Legislature(1999 - 2000)
04/28/1999 01:15 PM RES
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 203 - AGRICULTURE LOANS CO-CHAIR SANDERS announced that the next item of business would be 2d Sponsor Substitute for House Bill No. 203, "An Act relating to loans from the agricultural revolving loan fund; and providing for an effective date." Number 0904 REPRESENTATIVE HARRIS, sponsor, explained that HB 203 attempts to help people in agriculture who have borrowed money from the Agricultural Revolving Loan Fund (ARLF). It would lower the ARLF interest rate from 8 percent to 5 percent, to be more in line with other lending institutions. It would also provide guidelines regarding drought affecting agriculture for three years, intended to help individuals meet their loan payment schedules. Furthermore, Section 5 provides for $50,000 loans by approval of the board. Representative Harris deferred to Pete Fellman for a more in-depth explanation. Number 1053 PETER FELLMAN, Researcher for Representative John Harris, Alaska State Legislature, came forward, noting that he lives in Delta Junction. Involved in agriculture in Alaska for 12 years, he said although agriculture hit bottom in the late 1980s, many farmers have survived. Not unlike that elsewhere in the world, agriculture in Alaska is highly volatile and subject to the climate. However, when the ARLF was instituted, some provisions in statute weren't understanding of that volatility. Therefore, this bill tries not only to bring the ARLF in line with other lending institutions, but also to make it a little more farmer-friendly. MR. FELLMAN advised members that the Farm Service Agency (FSA), a federal lending agency that has come into Alaska in the last three years, has significantly lower interest rates than the ARLF's. Consequently, many [farmers] have turned to the FSA to borrow money, both for annual operations and long-term loans. That has reduced the number of loans made by the ARLF, which may shorten the life of the fund. Mr. Fellman pointed out that the Division of Agriculture's operating funds come from the ARLF, which has a projected life of about five years. Reducing interest rates could affect that. However, if another drought is suffered in Delta Junction, or another catastrophic event wipes out a crop, the likelihood of farmers' inability to make payments would greatly increase, which could significantly shorten the life of the fund. Number 1240 MR. FELLMAN told members they are looking at a reduction to no less than a 5 percent interest rate. A provision would also raise emergency loan amounts from $25,000 to $50,000. Furthermore, there is an important provision whereby loans can be restructured. In statute now, a farmer who has a problem for up to three years can roll a loan over, although that doesn't reduce the interest rate, stop the interest or reduce the principal; after that three-year period, there are no options. In all likelihood, the state would lose that money in a bankruptcy court. What HB 203 does is make it possible that if there are three disastrous years out of five, the ARLF could restructure loans, thereby saving the state's interest in agriculture. Number 1333 REPRESENTATIVE BARNES asked what the balance is in the ARLF. MR. FELLMAN said he believes it is $5 million. REPRESENTATIVE BARNES recounted that when the Delta barley/rape seed project was first before the legislature and the ARLF was enhanced, she believes that farmers had only agricultural rights, not fee simple title to the lands. They therefore could not go to a bank to borrow money. To her recollection, Senator Lyda Green's bill had changed that, to where the land is now owned by the farmers in fee simple title. She asked if Mr. Fellman knows whether that is the case. MR. FELLMAN replied, "Somewhat." He said the changes in Lyda Green's bill, which he believes was SB 109, have not attracted commercial lenders; he knows of only one loan to date by a commercial bank, National Bank of Alaska (NBA), based on those changes. The intentions were good, he said, and it did change the agricultural designation on land. However, it also attached an agricultural covenant that still ties up many aspects of mineral rights, water rights, and so on, and also makes restrictions on buildings. It has enticed the FSA, however, by making it possible for that agency to lend money to farmers. Number 1495 REPRESENTATIVE BARNES suggested that those covenants are similar to those for any land in Alaska owned by individuals, because of inability to own the subsurface mineral rights; many subdivisions have restrictive covenants, as well. She said at her last count, investments in Delta Junction were in excess of $200 million, perhaps closer to $300 million. Furthermore, the investment in Point MacKenzie was something like $350 million. Much of that money has been lost, she stated, and she has serious concerns about all loan programs like this. She further suggested that if farmers keep going broke and declaring bankruptcy, this will have to be recapitalized in the future. She expressed concern about rewriting the program to lower the interest rate, and said these people could probably borrow money from the banks for the same amount. Number 1612 MR. FELLMAN pointed out that the ARLF has received no funding since 1988. Although the fund revolves and the payback has been good, its life has been shortened by general fund expenditures from the ARLF, not by farmers going broke. He agreed that the state lost lots of money, partly, he said, because of restrictions put on land clearing and time limits. He said it has nothing to do with the inability to grow barley in Alaska or lack of a market, because there is a market. Without the general fund expenditures from the ARLF, it would be solvent and last indefinitely, he concluded. REPRESENTATIVE BARNES said that begs the fact of what has been put into the fund through the years. She asserted that the barley project in Delta Junction will never be commercially viable outside of Alaska because the bison eat most of the barley, although she believes there is a market in Alaska. Number 1745 REPRESENTATIVE JOULE asked whether, under the restructuring, a person could take out a series of $50,000 loans in successive bad years. MR. FELLMAN explained that to qualify to restructure under this bill, there would have to be three out of five years of suffering a disaster. After restructuring in any given year, there would be three more years before qualifying to restructure again. There are a variety of loans available, including operating loans and so-called chattel loans for equipment and cattle. Each has a specific limit, and it would be up to that limit. Number 1854 REPRESENTATIVE JOULE recalled dealing with loans relating to bad years for commercial fishing, and he asked whether the percentage rate for those loans is comparable to those under HB 203. MR. FELLMAN said he doesn't know, although he knows that the FSA rate is 5 percent, and, in some cases, 3.75 percent. REPRESENTATIVE BARNES told members she had acquired the information [from Jerry McCune, who was present]. She said it is 8 percent, plus 1.5 percent over the prime rate, whatever that may be. REPRESENTATIVE JOULE suggested that up to this point, at 8 percent, they are equal for fishing and agriculture. He restated concern about parity in those two industries. Number 1999 CO-CHAIR SANDERS asked if there were questions or comments, or if anyone else wished to testify; there was no response. Number 2034 REPRESENTATIVE BARNES made a motion to move 2d SSHB 203 from the committee with individual recommendations and attached fiscal notes; she asked unanimous consent. There being no objection, 2d SSHB 203 moved from the House Resources Standing Committee.