Whittling Down Washington State Ferries Or, How to Stop Flushing Taxpayers' Dollars into the Sound

Prepared by Jeff Hanson, Research Analyst

In its 1996-97 fiscal year audit of the Department of Transportation, the State Auditor's Office included three findings critical of Washington State Ferries (WSF). Ferry Director Paul Green told the Seattle P-I that his agency has improved since the 1993-94 audit, which included nine WSF findings. "We're whittling down these failures," Green boasted. (For those of you scoring at home, on page four we have provided a box score covering the last six audits. Consider that the nine findings of the 1993-94 audit followed the previous year's three findings. Should we have confidence that next year's audit will not similarly balloon from three to nine? It should also be noted that WSF's streak of poor control over fare collection stretches back eight years. Please, doesn't a mercy rule kick in soon?)

Let's face it, WSF is in many ways a failure. It may be a failure by design (because of state policies), but it is a failure nonetheless. Even leaving aside the ever-recurring front page WSF debacles, the ferry system fails because it relies heavily on taxpayer subsidies, yet has fought vigorously to prevent private ferry operators from taking over its current and planned passenger-only ferry routes, which are subsidized 85 percent and up. WSF is also rife with internal subsidies (from one ferry user to another), despite the fact that fare collection permits equitable, "pay-as-you-go" pricing in a way that current highway user fees do not.

On the bright side, a failure by design is easily corrected; no time need be wasted searching for intricate causes. Our state's policy makers are free to confront this particular policy of failure. Instead of muscling out the private sector and building four new passenger- only ferries, the state should eliminate the external and internal subsidies of the ferry system and should actively solicit private-sector participation.

Subsidies, Both External and Internal

WSF defenders justify the system's overall 30-plus percent rider subsidy (which does not include the additional subsidy of vessel or terminal capital costs) by proclaiming that the ferry system is transit. State law, in fact, declares that WSF is "a public mass transportation system." The attitude among ferry planners seems to be, "Hey, let's call it transit; that way we're supposed to be inefficient." Of course, the failures of transit ought to be eliminated, not emulated. There is no reason why Washington's taxpayers should be saddled with the annual ferry subsidies listed in the table below.

WSF System Subsidies	FY 93	FY 94	FY 95	FY 96	FY 97
Revenue minus expenses	-$38,396, 369	-$39,788, 384	-$32,595, 816	-$37,451, 151	-$41,643, 388
% Subsidy	35.9%	35.7%	29.0%	31.9%	33.8%

One reason WSF is inefficient and at times overcrowded is its fare structure, which is neither equitable nor rational. Currently, a trip on a ferry costs the same no matter what time of day, whether it's a peak commuter run or a sparsely-crowed off-peak run. Without varying fares based on the level of demand, some ferry users are forced to subsidize the trips of other users (to say nothing of the overall state subsidy). How do you know a subsidy when you see it? Each time a ferry leaves a queue of cars or foot passengers behind at the terminal, you can be certain that fares fall below the market value of the trip. Of those riders left behind, those who place a high value on their time would surely pay higher fares to secure a place on the departing ferry. By pricing high-demand runs too low, WSF loses revenue and exacerbates overcrowding (by failing to discourage those with flexible schedules to shift to lower- demand runs). Take the example of movie matinee pricing. Reflecting their low demand, tickets for matinees are priced lower to entice those with flexible schedules and a willingness to spend a couple of afternoon hours indoors.

Ferry users, then, have their fares subsidized by non-ferry users; and it is generally true that non- commuting ferry users subsidize ferry commuters. (To be fair, subsidies are also prevalent across and within different highway vehicle classes: cars subsidize trucks; non-commuter cars subsidize commuters; and trucks with light axle weight subsidize those with heavy axle weight. A comprehensive and equitable transportation solution requires these subsidies to be minimized as well.) By varying fares with demand and by eliminating the 30 percent state subsidy, ferry users will pay the appropriate market price and another $40 million per year (the 1996-97 subsidy) will be available for needed highway projects.

The Private Sector Versus the Sanctity of the Ferry Planning Process

Despite a legislative mandate to coordinate its planning with private ferries (RCW 47.06.050), WSF has done next to nothing to identify a role for the private sector. In fact, WSF actively fought a 1996 private-sector proposal to provide passenger-only service on an existing WSF route (Seattle- Bremerton) and a Seattle-Suquamish route (near a planned WSF Seattle-Kingston route). Despite requiring no state subsidy, the private proposal offered a quite reasonable fare ($5 round trip versus the WSF regular fare of $3.50, with its operations and capital subsidy). The proposal, however, required a waiver from the Washington Utilities and Transportation Commission (WUTC). Citing limits to its statutory authority, the WUTC rejected the waiver application. Whether or not the commission's decision was proper is debatable; so too is the question of whether or not the haphazard waiver application process is an acceptable way to "solicit" private-sector proposals. Nevertheless, it is disappointing that WSF fought so vigorously against the proposal; it is inexcusable that the experience did not motivate WSF and other ferry planners to reevaluate their future plans in light of serious private- sector interest.

In its ruling, the WUTC stated that, in addition to limits to its authority, the waiver was rejected because it would impose "substantial detriment on the Washington State Ferries through the disruption of its planning process." The perceived sanctity of the ferry system's plans is also evident in WSF Deputy Director Terry McCarthy's testimony before the WUTC. Private ferry service, he said, "should not be in the core cross-Sound routes which are already served or are planned to be served by WSF as part of its integrated service plan" (emphasis added). Well, we would sure hate to see the public interest intrude on the ferry planning process. In addition to rejecting the notion that there are core routes which are the exclusive domain of WSF regardless of the attractiveness of private-sector alternatives, we find the exclusion of private ferry operators from planned WSF routes to be especially senseless. Why barge ahead with four new passenger-only ferries, at $11.4 million apiece, and $67.8 million worth of terminal construction (not to mention interest on bonds) without actively soliciting private-sector, non-subsidized proposals?

A Solution: Whittling Down Washington State Ferries

Confronting the failures of the state ferry system will require grappling with entrenched, yet misguided state policies. If we are in the midst of a transportation crisis, as seems to be the conventional wisdom, then bold action is required. Comprehensive reform of Washington's transportation system is needed, both on the expenditure side and the revenue side. Elements of reform relating to WSF are listed below.

1. Improve efficiency of WSF. Ferry users deserve the assurance that their fare revenues are being used efficiently. The recommendations of the forthcoming performance audit report should be implemented, as appropriate.

2. Eliminate subsidies, both external and internal. The 30-plus percent state subsidy of WSF operations should be eliminated. Highway subsidies should also be identified and eliminated. Their identification will require the state to conduct a Cost Allocation Study or Cost Responsibility Study (it's been 20 years since Washington last conducted such a study).

3. Vary ferry fares with demand. Eliminating internal subsidies requires fares to conform with their market value. High demand ferry runs (yes, commuter runs) call for higher priced fares.

4. Actively solicit private-sector proposals. WSF and other ferry planners, with an obligation to serve the public interest, should incorporate private-sector alternatives in their planning. Proposals for private ferry service should be actively solicited (for both planned and existing WSF routes) and accepted in those cases where the public interest (as opposed to WSF's interest) is better served by the private sector. If existing WSF routes are replaced with private-sector service, then the state could redirect existing vessels to routes that lack private-sector proposals.

5. No new capital projects until other options exhausted. No new capital projects (vessels or terminals) should be approved unless no acceptable private-sector proposals are offered and no vessels can be shifted from newly-privatized routes.

Whittling down Washington State Ferries and embracing private-sector options will result in a more efficient, more equitable ferry system. By minimizing both ferry and highway subsidies, introducing private-sector competition and improving WSF efficiency, ferry users may find that, on balance, they receive a better service for a comparable price (some individual ferry users will pay more, some less). And Washington state will have more transportation dollars available for other worthy transportation needs.

Annual Audit Findings, WSF	FY 1992	FY 1993	FY 1994	FY 1995	FY 1996	FY 1997
Should Improve internal controls over ticket sales and revenue collection at terminals	X	X	X	X	X	X
Should improve controls over cash receipts and accounts receivable	X	-	X	-	-	-
Should reconcile cash accounts on a timely basis	X	-	-	-	-	-
Should rescind ferry passes issue to merit system employee spouses, dependents and retirees	-	X	-	-	-	-
Should implement controls to ensure the accurate and timely transfer of financial information from the transportation accounting information system to statewide reporting system	-	X	-	-	-	-
Should report suspected losses of public funds to the appropriate agencies	-	-	X	X	-	-
Should pay wages only for actual time worked	-	-	X	X	-	-
Should strengthen internal controls over payroll	-	-	X	X	X	-
Should obtain sufficient documentation before paying vehicle mileage expenses	-	-	X	X	X	-
Should ensure proper segregation of duties in the accounts payable department	-	-	X	-	-	-
Should pay vendors promptly	-	-	X	X	X	X
Need to improve internal controls and accountability of fixed assets and consumable inventory	-	-	X	-	-	-
Should improve internal controls over acceptance of checks for vessel fares	-	-	-	X	-	-
Vessel Engineering Department should comply with purchasing laws and regulations	-	-	-	X	X	-
Should improve internal controls over timekeeping	-	-	-	-	-	X

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org