Legislature(1995 - 1996)

04/28/1995 03:15 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
 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.                                                                    
                                                                               

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