Legislature(2009 - 2010)BELTZ 211
03/18/2009 08:00 AM EDUCATION
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* first hearing in first committee of referral
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SB 140-STATE INVESTMENT IN EDUCATION FUND 8:03:42 AM VICE CHAIR DAVIS announced the consideration of SB 140. 8:03:57 AM DIANE BARRANS, Executive Director, Postsecondary Education Commission, Department of Education and Early Development (DEED), said she is also the executive officer of the Alaska Student Loan Corporation. She said that SB 140 is necessary because the Alaska Student Loan Corporation has not been able to issue bonds due to the disruption in the capital markets since 2007. In 2008/9, they had sufficient cash on hand to fund the loans for the current loan year. Loan volume for this year is projected at around $95 million. However, they will have substantially exhausted their ability to issue new loans with cash on hand. MS. BARRANS explained that SB 140 does two things; it allows the commissioner of the Department of Revenue (DOR) to directly invest in student loans. The objective of this piece is to allow the corporation to have cash quickly to provide loans for 2009/10. The bill caps that amount at $100 million, and it limits the duration of the agreement between the corporation and the commissioner to no more than five years. So those funds will have to be returned to the general fund within that period. Second, SB 140 authorizes the DOR commissioner to provide credit enhancement, a liquidity facility, for the corporation to proceed to structure a deal to issue bonds sometime between 6-18 months. Their financial advisor indicates it is prudent to provide for two years of funding capacity by which time they hope the markets will have righted themselves to the point where they would no longer need support from the state. Specific to the liquidity facility, this would allow the corporation to issue variable rate bonds which allows investors to know at any point that if they want to sell those bonds, the facility will hold them until another buyer appears in the marketplace. 8:07:22 AM SENATOR OLSON asked what the loan volume trend has been for the last several years. MS. BARRANS replied the volume has been growing 8-15 percent annually. They expect that to level shortly as they won't be making as many alternative loans as compared to federally guaranteed loans - another increasing trend. SENATOR OLSON asked what the delinquency rate is. MS. BARRANS answered that the initial default rate is calculated once a loan has been in repayment for 12 months, and less than 5 percent were in default at that time. However, that number rises on the alternative side to just over 11 percent after about 5 years in repayment. SENATOR OLSON asked how she gets the money back on the alternative loans, if there is no federal guarantee. MS. BARRANS replied that they continue to collect on those loans for decades, but some of them are losses that have to be written off. VICE CHAIR DAVIS announced an at-ease at 8:09 and called the meeting back to order at 8:10. 8:10:01 AM MS. BARRANS said HB 109 that has just passed the other body allows them to raise the credit criteria on alternative loans. Because of the kind of delinquency rates they have experienced, investors, and the rating agencies, are increasingly requiring a higher quality asset to back bonds in the market. They are doing a combination of things this year to try to insure that the program is viable going forward. VICE CHAIR DAVIS closed public testimony and announced an at- ease from 8:11 a.m. to 8:20 a.m. 8:20:04 AM SENATOR HUGGINS asked Ms. Barrans if she had any information regarding the risk factor the state would be assuming in going to variable rate securities. MS. BARRANS replied that they have been issuing variable auction rate securities (ARS) for about four years, but the problem is that the mechanism by which those securities function in the market relied on having enough buyers and sellers. With the fallout from the mortgage back bonds, investors lost all confidence in that market place. As of February 2008, that market failed and is not expected to recover. They are paying interest and principal on existing ARSs as they come due, but investors are not happy, because they used to view them as fairly liquid investments and now they are illiquid investments. MS. BARRANS explained that the corporation is proposing to issue a different form of variable rate debt for which there is still a market. The reason for that is with the variable rate demand bonds, the issuer has some form of credit enhancement that insures the bond holders that if they want to sell at any time, they will be able to do so making it a highly liquid investment. 8:22:31 AM SENATOR OLSON asked how many people who take advantage of the loan program are living out of state. MS. BARRANS replied that historically about 60 percent of borrowers stay in the state, and she expects that number to increase because of recent attendance here. SENATOR OLSON asked how many of those who are finished with their education who are planning on staying outside of the state go into delinquency. MS. BARRANS replied they repay at higher rates. 8:23:31 AM JERRY BURNETT, Deputy Commissioner, Department of Revenue (DOR), said he was available to answer questions. SENATOR HUGGINS asked if there is a cap on rate adjustment for student loans. MR. BURNETT replied yes, and explained that since the DOR would be investing money in the bonds, they would expect to get repaid because there is a long history of repayment. The only risk to the state is the $206 million that will be illiquid. The state's largest fixed income pool now has a balance in the $7 billion range. Even with $50-oil over the next five years, because they are forward-funding education and have tax credit funds, the trailing spending in the general fund is such, as the bank, he can say that the balance will be large enough to support holding these as investments. 8:26:04 AM SENATOR HUGGINS assumed that the variable rate piece passes through to the borrower. MR. BURNETT replied that he doesn't deal with the loans themselves. SENATOR HUGGINS asked if they should consider other factors that for one reason or another they have not already blended into this bill that would be smart from a money management approach. MR. BURNETT replied no, this issue has been well considered by all concerned. The issue is clearly the disruption of the market at this time and the current bond market not having confidence. Also the current administration in Washington DC is looking at the private loan market for this kind of debt, because this is a concern nationwide. A number of other states have done similar things to preserve their student loan program. 8:27:44 AM SENATOR HUGGINS asked if AIG is involved in these kinds of activities in the U.S. MR. BURNETT replied that they have probably historically been a major buyer of variable rate debt for some of their programs, but not other than that. 8:28:28 AM SENATOR OLSON moved to report SB 140 from committee with individual recommendations and accompanying fiscal notes. There being no objection, the motion carried.