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port report re:port – The biggest loser

The Marine Terminal

One of the questions for our Port Report series is whether fees and charges that the Port collects from users of their business services produce revenue sufficient to cover their cost.  This month’s Report will try to shed some light on that question as it relates to the Port of Olympia’s biggest business enterprise—the Marine Terminal.

One dominant client

The Marine Terminal’s main activity is exporting logs—primarily for Weyerhaeuser, but also for Port Blakely Tree Farms. The Marine Terminal occasionally has handled gold ore from Europe, windmill blades from Brazil, organic grain from Turkey and heavy-lift cargo from Asia. It sends cattle to Vietnam, and recently ended a controversial contract to import materials used in fracking. But the lion’s share of the Port’s Marine Terminal business activity derives from Weyerhaeuser and its logs.

A small port, uncertain volumes

Weyerhaeuser is the largest private owner of timberlands in North America, with earnings of almost $450 million in revenue just from its 2017 Northwest log exports. The Port’s logs are destined mostly for China, Japan and South Korea. The volume of log exports has declined ever since 2014-16; and despite a recent contract to import logs from Alaska for transport to mills in Packwood and Morton, the volume of logs moving through the Port is projected to remain flat at 2017 levels. Whether even those levels will be maintained is an open question.

Losing money on the Marine Terminal

Do the fees charged Weyerhaeuser and other exporters cover the cost of the services, equipment and facilities the Port provides? According to their 2019 budget, the answer is a resounding “no.” The chart below shows the Port’s operating revenues and operating expenses plus allocated administrative, depreciation and interest costs. The Port loses money in each area of its operation—but the Marine Terminal is by far the biggest loser, with a negative 37% margin loss over the last 3 years.

Even using the best assumptions of future revenue, the budget shows a loss of $2 million from Marine Terminal operations. Projecting $3.47 million in operating revenue in 2019, after expenses and overhead, the Marine Terminal is left with $94,000.  Include depreciation of $1.4 million on associated assets, and the Marine Terminal’s operating loss alone comes to $1.3 million in 2019.  There were similar loss figures in 2017 and 2018. (A future Report will outline additional costs associated with the adverse impacts of Weyerhaeuser’s operations on water quality in Budd Inlet.)

Investing in new equipment

But operating losses are only part of the picture. In 2018, the Port used 71.5% of its capital investment budget, totaling $1.8 million, to buy 2 log loaders for the Marine Terminal.  The Port refinanced its debt to cover the cost of the loaders, on the basis that they would improve productivity.  Instead, the loaders were actually used only 78 hours in 2018—far short of the 205 hours projected by advocates of the purchase.

Interest and depreciation associated with equipment purchased for the terminal, including the log loaders, amounts to $819,000 for 2019, which brings the Port’s loss attributable to the Marine Terminal to a hefty $2.13 million.

Who makes up for the losses?

The Washington Public Ports Association describes ports as “a public entity with a profit motive.” Ports are not required to turn a profit, but their “primary goal is economic development for its community with the end result of job creation.“ They are permitted to tax residents because their investments are supposed to benefit the larger community. The Port’s Marine Terminal losses of $2.13 million, in combination with losses in every other budget category, are covered by an annual contribution of $6.28 million in property taxes collected from the residents of Thurston County. The Port of Olympia’s tax levy accounts for more than 50% of its annual operating revenues of $11.4 million. This is far in excess of the usual 19% found at the top 15 Washington ports. So we ask: is there a benefit to the larger community commensurate with this subsidy?

It worked in the 1980s

Two Port Commissioners, McGregor and Downing, assert that Marine Terminal clients fully pay their way for Port services and provide enough revenue to turn a profit for the Port and Thurston County. (They would like to exclude depreciation from the calculation of operating revenue.) They defend the purchase of log loaders for Weyerhaeuser, claiming that the equipment will pay for itself over the next 20 years. They point to Port literature that describes a “multiplier effect” that produces business activity supporting “nearly 5,000 family-wage jobs +$100 million in wages+$20 million in local tax revenue.”

But even if it the Port were to ignore good accounting practices, the cash outlay for interest on Marine Terminal equipment still wipes out the income earned. And the prognosis for log exports indicates that new loaders are more likely to sit idle on the dock than to “pay for themselves.”

A third Commissioner, EJ Zita, has questioned the expenses associated with the Marine Terminal. She believes the port has a fiduciary duty to ensure public assets benefit the common good above private interests’ and has advocated for reviewing rates and charges at the Marine Terminal. The accuracy of the “multiplier effect” on job creation has also been questioned, among other reasons, it includes employees of leased properties in its calculations.

Taking up tough challenges

Commissioner Zita has also asked for an independent financial consultant to strategize how the Port could get a good return on investment to the public, including identifying new opportunities that would offer good wages while adding jobs through such options as incubator hubs, food hubs and light industrial activities, for example. Given the persistent steep losses on the Marine Terminal business and the uncertain future of log exports, the Port could benefit from such an analysis. The Port’s own Vision 2050 survey suggests possible new investments for the common good.

Environmental concerns topped the list with 84% of respondents wanting the Port to sustain legacy pollution clean-up projects in Budd Inlet. Other high priorities selected were 1) working with the City of Olympia to create a more welcoming downtown, 2) adding amenities and access along the waterfront, 3) pursuing green energy production alternatives,  4) supporting family wage jobs, 5) exploring ferry, water taxi service and regional air commuter service, and 6) providing transparency in budget planning.

Maintaining the Marine Terminal cargo functions and looking for ways to leverage more tax levies garnered the least support in the survey.

Esther Kronenberg is a member of the Observer Corps of the League of Women Voters of Thurston County.

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