Legislature(2009 - 2010)BELTZ 105 (TSBldg)

03/18/2010 01:30 PM Senate LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SB 300 Out of Committee
Moved CSSB 292(L&C) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                       SB 300-AIDEA LOANS                                                                                   
2:21:03 PM                                                                                                                    
CHAIR PASKVAN announced SB 300 to be up for consideration.                                                                      
2:21:13 PM                                                                                                                    
TED  LEONARD, Executive  Director, Alaska  Industrial Development                                                               
and Export  Authority (AIDEA), Department of  Commerce, Community                                                               
and Economic Development  (DCCED), said they had  been working on                                                               
a  strategic plan  to improve  the Authority's  effectiveness and                                                               
this bill  takes the first steps  in allowing them better  use of                                                               
capital for businesses  and helps them better  invest in projects                                                               
as  they  move forward.  The  first  section modernizes  the  way                                                               
interest  rates  are  set  for loans  that  are  actually  funded                                                               
through their  own internal funds  - in essence,  pretending they                                                               
are going out  to market and asking  at what rate it  would buy a                                                               
bond  from them.  He  said for  a  period of  time  there was  no                                                               
municipal  bond  market  because of  the  financially  tumultuous                                                               
market,  so  their rates  went  up  to  9.5-10 percent  in  seven                                                               
He said  the second  part of  the bill  helps the  Authority help                                                               
businesses expand. This one is  an incentive rebate program which                                                               
allows the  agency certain loans  or investments into  areas that                                                               
are  economically  distressed or  for  businesses  that would  be                                                               
startups that would add true new  jobs to the economy to the tune                                                               
of 100 basis  points (1 percent) of  the loan for a  term of five                                                               
years.  This would  help give  businesses that  are investing  in                                                               
needs the state identifies a better cash flow for five years.                                                                   
2:24:44 PM                                                                                                                    
The third  section of the  bill is  to clarify whether  AIDEA can                                                               
invest  in a  project partially  rather  than having  to own  and                                                               
operate  the whole  project. This  is important  when looking  at                                                               
infrastructure  development in  the  future  that these  projects                                                               
could be  in the billions of  dollars, which would be  far beyond                                                               
AIDEA's  capacity  to  own,  and that  layering  of  funding  and                                                               
working with partners like a  Native corporation or an investment                                                               
bank would be the best way  to move forward. It would also spread                                                               
the risk to the private sector.                                                                                                 
2:25:55 PM                                                                                                                    
The fourth and  fifth sections deal with  their Rural Development                                                               
Initiative Fund (RDIF) and how to better promote it.                                                                            
SENATOR BUNDE asked  what impact 1 percent would  have on AIDEA's                                                               
bottom line.                                                                                                                    
MR.  LEONARD   replied  that  1  percent   shouldn't  affect  it.                                                               
Additionally,  they are  partitioning off  that risk  by allowing                                                               
only  5 percent  of  their  loan portfolio  to  be  used in  this                                                               
program. He added that for the  most part, AIDEA makes money when                                                               
it  is  loaning money  rather  than  investing its  own  internal                                                               
SENATOR BUNDE  said it would  be 1  percent less money  coming in                                                               
and he wondered what that impact would be.                                                                                      
MR. LEONARD  calculated that 5  percent of their  portfolio would                                                               
be about  $15-16 million and  100 basis  points of that  would be                                                               
about $150,000.                                                                                                                 
2:28:11 PM                                                                                                                    
MARK  DAVIS,  Economic  Development  Officer,  Alaska  Industrial                                                               
Development   and  Energy   Authority   (AIDEA),  Department   of                                                               
Commerce, Community  and Economic Development  (DCCED), explained                                                               
that the  first change in SB  300 is to AS  44.88.159(e) and that                                                               
is  about  how they  set  the  minimum  rate for  the  commercial                                                               
finance program,  known as the  loan participation  program. This                                                               
program  works by  having banks  bring clients  in to  AIDEA, and                                                               
AIDEA  participates with  the bank.  That provides  a filter  for                                                               
credit  evaluation and  underwriting.  It has  been a  successful                                                               
program   creating  4,720   jobs  since   2002  and   about  2900                                                               
construction jobs. The  portfolio stands at $376  million now and                                                               
they have $24 million pending  in applications. Unfortunately, he                                                               
said,  the  minimum  rate had  become  uncompetitive  over  time,                                                               
because by statute it is tied to  a bond rate. In fact, AIDEA has                                                               
not floated a bond since 1987 to raise money for this program.                                                                  
So he explained  that under current statute  they contact Goldman                                                               
Sacks  every month  and have  them calculate  what it  would cost                                                               
AIDEA  to float  a bond  to fund  the program  and that  sets the                                                               
rate.  In  2008 the  markets  collapsed  and the  municipal  bond                                                               
market is still collapsed. So,  in the mid-2009, AIDEA's rate was                                                               
calculated to be 9.64 percent at  a time when the commercial rate                                                               
for money was 5.48 percent. As  of the end of February their rate                                                               
was 1.33  percent over what it  would be if they  used the market                                                               
rate.  This  costs   companies  that  want  to   use  their  loan                                                               
participation program  - more than  an extra point for  really no                                                               
MR. DAVIS  said that AIDEA is  charged with making money,  but it                                                               
is actually charging a little  bit too much. The economic benefit                                                               
of  these large  construction  projects is  pretty obvious;  they                                                               
also provide long-term jobs.                                                                                                    
So, he said, instead of using  the bond market AIDEA is proposing                                                               
to  use the  nationally recognized  market index.  That does  two                                                               
things. First, it  ties their minimum rate to the  cost of money.                                                               
He  reminded them  that they  could have  a higher  rate for  the                                                               
purposes of  underwriting; they could also  calculate credit risk                                                               
into the  portfolio, which they do.  So, not every loan  gets the                                                               
minimum rate.  They might look at  the Federal Home Loan  Bank of                                                               
Seattle,  a  well  recognized rate  in  the  Northwest,  treasury                                                               
bills, the Federal Farm Credit  Banks Funding Corporation Funding                                                               
Index (the other major federal  index used in the United States),                                                               
or  Fannie  Mae.  If  they  use those,  it  would  also  be  more                                                               
transparent.  Right now  everyone  has to  wait  every month  for                                                               
Goldman Sacks  to recalculate. Tying  the rate to an  index would                                                               
help business  planning because a  customer or a bank  could just                                                               
look at an index and figure out what their rate would be.                                                                       
MR. DAVIS  said this  would protect their  dividend by  setting a                                                               
floor for the five-year rate of  return on the interest rates; so                                                               
it would actually protect the agency's economic performance.                                                                    
He said the  second change the creation of a  potential rebate on                                                               
that same loan  participation program that would be  no more than                                                               
1  percent  of  the  interest  rate charged  going  back  to  the                                                               
customer through the bank. They  would provide that rebate if the                                                               
project creates  jobs, furthers rural development  or meets other                                                               
economic  criteria, which  would be  set by  regulation. He  said                                                               
their proposals and regulations  would probably be development in                                                               
stressed   areas  following   the  Recovery   Zone  Act   federal                                                               
standards, for  startup companies, new technology  or alternative                                                               
energy. He  said protecting the  Authority is important,  so they                                                               
would  cap  it at  5  percent  of  the total  loan  participation                                                               
portfolio and the  rebate would be only for the  first five years                                                               
of the  loan. It is designed  to help a business  start up; after                                                               
that  they would  float  up to  the  full rate.    It's a  pretty                                                               
limited  rebate,  but   he  said  having  worked   as  a  private                                                               
transaction attorney  in the  state, he  found that  it's usually                                                               
the first five  years that are the tough ones  before things cash                                                               
flow efficiently.                                                                                                               
2:32:57 PM                                                                                                                    
MR. LEONARD emphasized  that this is a rebate,  so the businesses                                                               
in  this program  would have  to show  proof of  hiring those  50                                                               
people every year in order to get the rebate.                                                                                   
MR.  DAVIS said  he  found that  the United  State  has 44  other                                                               
entities similar to  AIDEA and several of them have  this kind of                                                               
program. They  also put reporting  requirements in place  for all                                                               
their  loan participations  through  regulation  asking how  many                                                               
construction jobs were  used with this loan program  and how many                                                               
permanent  jobs to  get  a  better feel  for  the  impact on  the                                                               
economy. The  rebate program would  work in conjunction  with the                                                               
strategic plan  to target the loan  participation program towards                                                               
economic development and job creation.                                                                                          
He said as  they face the recession, the two-fold  approach is to                                                               
preserve the  jobs you have  and to  find out legitimate  ways to                                                               
create new  jobs. Large term  retail and  commercial construction                                                               
can be  useful here and that  is what this program  is being used                                                               
MR. DAVIS said the final thing  would be to change the other side                                                               
of AIDEA  which is the  development finance program. That  is the                                                               
program in AIDEA that owns big  projects like the Red Dog Mine or                                                               
the   Skagway   Ore  Terminal.   Right   now   the  statute,   AS                                                               
44.88.080(5), is a  little unclear. It says they  can "acquire an                                                               
interest in a  project as necessary or  appropriate." However, he                                                               
said,  AS 44.88.010(a)  says  they  can incur  debt  "to own  and                                                               
operate  facilities"  and the  definition  of  facility under  AS                                                               
44.88.909 says a plant or facility.                                                                                             
Throughout  the years,  Mr. Davis  said, the  interchange between                                                               
those three statutes  has been interpreted that AIDEA  has to own                                                               
a discreet  portion of  a project. As  they approach  more modern                                                               
financing, it's  their view that AIDEA  should be able to  own an                                                               
indivisible interest  in a  project. That  would mean  they could                                                               
invest  20 percent  into  a project  like  hydro, renewable  wind                                                               
farms or  other projects that  meet their criteria.  For example,                                                               
they were  in negotiations  yesterday with  the US  Department of                                                               
Energy to  qualify under  Section 17.05  financing and  this bill                                                               
would  allow them  to have  more access  to federally  guaranteed                                                               
loans - another  benefit. It would also let  AIDEA have partners,                                                               
so someone else could  also look at the same project  - to do the                                                               
math  to  make sure  that  it  works.  A consortium  of  partners                                                               
usually  makes it  a  safer investment.  If  other people  aren't                                                               
interested,  you   have  to  ask   yourself  why  you   would  be                                                               
interested. He explained  that this would be a change,  but it is                                                               
already consistent  with the  statute that says  they can  own an                                                               
interest. It's more of a clarification.                                                                                         
2:36:18 PM                                                                                                                    
CHAIR PASKVAN  asked if he  believed these changes  would advance                                                               
the underlying purpose of AIDEA's initial authority.                                                                            
MR. DAVIS answered yes. The  statutes, with regard to the partial                                                               
interest, already says AIDEA can own  an interest in a project as                                                               
necessary,  but the  definition  of project  is inconsistent.  He                                                               
didn't think a definition should  override statutory purpose, but                                                               
that is kind of what had happened here.                                                                                         
As for the loan participation  program, when the Legislature used                                                               
the  bond rating  to  float bonds,  they  envisioned two  things:                                                               
first that they  would actually go the market to  raise money for                                                               
the loan  participation program,  which they  have not  done. And                                                               
secondly, the municipal  bond market for the last 30  years was a                                                               
fairly low rate, so  it made sense to tie it to  a low rate, but,                                                               
unfortunately  in our  country the  municipal bond  market is  no                                                               
longer  a  competitive   rate.  In  this  sense   they  are  just                                                               
modernizing  but with  the same  purpose. The  rebate program  is                                                               
consistent  with   the  goal  of  alleviating   unemployment  and                                                               
creating economic development, which is  in the preamble of their                                                               
CHAIR PASKVAN  asked if any  portion of the first  three sections                                                               
of  SB  300  materially  increases  the  risk  to  AIDEA's  funds                                                               
MR. DAVIS replied no; the rebate  program is limited to 5 percent                                                               
of their portfolio as a  firewall and it's at AIDEA's discretion.                                                               
And it only goes for 5 years  of a probably 25-year loan. This is                                                               
a useful tool  to get a project going -  to make something pencil                                                               
out when  otherwise it wouldn't pencil  out. There is no  risk to                                                               
changing  a rate;  having a  lower rate  that makes  sense allows                                                               
them  to do  more  business.  They are  not  forced  to use  that                                                               
MR. LEONARD added  that putting in the floor  for their five-year                                                               
annualized rate  of return sets  a clearer definition of  how low                                                               
their rates can go and protects their bottom line even more.                                                                    
2:39:20 PM                                                                                                                    
SENATOR BUNDE  asked if  their list  of organizations  they might                                                               
use to  establish a  minimum interest rate  is a  flexible group.                                                               
Would they require it to be changed from year to year?                                                                          
MR. DAVIS answered that the way  the bill reads they could set up                                                               
by regulation  and they would  look at each  rate and put  out in                                                               
regulation  their proposal.  They  would get  back comments  from                                                               
banks  and financial  institutions that  use it.  Right now  they                                                               
would probably want  to use the Federal Home Loan  Bank, which is                                                               
the bank that Alaska's banks want  to borrow from when they don't                                                               
want to go  to the Federal Reserve Board window.  So, it's a rate                                                               
that  they use  already  and it's  a rate  that  is favorable  to                                                               
borrowers but isn't so low they can't make money.                                                                               
2:40:27 PM                                                                                                                    
SENATOR BUNDE asked why they  removed the section that prohibited                                                               
someone  from receiving  an additional  loan  until the  original                                                               
loan had been repaid on page 3, line 25.                                                                                        
CHAIR PASKVAN  responded that Cathy  Jeans would answer  that and                                                               
they were just about at that point.                                                                                             
2:41:12 PM                                                                                                                    
MR.  LEONARD  remarked the  way  the  way the  Rural  Development                                                               
Initiative  Fund  (RDIF)  fund  works is  that  originally  AIDEA                                                               
funded that  fund and it  is run  by the Division  of Investments                                                               
and is in their financial statements.                                                                                           
2:41:33 PM                                                                                                                    
MR.  DAVIS  said it  evolved  into  a  revolving fund,  which  is                                                               
2:41:53 PM                                                                                                                    
CATHY  JEANS, Systems  Branch Manager,  Division of  Investments,                                                               
Department  of  Commerce,   Community  and  Economic  Development                                                               
(DCCED),  said her  agency  administers a  number  of state  loan                                                               
programs  including the  Rural Development  Initiative Fund  that                                                               
would be  amended by sections 4  and 5. She explained  that their                                                               
RDIF program  was established in  2000 to provide loans  to small                                                               
businesses, creating jobs in rural  communities around the state.                                                               
It  is based  on a  similar program  that was  operated for  many                                                               
years  by  the  former  Department   of  Community  and  Regional                                                               
Affairs. She said  they administer the program for  AIDEA and the                                                               
portfolio  currently consists  of about  40 loans  totaling about                                                               
$4.1 million in  debt. The program is set up  as a revolving loan                                                               
fund which means all repayments  and earnings that come back into                                                               
the fund are  retained in it and all operating  expenses are paid                                                               
out of  it. They currently  have about $1.5 million  available to                                                               
She said  the changes proposed in  SB 300 come about  as a result                                                               
of input  from the  public as well  as internal  discussions that                                                               
focused on  improvements that could  be made to this  program. So                                                               
section 4 removes  the restriction that a borrower  can have only                                                               
one  loan at  a  time and  increases the  dollar  amount that  is                                                               
allowed under  the program from  $100,000 per person  to $150,000                                                               
and from $200,000 to $300,000 for  two or more persons. Section 5                                                               
allows  them to  reduce the  minimum  interest rate  that can  be                                                               
charged from 6 percent to 4  percent. They do support the changes                                                               
because they  believe these changes will  increase utilization of                                                               
the  program, thereby  increasing jobs  and economic  benefits to                                                               
rural communities.                                                                                                              
MS.  JEANS  said  they  submitted  a  zero  fiscal  note  because                                                               
overseeing the changes had no administrative cost.                                                                              
2:44:26 PM                                                                                                                    
SENATOR BUNDE asked  why allow people to have more  than one loan                                                               
after  what has  happened recently  with toxic  mortgages in  the                                                               
U.S. Maybe people "would get in over their head."                                                                               
MS. JEANS  replied back when  the program first started  in 2000,                                                               
people could  get a loan, but  maybe they paid if  off after five                                                               
or six years,  but they want to get another  one and couldn't. So                                                               
they thought  by removing the number  of loans one could  have at                                                               
one time and  increasing the dollar amount because  things cost a                                                               
lot more  these days would  give them more opportunity  to expand                                                               
and start up their business.                                                                                                    
SENATOR BUNDE asked  what their process is for  judging whether a                                                               
person could get more money.  The section clearly said they can't                                                               
have another loan until the first one was paid off.                                                                             
MS. JEANS answered they can get  do that now, but when they can't                                                               
get  another loan  if they  already  have one  under the  current                                                               
SENATOR BUNDE  said his concern  is that  if they already  have a                                                               
loan,  they  could start  pyramiding  and  get under  water  with                                                               
another loan.                                                                                                                   
MS. JEANS replied  that their agency would evaluate  the loss and                                                               
credit  risk again  if  the  borrower were  to  fill out  another                                                               
application.  They  would look  at  how  much capital  they  were                                                               
putting into the process and other types of financing records.                                                                  
2:47:18 PM                                                                                                                    
MR. LEONARD  added when this  provision was  originally discussed                                                               
with the  Division of Investments,  it was a challenge  to decide                                                               
if startup  businesses should they come  in when they start  or a                                                               
couple of  years down the  line. If they  had the first  loan for                                                               
$50,000, for  example, they would be  stuck for the five  years -                                                               
even  if they  were  being very  successful  and expanding,  they                                                               
couldn't  come back  to  this program.  So they  set  a limit  of                                                               
$150,000 for  the increase, but  if the business had  good credit                                                               
and was expanding,  the idea was to give them  the flexibility to                                                               
increase their investment and keep moving forward.                                                                              
2:48:50 PM                                                                                                                    
CHAIR  PASKVAN,  finding  no   further  comments,  closed  public                                                               
2:48:56 PM                                                                                                                    
SENATOR BUNDE  said he  wished they could  hear from  the banking                                                               
CHAIR PASKVAN noted letters of  support in their packets from Key                                                               
Bank,  Wells  Fargo,  First  National  Bank  Alaska,  Alaska  USA                                                               
Federal  Credit   Union,  Alaska  Bankers'   Association,  Alaska                                                               
Pacific Bank, Mt. McKinley Bank, and more.                                                                                      
SENATOR BUNDE said he liked to have those things on the record.                                                                 
SENATOR  DAVIS  moved  to  report  SB  300  from  committee  with                                                               
individual  recommendations and  attached  fiscal note(s).  There                                                               
were no objections and it was so ordered.                                                                                       

Document Name Date/Time Subjects
SB 304 Back-Up.pdf SL&C 3/18/2010 1:30:00 PM
SB 304
SB 304 Bill.pdf SL&C 3/18/2010 1:30:00 PM
SB 304