Legislature(1995 - 1996)
04/28/1995 03:15 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 284 - AK COMMERCIAL FISHING & AGRICULTURE BANK CHAIRMAN KOTT announced HB 284, "An Act relating to the Alaska Commercial Fishing and Agriculture Bank," was before the committee. CHERYL SUTTON, Administrative Assistant to Representative Carl E. Moses, came forward to explain the bill. She said the bill was sponsored by the House Special Committee on Fisheries. Ms. Sutton said the committee packets include sectional summaries from Legislative Legal Services and Alaska Commercial Fishing & Agriculture Bank (CFAB). She noted CFAB did an excellent job of doing cross references to the sections of the statute and the sections of the bill. In addition, there is a sponsor statement, two zero fiscal notes and numerous letters of support. She said she would like to add that the numerous letters of support, it does not represent a small portion of the numbers of letters that have been sent to Representative Austerman in support of the bill. MS. SUTTON explained HB 284 seeks to modify and refit CFAB's enabling statute to reflect the evolving commercial law and the present day fishing economy's needs. CFAB was created in 1978 and much has changed in both commercial law and the fishing economy since that time. There are two significant changes that would be enacted with the passage of HB 284. First, is permanent ownership by the state through retirement of all but $1 million of the state's initial investment of $32 million. Second, the broadening of the purposes and circumstances for which a fisherman may use his limited entry permit as collateral. The intent of the changes is to make CFAB's loan program more compatible with the needs of the seafood industry. She noted Ed Crane, President, CFAB, is in attendance to offer testimony and answer technical questions. Ms. Sutton said it is an 18-page bill and appears to be very intimidating, but it is not. Number 500 ED CRANE, PRESIDENT, CFAB, said as Ms. Sutton indicated CFAB was an effort of the 1978 legislature to approach a form of privatization of financing of the seafood and agriculture industries and Alaska. The concept was one which was an effort to replicate institutions in what is known as a federal farm credit system in the Lower 48. It was essentially to create a private financing cooperative which would serve only Alaska residents and companies, in which ultimately would become self- sustaining. The state of Alaska invested initially $32 million as seed capital so that this new institution would have equity. Over the years, CFAB on the strength and with the use of that equity has borrowed consistently. They borrow from an institution called "A Bank For Cooperatives" located in Denver, to the point where they have at times had over $100 million of loans outstanding even though there has never been more than $32 million of state capital. In total over the years, they have made over $600 million in loan advances. The theory was that over time, the equity owned by borrowing members would be accumulated and replace the state's equity. Mr. Crane said when you become a borrower, you must buy stock in CFAB. They do business only with stockholders and every customer must become a stockholder. Mr. Crane said as of today, they have a little over $17 million of money that has been invested by the borrowing members. MR. CRANE said another part of the concept is embodied in the existing statute which said that by the year 2000 or within 20 years of the state's initial investment, which took place in 1980, CFAB must retire or repurchase that stock from the state, the entire $32 million. As of today, they have retired $22 million of it and there is still $10 million left and five years to do it in. MR. CRANE said the most significant thing the bill does is to modify that requirement so that CFAB will only retire $31 million of the total $32 million. He said $1 million of state capital will remain as permanent equity. CFAB will survive with the $1 million of state capital in addition to whatever member capital is acquired. Mr. Crane said there was a reasons for that. One is there is an unintended anomaly in the original statute which says that when the entire $32 million is retired, the statute lapses. If the statute lapses, there is no CFAB. MR. CRANE explained the other more significant thing is a large part of CFAB's service to commercial fishermen and the needs of commercial fishermen is premised on the fact that CFAB is the only private lender which has the statutory authority to take a lien on limited entry permits. No other lender, other than the state's own fishing loan program, can do that. Because limited entry permits are such a significant part of any fisherman's capitalization, it is an increasingly important part of CFAB's business, as they finance for new permits and use permits as collateral for loans for other purposes. In an effort to maintain that special status, CFAB believes it is important to continue the relationship of the state as an owner with CFAB, which in turn rationalizes not only that special status but the other points of relationship between CFAB and the state. MR. CRANE explained the other points of relationship is the legislature does have, both under the existing statute and the proposed revision, the authority to direct the legislative auditor to make any sort of audit on CFAB which it chooses. It was done several years ago. In addition to that, state bank examiners in the Department of Commerce and Economic Development examine CFAB each year. It is recorded and submitted to the legislature and the Administration. Mr. Crane explained the legislative auditor has access to CFAB's independent outside auditors. Finally, the Governor of Alaska appoints two of CFAB's seven directors. The other five are elected from among the borrowing members. MR. CRANE said CFAB is strange in structure. He noted the state Supreme Court has on occasion commented in effect that CFAB is a little bit further removed from the state than the Alaska Railroad and some other institutions. MR. CRANE said the change he referred to is in Section 9 of the bill, which is somewhat convoluted language. It does not specifically mention $32 million, but what it does say is that it continues to require CFAB to repurchase all the shares of the stock owned by the state except for $1 million, whatever amount exceeds $1 million. MR. CRANE explained the remainder of the bill is essentially a revision of CFAB's statute, 44.81. He said there is much that wasn't changed. He referred to Sections 10 through 26 and said they relate to the experience CFAB has had over the past 15 years, and some of the inconsistencies and gaps that they have encountered in the existing statute. There is also some conformity with some of the ways fishing economics have changed and the variety of laws affecting commercial lenders. Mr. Crane said there are broader powers in respect to permit financing and that is found in Section 20. He said he would be happy to answer questions. Number 630 REPRESENTATIVE PORTER asked if CFAB is the entity that makes the agriculture loans also. MR. CRANE indicated it was. He noted in practice, and if you exclude the certain kinds of timber loans that we classify as agriculture, they do very little in the way of farm loans. He said he believes they only have one loan on the books. CHAIRMAN KOTT asked Mr. Crane what CFAB's relationship is with the federal farm credit system. MR. CRANE said CFAB is a borrower of what is called the National Bank for Cooperatives, which is one of the institutions of the federal farm credit system. He noted there is a variety of institutions in that system and each of them have undergone quite a few changes over the last few years. TAPE 95-51, SIDE A Number 001 REPRESENTATIVE ELTON said, "...substantive change I wanted to note for the other committee members and one that I thought a lot about and we had some discussion on it in the previous committee was there is an expansion of power for CFAB into getting into -- I hesitate to use the word `venture capital' because it's not -- it allows the bank to acquire an equity interest in businesses or enterprises that will advance commercial fishing and agriculture in the state. At first I was a little bit bothered by that but the more I think about it, I think the better I feel about it. I think the bank has an extensive history, especially over the last eight or nine years, and has demonstrated that they have the ability to do that kind of stuff, and frankly, I think it is probably good for those two economic sectors. So, I have no problems with it and I'm prepared to move the bill with individual recommendations if there are no further questions." Number 022 REPRESENTATIVE PORTER asked if the eventual goal is to devest that interest. REPRESENTATIVE ELTON said that is probably the goal. He gave an example of the bank foreclosing on a fish cannery and not having the ability to operate that cannery. He said that is one provision that he isn't sure how it evolved. The second provision does allow them to acquire equity interest. Representative Elton said he would guess that the best picture would be a business decision made by his board of directors. MR. CRANE said what Representative Elton is referring to is on page 8, Section 17, subparagraph 14 which addresses subsidiaries. That is an example of the type of situation that they have run into. Several years ago, CFAB acquired, through foreclosure, a processing plant on Ugamak Bay near Kodiak Island. They could not find a buyer but found a company that wished to lease and operate it for at least a season. CFAB had a great deal of concern about exposing the total bank assets to whatever liabilities might arise from being the landlord of an operating food factory. So CFAB created a subsidiary and incorporated it under the general business statute and transferred the plant to it and passed the paperwork back and forth to try and legally insulate the bank from whatever might occur. He noted nothing did occur. CFAB's attorneys said the statute doesn't say they could have a subsidiary. The statute is one which will always be strictly interpreted that says you can do this, this, this and this. It doesn't mention that you maybe can't do that. Mr. Crane said that is the genesis of that particular paragraph. MR. CRANE said another thing the CFAB has considered, which would have relevance, is the documentation from marine mortgages and Coast Guard documentation and registration of vessels. Now there is the processing of individual fishing quotas regarding transfers and applications which are fairly technical. CFAB has developed some expertise in the area and they have thought about creating a subsidiary, at least on paper, to offer those services to commercial banks and other institutions that would have occasion to use them. MR. CRANE referred to paragraph 15 and said venture capital does seem like a much grander concept than anything they have interest in. This is inspired because quite frequently CFAB is approached by fishermen, groups of fishermen or people (indisc.) on the street who have an idea for some type of value added processing or a new product. He said there are times when it looks like there might be some potential but those ideas may not be bankable. They are not anything that would meet the standards for credit and there is a very clear and definite higher level of risk than is appropriate for a lender. CFAB has looked at many of those ideas and have thought it might be worthwhile to perhaps invest some of CFAB's money, not as a lender but with full knowledge that it is "X" dollars of capital that you're prepared to put at risk just as any venture capitalist does. The objective would be to divest it. It is purely to act as a development institution. Mr. Crane explained CFAB is not a large institution; their total footing is a little less than $40 million. He said he isn't talking about investing millions of dollars but perhaps several thousand. MR. CRANE said, "We do spend money, not a lot of money, but we do spend money each year to advertise, to support things like fishing seminars and other things that go on for commercial fishermen. We see this really as potentially another form of that. One of our directors, former Senator Eliason of Sitka, is one of CFAB's directors and he did appear before the Fisheries Committee and Representative Elton posed that question to him as to the extent the board had discussed this particular point and if the board was comfortable. I believe he was quite positive in his affirmation there." Number 166 REPRESENTATIVE KUBINA made a motion to pass HB 284 out of the House Labor and Commerce Committee with individual recommendations. REPRESENTATIVE ROKEBERG objected for the purpose of a question. He asked Mr. Crane what the equity portion of CFAB's balance sheet is. MR. CRANE said approximately $27 million to $28 million. He noted that is $10 million of state equity and a little over $17 million of members' equity. REPRESENTATIVE ROKEBERG referred to subsection 15 being the venture capital provision and asked if it was a new provision. MR. CRANE responded that is new. REPRESENTATIVE ROKEBERG asked if there have been loans against limited entry permits. MR. CRANE responded they have given loans for 15 years. REPRESENTATIVE ROKEBERG asked what kind of a loan to equity ratio they use on those types of loans. He said there is volatile pricing. MR. CRANE said there is volatile pricing and for that reason, they do not approach it in terms of loan to equity. He said their loans are based on projected cash flow and the borrower's ability to service the debt. That may mean they will lend a person 82 percent of what he is paying for the permit or they may lend 45 percent. He said they don't have a flat standard. Number 200 REPRESENTATIVE ROKEBERG withdrew his objection. Number 201 CHAIRMAN KOTT said there is a motion to move HB 284 from the House Labor and Commerce Committee with individual recommendations and a zero fiscal note. He asked if there was further objection. Hearing none, HB 284 was passed out of committee.