0 113 72 29 70 68 0 25 722 FY17 200 145 286 113 100 136 0 68 550 25 1,623 2015-17 400 290 286 226 172 165 70 136 550 50 2,345 Options for Addressing the Remaining Shortfall This is a serious situation. WSF does not have the budget to sustain the operating program through the end of the biennium and deliver the services that the Governor, legislature and public expect. Any of our available options have political and public consequences. The options outlined below can be taken independently or in combination with one another. Make reductions necessary to stay within the enacted budget and make further reductions to address shortfall this biennium Reduction Suspend vehicle reservations as of Jan. 7, 2017 for Winter 2017 and Spring 2017 seasons Amount Notes (estimate) in 1000s 662 Reservations would resume at the beginning of the summer 2017 season (June 25) Considerations/Consequences    3 Likely push back from the communities, particularly in Spring 2017 when ridership begins to increase and we see longer lines at the tollbooth. We will experience call center challenges when we ramp up and ramp down and call center volumes would likely spike due to public confusion about not knowing how to plan their travel.. So many changes could result in confusion for our terminal staff and Reduce terminal maintenance budget by deferring Kingston Slip 1 scour repair 100 This area already reduced by 145K in FY 17 Defer WSF Long-Range Plan update In Process The Long Range Plan, and associated public process, is an expensive undertaking including the hiring of consultants, public outreach which estimated to cost at least $300,000, and printing materials, etc. 10% non-labor reduction In Process In Process customers in understanding the use of the reservation system and when we are/are not taking reservations.  Some IT functionality may be negatively impacted resulting in poor implementation during the summer season.  Likely widespread of public and political criticism that a program that has proven to be successful and has increased ridership has been cut. We are continuing to monitor the Kingston terminal. The risk of reducing budget is that the scope of this project has not been fully defined.  WSF’s last long-range plan was completed in 2009; deferring an update opens us up to criticism that we’re operating without a plan. We could develop a “bridging” document in the interim until we have funds to develop the full plan.  Would not provide the justification and context needed for the next new vessel replacement program for decommissioning the Super class Further constrains WSF in delivering safe, reliable, and customer-oriented service. Service reduction scenarios Reducing service is another way to reduce operating costs. The service that WSF currently provides was budgeted by the legislature for the 15-17 biennium with the goal of maintaining existing service 4 levels. The following potential service reductions are targeted towards sailings with low ridership and/or routes with lower than average farebox recovery. Cutting highly utilized sailings would impact more riders and offset any cost savings with fare revenue loss. Timing of Service Reductions The public outreach process for major service changes must start several months ahead of a seasonal schedule change period. The 2016 fall schedule, which runs from mid-September to the first week of January 2017, is complete. It has already been input into the reservation system and we will begin accepting fall reservations on July 18; the printed schedules have gone to the printer for publication. The next two schedule change opportunities are January 8, 2017 for the winter schedule, and April 2, 2017 for spring. Season Winter 2017 Spring 2017 Period of savings in 15-17 biennium Six months Three months Timeline for start of public process September 2016 December 2016 Approach The first approach to reducing service is to trim service hours on routes, targeting lighter used sailings. This results in fuel and deck crew savings, but not any savings on engine room crew. These typically target lighter used sailings in the evening/nighttime or mid-day periods. Scenarios 1, 2 and 3 are in this category. More significant savings can be achieved by removing a vessel from service, as that can eliminate the engine room. This, however, results in more severe service impacts. Scenarios 4, 5 and 6 are in the latter category. SIX - MONTH SERVICE REDUCTIONS PLAN Start Process – early August Public outreach - September Service Related Reductions Net Savings Cumulative Savings 1) Eliminate late night service at Mukilteo (4-hour reduction) #1 boat starts at Clinton instead of Mukilteo (422,548) 2) Reduce Point Defiance-Tahlequah route (2-hour reduction) 18-hour boat to 16-hour boat (108,451) 3) Mid-day tie up at Bremerton (2-hour reduction) (405,330) (936,329) 4) Reduce Fauntleroy route to 2-boat service (348,190) (1,284,519) 5) Decrew Sealth engine room (925,640) (2,210,159) 6) Eliminate 2nd boat at Port Townsend spring shoulder (224,804) (2,434,964) 5 (422,548) (530,999) THREE - MONTH SERVICE REDUCTIONS PLAN Start Process – mid November Public outreach - December Service Related Reductions Net Savings Cumulative Savings 1) Eliminate late night service at Mukilteo (4-hour reduction) #1 boat starts at Clinton instead of Mukilteo (211,274) (211,274) 2) Reduce Point Defiance-Tahlequah route (2-hour reduction) 18-hour boat to 16-hour boat (54,226) (265,500) 3) Mid-day tie up at Bremerton (2-hour reduction) (202,665) (468,165) 4) Reduce Fauntleroy route to 2-boat service (174,095) (642,260) 5) Decrew Sealth engine room (462,820) (1,105,080) 6) Eliminate 2nd boat at Port Townsend spring shoulder (224,804) (1,329,884) Next Steps Once the department has determined which reductions to pursue and confirmed the expected savings, the next step is to develop a request for budget relief to pursue in the next legislative session. Examples for areas where WSF could seek additional funds include:   Funds for the vehicle reservations program uninterrupted and without major policy changes. Ask the legislature to allow fuel savings to offset the funding shortfall in Program X Additionally, several policy issues may need to be addressed once cuts are selected. Delaying the update of the Long Range Plan will require communications with the Ferry Advisory Committees, the Transportation Commission, and likely the legislature. Adoption of a service reduction option by the legislature is needed before Ferries can realize cost savings or implement staffing cuts. Seasonal elimination of the reservation system is a policy issue that needs to be supported by the legislature. I don’t believe the funding level the legislature provided anticipated disruption to the system. Change in the operating policies associated with the reservation system may not require legislative action, but clearly we would need buy-in by the Department and Governor’s Office before we initiate any outreach. A change in the three tier release as currently configured in the reservation system would be met by significant opposition from San Juan Islands. A more detailed financial analysis is necessary on the proposed reductions selected before we finalize a specific savings number so clear direction is needed by the Department so I can instruct staff on the priority work needed to develop a final budget cut plan. 6