The Alaska Marine Highway System will apply for $161 million in federal operating assistance for calendar years 2026 and 2027, officials told a Senate finance subcommittee Tuesday.

The Federal Transit Administration released a notice of funding opportunity Monday for its rural ferry program, making $410 million available in competitive grants. The Alaska Marine Highway application would cover two years of operating costs, leaving approximately $250 million available for capital projects the department also plans to pursue.

The federal program requires ferry systems to maintain at least 75 percent of their average state funding from 2017 to 2019. Otherwise, there is no federal maximum share for operating assistance.

"FTA has committed to an expedited award," an administration official said. If the timeline follows the previous funding cycle, the department expects a grant award in late July or early September.

The application comes as the Marine Highway faces a $78 million federal revenue shortfall in its current calendar year budget. The governor's proposed budget includes a new structure that would realign appropriations with the fiscal year rather than the calendar year, creating a two-year appropriation with six months of padding on each end.

"This would allow us to swap some federal funds and AMHS revenue funds, approximately $20 million between the two appropriations," the official said. "That will essentially float the system between the time our current funds run out given the federal shortfall and the time the other award would come online."

The Alaska Marine Highway Operations Board supports the budget restructure. The change would reduce administrative burden and allow the system to request collective bargaining increases and salary adjustments aligned with legislative finance requirements.

The Marine Highway generated $37.2 million in revenues during fiscal year 2025, down from $50 million in calendar year 2024. Director Craig Toringa attributed the decline to fewer sailing days caused by extended vessel repairs.

"We had the same number of ships, we had fewer weeks of operation," Toringa said. The Kennecott was out the entire year for generator replacement. The Lakonti required three months of additional steel repairs beyond what was planned. The Tustimena stayed in the yard 30 days longer than scheduled.

The system's farebox recovery rate reached 26 percent in calendar year 2025, up from 25 percent the previous year. Ticket sales generated $31.1 million in fiscal year 2025. Stateroom sales added $3.5 million. Passenger services contributed $2.5 million.

The department plans to implement a 2.1 percent fare increase starting May 1, 2026, following a recommendation from the Alaska Marine Highway Operations Board. The increase aligns with the Consumer Price Index for all urban consumers.

The system is also pursuing immediate cost reductions to bridge the funding gap. Officials plan to dispose of the Matanuska, currently used as a hotel ship for crews in Ketchikan at a cost of $800,000 per month. Moving the Taslina to a capital project would shift crew costs away from the operating budget. Combined, the measures would save approximately $1.15 million per month.

The department completed major work on the Kennecott in 2025, replacing oversized generators that were required to be changed due to pollution concerns. The vessel, built in 1998 as a spill response ship before conversion to ferry service, had never been blasted and repainted. Crews replaced corroded steel, installed a new electrolysis system with anodes, and repainted the hull.

"We had no anodes when it came out," Toringa said. An electrolysis engineer designed a new system with bolt-on anodes that divers can replace or inspect.

The Taslina crew quarters project is ready for bid. Federal Transit Administration requirements are complete. Overhaul plans are being finalized. The department expects to release the bid package this month.

The Columbia will undergo modernization including replacement of firefighting systems, cabin upgrades, and installation of additional electrical outlets. The vessel moved 1,000 fewer cars between calendar years 2024 and 2025 compared to the previous period, but generated higher revenue because its larger car deck commands higher rates.

The Tustimena went out for bid in late January. Some bidders withdrew due to federal icebreaker and Navy landing craft projects, but the department said players remain. Bids are due in May, with possible extension if requested.

The system hired 64 employees and lost 67 in calendar year 2025, an improvement over 2023 and 2024 when retention ran around 40 percent. Collective bargaining wage adjustments helped the department hire more third mates, though the system remains short on engineers.

The department is funding scholarships for able-bodied seamen to advance to third mate and for oilers to become third assistant engineers. Three mariners are currently in each program. A new partnership with MITAGS in Seattle supports a two-year cadet program where participants earn sea time on Alaska vessels while attending school, graduating with a third mate license.

The department also implemented a pilot incentive program that pays masters and mates to ride on their time off to earn pilotage qualifications. Six masters and mates left for pilot positions last year, but officials said no openings are expected this year.

The Senate Department of Transportation Finance Subcommittee met for 25 minutes Tuesday morning. Members present included Chair Steadman and Senators Dunbar, Wolkowski, and Cronk. Senator Bjorkman arrived after the meeting began.

Senator Dunbar requested written responses on two topics: whether a labor dispute at the Ketchikan shipyard might disrupt service, and the status of the Cascade Point project following reported delays with the Army Corps of Engineers.