Matanuska-Susitna Borough officials are prepping for negotiations with the U.S. Transportation Department to resolve $12.3 million the borough owes the feds for its failed ferry plan.

In all, the Mat-Su Borough received $21.2 million from the Federal Transit Administration from three grants awarded between 2002 and 2009 to jumpstart ferry service across Knik Arm between Port MacKenzie and Anchorage.

Mat-Su Manager John Moosey said at a special Aug. 21 assembly meeting that he discussed the bind the borough is in with Transportation Secretary Anthony Foxx in person when Foxx visited Alaska in early August. He said Foxx invited borough officials to meet with DOT leadership in Washington, D.C., in the coming weeks to negotiate a settlement.

Of the $12.3 million the borough spent on the project, $3.6 million was on a passenger terminal at Port MacKenzie and other funds were used to help pay for construction and outfitting of the 195-foot Susitna, which was turned over to the borough shortly after construction.

The U.S. Navy footed most of the $78 million bill for the Susitna, a prototype military landing craft.

Assemblyman Jim Sykes said in an interview that borough leaders discussed possible legal solutions to try and force a settlement during an executive session Aug. 12, but largely figured challenging the federal government would be a losing battle.

Mat-Su attorney Nicholas Spiropoulos said the current Sept. 5 deadline for payment stands in the way of negotiations.

“One of the first things we’re going to address (with FTA) is we need an extension to have a dialogue,” Spiropoulos said.

If the borough ends up paying an interest penalty, it would likely be between 1 percent and 3 percent, depending on applicable market rates. Multiple borough officials have reiterated that they are hopeful a settlement without a penalty can be agreed upon.

In the past, some Mat-Su officials said the project fell apart because it was determined the Susitna’s several hundred thousand dollar per month operating bill was unsustainable. Recently, the Municipality of Anchorage’s reluctance to commit to a ferry terminal has been blamed for killing the plan.

Mat-Su Assemblyman Steve Colligan said at the Aug. 21 meeting that when Anchorage pulled out of the ferry development under then mayor-turned Sen. Mark Begich, “We had one hand clapping in that relationship.”

On Aug. 5, acting FTA Administrator Therese McMillan sent a letter to Moosey demanding payback of the money within 30 days or the borough would face penalties, including possible garnishment of other federal appropriations.

McMillan wrote that she regrets the fact that the borough has not been able to find a use for the Susitna or a qualified public entity to take the vessel, which could absolve the borough of its debt.

However, “FTA has no legal authority to unilaterally waive the debt and is required to begin the collection process,” she wrote.

Colligan noted that he and other Mat-Su officials traveled to Washington, D.C., last year and requested the demand letter — necessary for a resolution to be reached, he said.

If the borough were to find a private buyer for the Susitna, it would have to repay at least a portion of the $12.3 million it spent.

The borough has rejected private bids of up to $2 million.

The Philippine Navy was scheduled to inspect the Susitna — docked in Ketchikan — Aug. 27-28, according to a borough release.

Assemblyman Darcie Salmon said representatives of the Knik Tribal Council approached him Aug. 20 with interest in the Susitna.

Knik Tribal Council leadership could not be reached for comment regarding the ferry.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.