Legislature(1999 - 2000)

04/28/1999 01:15 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                               
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.                                                                     

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