Legislature(2009 - 2010)BELTZ 211

03/18/2009 08:00 AM EDUCATION

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SB 140 Out of Committee
Uniform Rule 23 Waived
Bills Previously Heard/Scheduled
Moved SB 101 Out of Committee
           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                                                               
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                                                               
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                                                               
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.                                                                                         

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