Legislature(1995 - 1996)
03/13/1996 03:16 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 526 - AIDEA OPERATIONS/PROJECTS/LOANS Number 931 CHAIRMAN KOTT announced the next order of business would be HB 526, "An Act relating to the financing authority, programs, operations, and projects of the Alaska Industrial Development and Export Authority; providing an exemption from the procurement code for certain projects of the authority; and providing for an effective date." GEORGE DOZIER, Committee Aid, House Labor and Commerce Committee, explained HB 526 makes a number of technical changes. Sections 2 through 4 of the bill changes the phrase "loan financed" to "loan participation purchased." The purpose of this is to make it clear that AIDEA, in the Loan Participation Program, purchases part of the loans rather than actually financing the loans. Mr. Dozier explained the bill eliminates the business assistance fund. Under current law, part of AIDEA is the business assistance fund which is used to backup loan guarantees under the Business Assistance Program. By the elimination of the business assistance fund, that would make the entire corpus available to backup business assistance guarantees. MR. DOZIER explained Section 8 increases the amount of a loan guarantee that AIDEA may make in its Business Assistance Program from $75,000 to $100,000 without collateral. Under existing law, a guarantee could be made for a loan that is not collateralized up to the amount of $75,000 provided that the loan is amortized over a period of five years or less. With this change, that amount would increase to $100,000. He explained there was another change made in Section 8. Under current law, the proceeds of a loan that has been guaranteed, under this program, must go to a business that is majority owned by Alaskans. Under the bill in Section 8, the change would be that the proceeds would only need to go to a business that benefits or is conducted in Alaska. The ownership of the business would be irrelevant. Mr. Dozier pointed out another change made in Section 8 is that under current law, AIDEA is not permitted to guarantee the interest of loans that are made by these financial institutions to third parties. With this change interest could be guaranteed. Number 1095 MR. DOZIER explained Section 15 is related to Section 8 in that it makes it clear that a previous provision of the law is repealed. The current provision is that individuals who hold debt instruments that are subject to the Loan Guarantee Program or that had been guaranteed by AIDEA, have no recourse to the assets of AIDEA beyond those assets which are designated to be in the loan assistance fund. Since the fund is repealed, there is no longer a need for this section and it no longer makes sense. MR. DOZIER informed the committee Section 16 repeals a couple of previous legislative authorizations for bonding projects. He noted one would be the bond project for the fueling facility at the Anchorage International Airport which was in the amount of $40 million. That is no longer needed as the airlines self-financed that. Another legislative authorization was for the midrix project at Point McKenzie in the amount of $50 million. That project is no longer intended to be at Point McKenzie so it is no longer necessary to have these appropriations as part of the statutes. Mr. Dozier explained another important provision in Section 16 is a repealer of the sunset provision that applies to the Business Assistance Program. That entire program will sunset in July of this year. MR. DOZIER referred to Section 17 and said it authorizes AIDEA to issue bonds for the Delong Mountain project which services the Red Dog Mine. That would be in the amount of $60 million. MR. DOZIER said Section 18 addresses the Snettisham hydroelectric project. That would be an authorization for bonding in the amount of $100 million. MR. DOZIER explained Section 19 gives an immediate effective date. Number 1243 RILEY SNELL, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce and Economic Development, was next to address HB 526. He pointed out HB 526 is very similar to HB 425, introduced by the Governor. Probably the only principle difference has to do with the absence in HB 526 of including the renewed authority to issue bonds. He said AIDEA feels that is a very important provision which needs to be added to the legislation. He said he would work with the committee to explain what the absence of that provision does to their ability to assist customers throughout the businesses in Alaska. Without that addition, there are several project financings that they would be unable to respond to. Mr. Snell said currently, they are waiting for the renewal of these powers in order to be able to assist the AMX Company in Fairbanks to do a conduit of financing for their mine. There is a provision of that project that could be done as tax exempt. He explained the Authority would act as an issuer being able to use their powers, if they were renewed, in order to obtain a lower cost financing for those items that would be eligible. MR. RILEY explained there are additional projects that are awaiting the authority to regain its powers to issue those types of bonds. One includes the Kenzington mining project and they're currently having discussions with others. In addition to being able to do what they call the conduit type financings there is also, with the absence of the renewal of these powers, the inability to participate in the ability to issue bonds for loans under the loan participation program of the Authority. The most recent project where they were able to use those powers was in the Kodiak fish mill project which included a fish mill project that was under a compliance order to clean up its operations. Many of the facets of that project were eligible for tax exempt financing and AIDEA was able to use its power to bring a lower cost of financing into that project that allowed them to have a more affordable overall total cost financing. Mr. Riley said with the one absence of that provision, which was Section 2 in HB 425, AIDEA finds that this bill satisfies the recommended changes that board of directors were recommending be taken up. Mr. Riley said he would be happy to review the specifics of the projects or provisions if the Chairman wishes. Number 1416 REPRESENTATIVE KOTT asked Mr. Riley to explain what the ramifications would be if this bill, or a similar bill, were not to pass this session. MR. RILEY said he thinks there would be a very definite impact on the business communities of the state of Alaska. As most of the business people in attendance knows, you can hardly find a bank doing business in the state of Alaska who will participate in a loan that will exceed ten years in terms. That is partly because of the FDIC regulations on how they now make banks account for their participation in lending practices. In the absence of the banks being able to do that because of closer regulations from the FDIC, these types of longer amortization schedules have fallen to the markets of pension funds, insurance companies and those types of people who have traditionally been involved in commercial real estate. As a result of a downturn in the state's economy in the mid 1980s, most of these types of lenders have fled the state. He said AIDEA represents probably the only long term lender of capital of this nature. With the way their programs work, by the bank's participation remaining at a ten year term, AIDEA will take a longer term amortization which allows the businesses in the state to actually structure financing that is affordable. Absence that type of capital market, there could be distress as to the capital gap to do certain types of commercial lending in the state. Number 1516 REPRESENTATIVE ELTON asked Mr. Snell to explain what the impact of the passage of the bill would be without the bonding provisions. MR. SNELL said he believes the answer would be very similar. With no legislation, the biggest impact would be on their inability to use their bonding powers to assist businesses in the state. Mr. Snell said if the bill were to pass without that bond, they could do certain types of lending out of their cash equity, but they would still be prohibited from probably using the lowest possible financing costs or features for certain types of projects for businesses in the state. Number 1562 REPRESENTATIVE ELTON asked the committee if it is protocol not to replicate an existing bill. He asked if there is any reason that the bonding provisions are not in HB 526. CHAIRMAN KOTT stated there are no reasons to substantiate why they are not included. He said it was basically left up to the committee to determine whether or not these particular bonding requirements should be inclusive within the bill. Chairman Kott said if it is the will of the committee to insert those further recommendations of AIDEA, he wouldn't have any heartburn. Number 1617 REPRESENTATIVE PORTER asked Mr. Snell if the sunset is the problem with the bonding in general. MR. SNELL said that is correct. He said there was a provision that was in the previous legislation of the authority that had a sunset provision. As a result of that sunset provision, which became effective on July 1, 1995, AIDEA has lost its ability to issue bonds. That is something that has been traditional. These powers have been passed through to the Authority in previous years, but there has always been a sunset provision that requires them to come before the body to get these powers renewed. Number 1673 REPRESENTATIVE PORTER asked if there was an attempt last year to extend or do away with the sunset. MR. SNELL indicated the answer is no. He said, "We did an inventory of our customers, understanding just exactly what likely was the deal flow where we would have to have the bonding (indisc.) renewed, and based upon the newness of the Administration and the fact that were told that none of our current customers that we were aware of had those projects that would be coming forth, we felt we could deal with it in this session. And as where we set today, as long as this body takes the action, then we still have all the customers in a position to where we could use these powers. Number 1724 REPRESENTATIVE ELTON offered an amendment to HB 526 that reinserts Section 2 from HB 425. It would be lines 9 through 12 on the handout the committee had just received. He said to insert that as a new Section 2 in HB 526 and then renumber the subsequent sections. CHAIRMAN KOTT said the amendment basically inserts Section 2 of the Governor's bill, HB 425. He said they would be granting AIDEA the ability to bond for projects less than $10 million without legislative approval. Number 1807 MR. SNELL pointed out that those are powers that were previously in law. CHAIRMAN KOTT asked Mr. DOZIER to come back before the committee. He said there is an opinion by counsel regarding this particular section. He then objected to the proposed amendment for the purpose of discussion. Number 1891 MR. DOZIER explained that the opinion was that the way Section of HB 425 currently reads is that there is a grant of the ability to issue bonds up the amount of $10 million without legislative oversight. A limitation on the ability to grant bonds in excess of $10 million, without legislative oversight, when the bonds are issued to assist in the financing and development projects under 44.88.172 through 177. The negative implication would be that the limitation or the requirement of legislative oversight may not apply or arguably might not apply if the intent is to issue bonds in the amount of $10 million or over for purposes not related to development projects under Sections 172 through 177. He indicated counsel has suggested that the committee should delete the language, "To assist in the financing of a development project under 44.88.172 through 44.88.177." He said it would simply read starting on line 11, "Amount greater than $10 million." REPRESENTATIVE PORTER said, "Wouldn't that generally return to where it was in the first place?" Number 1049 MR. SNELL said he thinks there is some difficulty with that language. The first concern is there are several types of programs and bonding powers within the Authority. There is a development finance program which are for the larger projects like Red Dog, Snettisham, Skagway ore terminal, Unalaska port, those types of projects that they have engaged in under what is traditionally called the "Own and Operates Projects Program." Then there are the loan participation programs where a bank will originate a loan, bring it to the Authority for their participation. He pointed out AIDEA is capped in another portion of their statues to a limit not to exceed $10 million in any participation by a bank loan. Mr. Snell said AIDEA already has the additional safeguards. He said they are ready prevented in any single loan participation of participating on their part up to anything greater than $10 million. Mr. Snell said, "Where I believe that language would run afoul of some projects that we offer assistance to businesses in the state is in what is called conduit of financing or revenue financing where the Authority's credit is not involved. It is strictly the credit of the businesses and we are just acting in the capacity of an issuer. Those would be the case in Fort Knox where there is $30 million of eligible qualifying costs under the Internal Revenue Service tax code that we can issue that do not affect, in any way, shape or form, the finances or the credit of the Authority. I believe, just listening to the language that was read, that could preclude us from acting as an issuer on behalf of businesses in the state for those types of projects without legislative approval. And these deals -- this deal flow usually come through to where the legislative body may not be in session or it could be awkward in bringing this in a bill form through that process would be my only thought at this time." Number 2205 REPRESENTATIVE PORTER said with Mr. Snell's explanation, he would presume it wouldn't be a problem if the bill were amended to say, "In an amount greater than $10 million that would affect the credit of the authority..." MR. SNELL said he believes that is correct. Number 2243 REPRESENTATIVE ROKEBERG indicated concern about cutting Legislative Budget and Audit out of the loop particularly if there is conduit financing. He said he is reluctant to jump on something like this without further review. REPRESENTATIVE PORTER referred to when AIDEA had the bonding authority and asked if this was a requirement then. MR. SNELL said they were given the $10 million and there was no restriction on what they could do under a conduit financing. It did not require further legislative oversight. REPRESENTATIVE ROKEBERG said new language is being added. REPRESENTATIVE PORTER pointed out the language being added is apparently aimed at getting us back where we were prior to the sunset. Number 2347 REPRESENTATIVE ELTON said if Representative Porter wants to put his language in the form of a motion, he would consider that a friendly amendment. REPRESENTATIVE ROKEBERG said he didn't understand. REPRESENTATIVE PORTER said he would move to amend the amendment to delete on page 1, line 11, "to assist in the financing of a development" and all of line 2, but then add words to the effect of "in an amount greater than $10 million if those bonds would affect the credit of the state of Alaska." MR. SNELL suggested that "the Authority" be inserted in place of "the state of Alaska." He noted they have independent status. REPRESENTATIVE PORTER said if those bonds would affect the credit of the Authority. REPRESENTATIVE ROKEBERG noted, for the record, that he was reading out of HB 425. REPRESENTATIVE PORTER said, "Again, for the record, the intent is to bring it back to where we were prior to July, 1995, whatever that appropriate language to do that..." [END OF TAPE...] TAPE 96-22, SIDE A Number 001 MR. SNELL said, "Representative, I believe the that the sunset provision removes the powers to do it without and then you come before them to get renewed." CHAIRMAN KOTT said currently as it stands, AIDEA has no authority to bond for any amount without coming to the legislature. MR. SNELL said other than refunding bonds, they have no ability to issue new bonds. CHAIRMAN KOTT said the question before the committee is whether or not they want to restore it to what it was July, 1995, which provided the opportunity to bond up to $10 million without legislative authority because they have sunsetted. He said that is the amendment. REPRESENTATIVE ROKEBERG said the Governor's bill did take out the accepting refunding bonds. He asked Mr. Snell if they are no longer doing refunding bonds. Number 123 MR. SNELL explained those are bonds that come due and are callable and based upon what the current interest rate environment is, a lot of time you can do what is called a "refunding bond" to lower the cost on the interest on the bonds. That then is passed to the borrowers. REPRESENTATIVE ROKEBERG said there is a lot of stuff going on in about five or six words that he is concerned about. REPRESENTATIVE PORTER asked Mr. Snell why they wanted to accept refunding bonds. MR. SNELL said it was a legal drafting issue that he believes they have the powers to do a refunding bond so that was some editing on the provisions. REPRESENTATIVE ROKEBERG said it is hard to read it out of context. Number 252 CHAIRMAN KOTT said the motion was to adopt Amendment 1 which would then read, "Without prior legislative approval, the Authority may not issue bonds greater than $10 million if those bonds would affect the credit of the authority." REPRESENTATIVE ELTON said it is important to note that this is a conceptual amendment. CHAIRMAN KOTT asked if there was objection to the amendment. Hearing none, Amendment 1 was adopted. Number 331 REPRESENTATIVE SANDERS questioned whether AIDEA is going to buy a dam and own it. MR. SNELL referred to the current owners of the Snettisham and the Eklutna hydroelectric project is owned by the Federal Alaska Power Administration. There have been ongoing discussions by our congressional delegation as well as by the state for a number of years looking at ways to transfer those projects from federal ownership back into either state or local ownership. Based on the number of years of negotiation and based on a number of memorandums of understandings that have been crafted by previous administrations, Congress finally took the action last session to transfer these projects out of federal ownership to state ownership, as it relates to Snettisham. As it relates to Eklutna to participate in utilities in the railbelt area who will be acquiring that. The purpose of that transfer, as he understands, is to get the federal government out of the energy business in Alaska. He noted this is something that has been talked about for a long time. The purpose is also to allow the local governments and the state, in the case of Snettisham, to obtain the assets to ensure stable energy rates to the consumers in these areas. Mr. Snell explained he believes, based on the negotiations that AIDEA has been involved in over the last couple of years as it relates to Snettisham, that they have structured the outline of an agreement that provides substantial comfort to AIDEA through the ability of Mr. Corbus to operate the plant and to be able to meet what has already been a 20 year history on a project that has operated. Mr. Snell said they are satisfied that there are reasonable ways of having reserves and replacement funds made available so that when you need to replace parts, that there are adequate funds to do that. This means that under a taker pay contract with the local utility, that we can stabilize the electric rates within the Juneau area. Mr. Snell indicated they take comfort in the terms of the contract that they are negotiating with Mr. Corbus. He said AIDEA feels this is an appropriate deal and one that the state should follow through with. MR. SNELL said the reason that the state must be the owner is so there is the ability to use tax exempt financing. If it is publicly owned, they have the ability to bring tax exempt financing which will lower the overall cost of the acquisition costs from the federal government to the state. He explained they fully intend and have crafted the necessary agreements to put all of the operating and maintenance responsibilities back on the local utility. Mr. Snell said AIDEA is not an operating entity. Although they have several ownerships in projects, they transfer those responsibilities directly back to the businesses that they are engaged with. Number 608 REPRESENTATIVE ROKEBERG asked if this is the only legislative oversight on the Snettisham transfer. He asked if it was contained in the bill. He asked if there is other legislation that talks about this. MR. SNELL indicated this is the only legislation that talks about the Snettisham transfer. He explained AIDEA will have all the attributes of ownership, but they will transfer the direct operating and maintenance responsibilities directly to the local utility. In addition to that, under the power sales agreement that will be drafted, it will be a take or pay contract with the local utility, which they are obligated to make payments to the state under nearly and most all conditions. Number 753 REPRESENTATIVE ROKEBERG said he would like to have a background of understanding of what the changes are in what is called the participation purchase or the business assistance loan program. He said several pages of the bill are apparently AIDEA's recommendations for changing that program and rising the level up to $100,000 from $75,000. Representative Rokeberg asked when this provision was put in AIDEA's authority. MR. SNELL explained he believes the program was adopted and brought forth under the authority's umbrella in the mid 1980s. REPRESENTATIVE ROKEBERG asked how many loans the Authority has actually made. He said it was his understanding that there wasn't too many. MR. SNELL explained it has never been overly active because there have been companion type programs at the federal government level, predominately the SBA Program which is very similar in structure in providing guarantees to the banks on (indisc.). To date, he believes they have $2.8 million committed under this program. He noted they also currently have in process about another $1.7 million. Mr. Snell informed the committee they have had one default under the program and it was to the tune of $37,000. REPRESENTATIVE ROKEBERG asked Mr. Snell to walk him through the loan process. MR. SNELL explained that a borrower would not approach them directly as they do not do direct lending. They originate their loans with the bank. The bank underwrites the loan, presents their write up to the Authority, the Authority Credit Committees on the loan following their own loan officer's review and its own write up on the credit. The Credit Committee then makes a determination as to whether or not it satisfies all the requirements of credit worthiness. They will either pass to participate on the loan or they'll approve the loan and then the necessary paperwork with the bank for AIDEA's guarantee is executed. REPRESENTATIVE ROKEBERG asked what the typical loan to ratio is. MR. SNELL indicated it is about 75 percent. The bank then picks up the balance. REPRESENTATIVE ROKEBERG asked what the typical rate currently is. MR. SNELL said AIDEA's taxable rate currently is probably in the 9.2 percent range. The bank is usually prime plus something. REPRESENTATIVE ROKEBERG asked what AIDEA is selling their taxable bonds for. MR. SNELL indicated 9.25 to 9.50 depending on where the market is. He explained his actual cost of money includes necessary loan loss reserves, commitment fees and those types of things. REPRESENTATIVE ROKEBERG asked what is being done structurally. MR. SNELL explained the SBA has undergone some rather significant changes in their program. They now do not guarantee as large amount under any given loan. They've raised their fee structure to where it is not very attractive and in a lot of cases not affordable to small business in the state. He noted AIDEA has been approached by the small business community along with the banking institutions in the state asking them to modify their programs to where it is more attractive for the use by the banks and small businesses in the state. It is predominately the result of the federal government changes in the existing SBA Program. REPRESENTATIVE ROKEBERG asked what the loan to ratio would be if there was a real estate loan of $1 million. MR. SNELL explained it would be 75 percent loan to value or an appraised value on the project not to exceed 80 percent. He said if the committee were to look at AIDEA's default rate, they would agree that AIDEA probably does some of the toughest underwriting as to the loans that are brought to them. Number 1183 REPRESENTATIVE PORTER said AIDEA is going to ask the local utilities to oversee and pay the maintenance requirements for the project. MR. SNELL said from the power sales agreement, they would be responsible. REPRESENTATIVE PORTER asked if that is currently being done by the feds. MR. SNELL said it is. REPRESENTATIVE PORTER asked if it is assumed that rates are going to go up when this happens. MR. SNELL said the way the structure is set and the way that they have calculated the purchase price with the Alaska Power Administration, it is AIDEA's belief that rates will remain substantially the same. He noted any rate adjustments would have to go before the Alaska Public Utilities Commission. Number 1284 REPRESENTATIVE ROKEBERG referred to page 4, line 24, subsection (2) (c), "The authority may guarantee the payment of interest on the guaranteed portion of a loan for the time and in the manner established by the authority by regulation," and questioned the meaning. MR. SNELL explained the current program works in such a fashion that the old program of AIDEA, the existing program of AIDEA, did not guarantee interest on a loan that went into default. The new proposal, which would be adopted by regulation by the Authority, they would move forward with public hearings and adopt regulations that would allow interest payments under the guaranteed program up to a period of ninety days. He said AIDEA believes that is a prudent and reasonable time frame to allow the banker to move in and to liquidate the collateral at the point that the loan was to go into default. It is something that currently exists under the SBA Program. He indicated he would schedule time with Representative Rokeberg to review the bill. Number 1468 REPRESENTATIVE SANDERS made a motion to move HB 526, with accompanying fiscal notes and amendments. CHAIRMAN KOTT asked if there was an objection. Hearing none, CSHB 526(L&C) was moved out of the House Labor and Commerce Committee.