Legislature(1995 - 1996)

05/03/1996 10:15 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
       CS FOR HOUSE BILL NO.  284(FIN)                                         
       "An  Act  relating  to the  Alaska  Commercial  Fishing                 
  and            Agriculture Bank."                                            
  Amy Daugherty, staff aide to  Alan Austerman introduced this                 
  bill.  She  referred to the last  page of the bill,  page 17                 
  and   deleted the  words of  the last  line, "on  or".   Co-                 
  chairman Halford asked  that the amendment that  was adopted                 
  and then  inadvertently deleted from the draft  and the bill                 
  went all the way  through the process without the  amendment                 
  be explained either by staff or CFAB.                                        
  Ed  Crane,  President  of  CFAB  was  invited  to  join  the                 
  committee.  He said the particular amendment in question was                 
  adopted unanimously by  the House  Finance Committee and  it                 
  some  how   disappeared  when  the  bill   was  subsequently                 
  transmitted onto House Rules and the House Floor.  It was an                 
  amendment that is anticipated  Senate Finance Committee will                 
  restore as was the intent of the House Finance Committee.                    
  This bill  was occasioned  in anticipation  of full  private                 
  ownership of CFAB which is one  of the primary objectives of                 
  the founding fathers back in 1978.   There was a requirement                 
  for CFAB to become  fully privately owned no later  than the                 
  year  2000;  that all  of  the  State's investment  must  be                 
  retired by  then.  CFAB has retired $25 million of the State                 
  investment and the remaining $7 million will be retired over                 
  the next thirty months.  Rather  than waiting until the year                 
  2000  that day will  soon be  upon us.   He  explained three                 
  general categories of the  bill.  One, the  clarification of                 
  inconsistencies and filling  in gaps  and the resolution  of                 
  uncertainties as referred to  in sections 9, 12, 15,  23, 24                 
  and 26.   Two,  the accommodation  of changes in  commercial                 
  fishing economics  and  commercial fishing  laws  that  have                 
  occurred since the original statute  was written as referred                 
  to in sections 15,  17 (paragraph 6), 18 (paragraph  5), 19,                 
  20, 21 an 22.  Three, to recognize that Alaska Statute 44.81                 
  which applies only to CFAB is a restrictive statute which is                 
  always going to be subject to  strict interpretations by the                 
  Court  and  in  which certain  inconsistencies  present real                 
  dangers to a  company like CFAB,  which operates in a  world                 
  quite sensitive to  litigation as referred to in sections 17                 
  (paragraph 14) and  18 (paragraphs 1,  8 and 9).   Questions                 
  were raised  in House  Finance Committee  which resulted  in                 
  legislative  auditors  spending  considerable  time at  CFAB                 
  during  the  interim.    They  took   a  long  look  at  the                 
  legislative   history   of   CFAB.     In   this   bill  the                 
  accountability  was  retained  to  the  Legislature and  the                 
  State.  The Governor will continue to appoint  two directors                 
  to CFAB's Board of Directors and the annual report including                 
  an independent auditors  report is required be  submitted to                 
  the Legislature and  the Governor.  CFAB  remains subject to                 
  annual  bank examination.   On any given  day any legislator                 
  can propose changes to CFAB statute.                                         
  Co-chairman Halford asked how the bank treated the residency                 
  of borrowers.  Mr. Crane said  statute provided loans can be                 
  made only  to residents for  which the duration  required is                 
  one year.  He  referred to their credit  policy and read  it                 
  into  the  record.He   said  they   encounter  very   little                 
  questionable practices  and maybe  2 -  3 applications  have                 
  been  denied  because  of  residency.   Co-chairman  Halford                 
  referred to  section 10(b) on  page 4.   Mr. Crane said  the                 
  specific section  does conform.   The  language was  crafted                 
  about nine years  ago under  the late Senator  Bennett.   He                 
  related the difficulty  in being able  to find directors  to                 
  serve  as there are no special  privileges attached to being                 
  on the board  of directors.   The majority of board  members                 
  are  fishermen and in general  they must be borrowers before                 
  they become members of CFAB.  He advised that there can be a                 
  bad  season  due to  any  number  of reasons,  which  do not                 
  necessarily reflect poor character, poor credit practices or                 
  any type of misconduct  or ethical problem.  With  borrowers                 
  generally, including directors who are borrowers, when those                 
  situations occur, expectations are modified and there can be                 
  a delinquent loan for twelve months.  There needs to be room                 
  for a director  who is a  fishermen borrower  to be able  to                 
  deal with  the things  that happen  to fishermen  borrowers.                 
  Co-chairman  Halford  said  he  believed  this  was  strange                 
  language  regarding  the  board  of  directors and  was  too                 
  permissive.   Senator Sharp said he was  also surprised with                 
  the permissive language.  Federal regulations and real banks                 
  are severely limited  in loaning to directors  and officers.                 
  This kind of allowance  was permissive.  Mr. Crane  said the                 
  bank examiners were aware of this situation.  There has been                 
  occasion  to   act  on   this  matter  by   the  board   and                 
  consideration was given  to the examiner's view at the time.                 
  Within the past two years there was a director reflecting an                 
  economic  rather than  ethical  weaknesses  and was  advised                 
  formally that unless  certain things were done  with respect                 
  to  his loan by a certain date,  his membership on the board                 
  would be revoked.   The qualities that make a  person a good                 
  and valued director  are not necessarily the  same qualities                 
  which make him or her a good fisherman or borrower.  Senator                 
  Sharp concurred but  felt a  delinquent director allowed  to                 
  borrow   from   their   own  bank   may   lead   to  further                 
  complications.  That  lowering of tolerance is  why there is                 
  such prohibition in the banking institutions.  Senator Frank                 
  also concurred and said there had been a substantial  change                 
  in the  last fifteen years  in regulations and  practices of                 
  banking  in  general.    He  suggested  deleting  the  words                 
  "chronically and irredeemably" on page 4, line 30.                           
  Mr. Crane said that  CFAB is regulated and this  $35 million                 
  institution is subject to strict scrutiny through State bank                 
  examiners, it's own  auditors, an exhaustive  examination by                 
  it's lenders, legislative audit and IRS audit.  The policies                 
  and practices  of CFAB  which  could change,  do not  permit                 
  special treatment for  director loans.  Senator  Frank still                 
  felt the language  was permissive in requiring  the board to                 
  remove someone.   Senator Sharp concurred.   Senator Zharoff                 
  felt there was no problem  in leaving the wording as  it was                 
  since it had been there since  inception.  Mr. Crane advised                 
  that there are seven members of  the board, two appointed by                 
  the Governor.   He further explained the  phrase of "natural                 
  persons"  as being distinct  from legal  persons.   CFAB has                 
  made  a few farming loans  and the main  reason for that was                 
  because there  is little bankable  commercial agriculture in                 
  Alaska.  Timber is classified as agriculture.                                
  Senator  Sharp  asked  how  members   were  compensated  for                 
  attending  board  meetings and  Mr.  Crane said  the current                 
  practice of CFAB had been  for modest compensation, $50/hour                 
  up to  $350/day maximum.   Total compensation last  year for                 
  seven members of the board of directors was $13,000.                         
  Senator Sharp proposed  an amendment on  page 4, line 30  to                 
  read "maintains a chronic substandard borrowing relationship                 
  with the bank shall be removed  from the board."  Mr.  Crane                 
  noted with  regards to changing  "may" to "shall"  that CFAB                 
  was a private institution and said it was not needed to have                 
  a statute directing something like that.   How would this be                 
  enforced?  Otherwise there  was no objection to the  rest of                 
  the amendment.    Senator Sharp  felt the  latitude for  the                 
  board  and   management  to   define  "chronic   substandard                 
  borrowing" was left  in.  However he felt what  was fair for                 
  other borrowers should also be fair for directors.                           
  After  brief  miscellaneous  discussion  by  the   committee                 
  members  Senator Sharp  moved  amendment  #1(a) and  without                 
  objection it was  adopted.  Amendment  #1(b) was also  moved                 
  and failed;  later it  was rescinded  without objection  and                 
  Senator Sharp  re-moved this  amendment #1(b)  and with  the                 
  objections of Senators Zharoff and Phillips being duly noted                 
  it was adopted.  Senator Zharoff moved amendment #2, page 17                 
  line  31  to delete  "on or"  and  without objection  it was                 
  adopted.    Senator Zharoff  further  moved amendment  #3 on                 
  behalf of the sponsor and without objection it  was adopted.                 
  Amendment #4 was  also moved by  Senator Zharoff and it  was                 
  held pending.                                                                
  Co-chairman Halford recessed  the meeting  at 12:00 noon  to                 
  call of the chair.                                                           

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