Economic History of Cruise Tourism in Sitka, Alaska
/I arrived in Sitka last July to work with Artchange, Inc. Soon after, the director, Ellen Frankenstein and I began work on a documentary chronicling the excitement, apprehensions and preparations underway for this year’s cruise tourist season, wherein nearly half a million passengers are slated to disembark in town. To better understand the role cruise tourism plays in Sitka’s economy, and how one can meaningfully look to the future, I decided to study the subject’s history. Accordingly, what follows is a brief economic history of cruise tourism in Sitka, from the closure of the pulp mill to the present.
In brief, this research helped understand Sitka’s challenges as a small Alaskan town, as it seeks to raise enough revenue to repair and maintain its local infrastructure at a time when the state government, otherwise an important source of financial support, can provide little to no assistance because of the downturn it suffers because of the drop in oil prices. While increased revenues from booming cruise tourism might help this predicament, cruising in Sitka has been a volatile industry prone to booms and busts. While the increased monies are surely welcome, cruise tourism is far from a panacea for Sitka’s financial predicaments.
- Atman Mehta
June 30, 1993 was the day the Alaska Pulp Corporation (APC) announced the closure of its mill in Sitka. Without any prior intimation, city officials were informed hours before the public announcement that the town’s largest employer, responsible for nearly a quarter of its employment and payroll, would cease operation in three months.
What made the closure more frightening than it might have otherwise been was its timing. Only two weeks earlier, recognising the deficits at hand, the assembly had approved a budget including a raise in electricity rates, reduced contributions to the public library (which would keep it closed for an additional day of the week), and a downsizing of the police’s drug awareness program.
Together, this risked the sort of depression familiar to small towns: wherein a departing major employer takes a lion’s share of the population, revenue, and property values with it, eliciting a prolonged downwards spiral. Ernestine Griffin, former director of the Sitka Chamber of Commerce, expressed as much: “It’s like death.”
Nevertheless, Sitka more than survived the mill’s closure. None of the feared cataclysms, of cratering property values, forsaken neighbourhoods, or mass unemployment, came to fruition. In fact, in less than a decade, most of the economic losses in terms of payroll and public revenue would disappear. But recovery from the mill’s closure was far from guaranteed; it rested on myriad contingencies.
In large part, the robust diversity of the local economy supported the town after the mill’s closure. While the mill was the preponderant employer in town, it was far from exclusive in its role. Already by 1994, healthcare, thanks to growth in both SEARHC and the community hospital, achieved a payroll of $22.6 million, substantially past the timber industry’s peak of $19 million. The seafood industry similarly grew impressively.
Another momentous source of strength was cruise tourism. In 1992, 167,000 cruise tourists visited Sitka; by 1996, the number neared 250,000. The number of tourism-related jobs in the period doubled. For an entire decade, expenditures by cruise passengers averaged a 12% year-on-year growth to reach an estimated $22 million by 1996. Not astonishingly, many major contemporary players in tourism, such as Tribal Tours, owe their origin to the few years after the pulp mill’s closure.
While this did not substitute the long-term employment the mill had provided, it put dollars in wallets, preventing a popular exodus which would surely result in immense economic affliction. For the time being, this was enough.
Yet, despite the inhibition of unmitigated disaster, Sitka’s economy was far from unimpacted. The annual payroll had dropped by more than 10%, and the city’s population, employment, and tax revenues witnessed minor declines. A locus of continuous stress was the school district, which was forced to lay-off employees and suspend the elementary swim program, among other cuts. At a public meeting held by the school-board in 1996, a parent characterised the options at hand: “Do you want to cut your hand, do you want to cut your foot off, or do you want to cut your nose?”
Simultaneously, 1996 was also the year when most federal and state relief programs would slow, if not entirely cease, and the mill’s severance package to former employees would expire, facts certain to reveal how strong Sitka’s recovery truly was.
Moreover, the state government was of little assistance to either the city or the school district, since oil production on the North Slope had peaked in 1988, and prices had barely begun to recover from the 1980s’ crash. When a delegation from the assembly travelled to the state budget session in March 1996, what they discovered in fact was a competition in austerity.
Faced with such problems, then-Mayor Pete Hallgren had a simple idea: to charge a “head tax” for each cruise passenger which arrived in Sitka, which would both help the city better service the tourists who were arriving in greater and greater numbers, and generate additional revenue for the city. In response, a spokesperson for Holland America, one of the major cruise lines visiting town, threatened that Sitka’s status as a cruise ship port was “increasingly fragile”, since a critical variable for the industry was “how it’s being treated by the community in regards to taxation.”
Sure enough, Holland America subsequently announced that it would send only half as many ships to Sitka in the following year, diverting traffic to Skagway instead because of the issuance of more Glacier Bay permits. This caused an estimated loss of $3.5 million in retail sales at a delicate time in Sitka’s post-mill recovery.
It is impossible to divine whether Holland America’s decision was in retaliation to the proposed head-tax, or a genuine business decision to offer more trips to Glacier Bay. In any case, the fact revealed the basic fragility of reliance upon cruise tourism as a major economic base: it could fall as quickly as it could rise.
If between 1992 and 1996 cruise tourism grew by 50%, between 1996 and 1997 it fell by a full 30%, from 240,000 to 178,000, almost entirely reversing gains made in previous years. The dynamic was lucidly relayed by industry officials to city leaders: “The number and visits by cruise ships to Sitka are determined by forces outside the community’s control, and there’s not much the town can do to attract more.” With no clear means of recourse, a cruise boom could quickly become a cruise bust.
While this might have thrown a wrench in Sitka’s post-mill recovery, the problem was forestalled because of entirely unrelated negotiations in Washington. In July 1996, while tensions between Hallgren and the cruise industry were growing, state senator Ted Stevens struck a deal with Bill Clinton to provide Sitka $20 million as part of an economic recovery grant, which the city eventually split into $16 million to create a revolving fund for both public and private sector loans, and the other $4 million for roads, schools and recreation.
This rescued Sitka’s economy at a fragile time. Previous years had witnessed falls in both population and sales tax revenue, which although not as precipitous as feared, might have exposed more fundamental vulnerabilities as relief programs dried up. In any case, the 1990s revealed a characteristic of cruise tourism for Sitka: volatility.
Remaining depressed until the early 2000s, cruise tourism began quickly to rise thereafter to reach its peak of 290,000 in 2008. This growth was once again brought to a halt by the year’s Great Recession. As cruise companies pared back their operations in Alaska, Sitka suffered major declines. Between 2008 and 2014, cruise tourism fell by nearly 70%, from 290,000 to 90,000. Coupled with the effects of the recession, this led to a steady decline in sales for several local industries.
Unlike the precipitous fall in cruise numbers, however, and rather remarkably, sales tax revenue only flatlined. While even conservative estimates suggested that the drop in cruise tourists augured a decline in revenue of almost a million dollars, growth in the service sector, local government, and construction made up those losses. Like 1997, the landing after a rapid decline in cruise traffic was relatively soft, on this occasion thanks to a relatively diverse economy.
Meanwhile, as Sitka’s cruise tourist numbers fell back to 1980 levels in the mid-2010s, the nature of the national economic recovery after 2008 compounded the town’s fiscal challenges. By 2015, the expansion of hydraulic fracturing – or “fracking” – to ease the earlier oil-price shock brought oil prices hurtling down from over $150 per barrel to less than $30 per barrel, resulting in a major recession for the Alaskan state. Alongside a sluggish recovery at the national level, this caused both state and federal contributions to Sitka’s budget to fall and fall.
Such reductions in governmental assistance materialised right when the bill to repair and maintain Sitka’s aging infrastructure was rapidly rising, as the tumultuous struggle to repay bonds issued to expand the Blue Lake Dam revealed. This increasingly pressured local revenue, effectively posing the question: is Sitka able to internally generate all the revenue it requires?
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The overwhelming economic challenge Sitka faces today is to somehow generate the revenues necessitated by its major infrastructure requirements, from the Green Lake Dam to the Marine Street power station. With oil production in the state in steady decline, and the federal flirtation with fiscal expansionism having all but concluded, the cavalry can hardly be relied on to save the day. The city government is left with squaring the circle of spending more towards infrastructure, keeping local utility rates and taxes low to maintain affordability, and still produced a balanced overall budget.
It is in this context in which the rise in cruise tourism ought to be evaluated. While the increased sales tax revenue is certainly welcome, it is far from a perfect resolution to local problems. Most obviously, sales tax revenue is no substitute from state or federal support for local finances. While additional monies will allow the city more fiscal latitude, it will almost certainly not cover all the investments Sitka needs to make.
Moreover, as the pandemic amply demonstrated, cruising is characteristically a volatile industry, a fact especially true for Sitka, where it has been far more fluctuant than other South-East destinations.
Such instability can cause significant financial disruptions. Once accustomed to greater revenues from more visitors, any future downfall in those numbers will bring difficult budget sessions. Already in 2021, the assembly questioned the amount it could contribute to the school district because of Canada’s ship ban.
Even if such volatility is attenuated by the long-term birthing agreement a major cruise company (Royal Caribbean) has with the Sitka Sound Cruise Terminal, the industry will not provide a comprehensive resolution to the town’s economic predicaments, primarily for two reasons.
First, even in those destinations which receive more than a million cruise tourists – like Juneau or Ketchikan – the resultant sales tax revenue hovers around four or five dollars per passenger. While this isn’t an insignificant windfall, it pales in comparison to the costs of repairing all of the town’s infrastructure. Consider that the Blue Lake Dam expansion alone ran into over $150 million.
Second, while the option of directly taxing the industry might both provide more stability and begin to meet Sitka’s infrastructure challenges, that is off the cards. Right from 1996 – when Holland America cut its stops to Sitka in half – to 2016 – when the industry association sued the city of Juneau for how it spent the state-wide head-tax –, the industry has persisted in its opposition to being taxed for any “general governmental purpose.”
The only direct tax on the industry, the state-wide CPV tax, is restricted to being expended towards the benefits of the ships or its passengers. At best, this might help offset the costs incurred by the city to service tourists, which does nothing to raise revenue to invest in other public needs. In short, Sitka might find itself in the strange position of hosting an industry with significant growth, and yet have no way to meaningfully tax it.
Nevertheless, given that other revenue streams – such as property tax –, which are both unrestricted and more stable, are non-starters due to the local cost-of-living, and in context of the “alligator” graph of rising infrastructure investments and stagnant governmental assistance, at present a growing cruise industry might be the only feasible answer to Sitka’s economic necessities, no matter how imperfect. In the management of those imperfections lies much of what is ahead.
