Legislature(2009 - 2010)HOUSE FINANCE 519
03/30/2010 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB410 | |
| HB412 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 410 | TELECONFERENCED | |
| + | HB 412 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 410
"An Act relating to loan participations and
development finance projects of the Alaska Industrial
Development and Export Authority; and relating to
loans from the rural development initiative fund."
1:36:58 PM
TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF
COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, explained
that three of the bill's sections deal with AIDEA and one
part deals with an AIDEA fund run by the Division of
Investments. He detailed that the changes requested by HB
410 would deal with the first part of implementing the
strategic plan, the effectiveness of AIDEA programs, and a
new development tool related to the loan program.
Section 1. AS 44.88.159(e) is amended to change the
method by which AIDEA determines the minimum interest
rate to be charged on loan participations that AIDEA
finances with AIDEA assets rather than bond proceeds.
Current method requires AIDEA to establish a minimum
by estimating the true interest cost in AIDEA were to
use bond proceeds. The proposed method would allow the
minimum to be based on the greater of either the rates
achieved by a type of category of financial security
in a published nationally recognized market index or
the 5-year rate of return on AIDEA's investments.
Mr. Leonard detailed that Section 1 would address how the
minimum interest rate is set when AIDEA funds loans with
internal funds. Currently, AIDEA sets the rate by going to
the bond market and asking an expert like Goldman Sachs.
When the municipal bond market had problems, AIDEA's rates
went from the 6 percent range up to the high 9 percent
range; the rates have come down but are still shifting. The
agency was considering going to an index so that customers
and partners could have a more steady interest rate.
Section 2. AS 44.88.159 is amended by adding a new
subsection that allows AIDEA to establish in
regulation a new program to provide incentive rate
rebates to certain loan participations that create
jobs, promote rural development or foster other
economic development criteria.
· Rate rebates are limited to no more than 1% of
the interest rate charged to AIDEA's portion of
the loan participation.
· The balance of loans subject to rebates would be
limited to no more than 5 % of the outstanding
balance of all loan participations.
· The authority may not commit to pay an incentive
rebate for more than 5 years.
· Allows AIDEA to establish a separate account for
this program.
Mr. Leonard reported that Section 2 would set up a new tool
under the commercial finance program that would allow an
incentive rebate program to give incentives to businesses
meeting certain criteria. For example, if a criterion was
to develop 25 new jobs with the investment, AIDEA would not
give the rebate unless the jobs were in fact created.
Co-Chair Hawker pointed out that the provision would bring
extreme latitude to the agency because the criteria listed
are authorized to be established in regulations adopted by
AIDEA. Mr. Leonard agreed. He added that AIDEA had
considered putting the criteria in statute, but they felt
they needed the flexibility to tailor to the areas in which
they were trying to incentivize investment.
Representative Kelly asked whether the AIDEA board approved
regulations. Mr. Leonard responded in the affirmative. He
added that the agency was in the process of modernizing the
organizational structure so that loans would go to
investment committees made of private sector and management
before going to the board.
1:42:57 PM
Mr. Leonard continued with Section 3:
AS 44.88.172(a) is amended to clarify that AIDEA can
own or operate a percentage of a project - not the
entire project.
Mr. Leonard detailed that currently there are two sections
in statute; an intent section stipulating that AIDEA can
own an interest in a project, and another section stating
that AIDEA has to own the project. The request would
clarify that AIDEA has the ability to own a portion of a
project. He noted that the price tags on economic
infrastructures are increasing. For example, a plant could
be in the $1 billion to $2 billion range, past AIDEA's
capacity; AIDEA could help the project be successful by
owning a portion of it. In addition, evaluating the
practices of other development finance organizations has
revealed that partnering with the private sector shares the
risk.
Co-Chair Hawker clarified that the intent was not to
prohibit the practice of full ownership but to widen the
latitude to allow AIDEA to be a component investor in
projects. He thought the existing language was not clear,
but seemed to preclude ownership of the entire project. Mr.
Leonard acknowledged the need for more clarity.
Section 4. AS 44.88.610(a) is amended to allow
borrowers to have multiple Rural Development Revolving
Loan Fund loans and increases the cumulative amount a
person may borrow from $100,000 to $150,000 and
increases the cumulative amount two or more persons
may borrow from $200,000 to $300,000.
Mr. Leonard explained that the section addresses a fund
that AIDEA financed in the past and the Division of
Investments currently operates. The fund is one of the few
that AIDEA has under its umbrella that is a direct
participation loan program. The authority had searched for
ways to utilize the money to get more loans into rural
areas. The division suggested changing the limits from
$100,000 to $150,000 for one business and from $200,000 to
$300,000 for more than two businesses, and then changing
the rate from 6 percent to 4 percent (more in line with
other programs run by the Division of Investment). He
stressed that the change would allow a successful business
to have more than one loan as it grows.
1:47:34 PM
Co-Chair Hawker clarified that the provision was not
changing the rate from 6 percent to 4 percent, but changing
the minimum rate. Mr. Leonard agreed.
Vice-Chair Thomas referred to page 3, line 23 adressing
business located where the population is 5,000 or less and
not connected by road or rail. He asked whether Haines
would qualify since the connecting road went through
another country.
GREG WINEGAR, DIRECTOR, ALASKA DIVISION OF INVESTMENTS,
DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT,
answered that that the key is being connected by road or
rail; it does not matter that the road goes through another
country.
Vice-Chair Thomas thought the language should be changed.
Mr. Winegar offered to work to change the language and
acknowledged discussion about the where the lines should be
drawn. He thought the upcoming census could make a
difference in which communities would qualify.
Vice-Chair Thomas recalled other legislation that defined
"resident" and wanted clarification.
Representative Austerman queried the position of Haines
regarding the definition.
Vice-Chair Thomas replied that in the past the fact of a
foreign country had excluded Haines because a connecting
road was defined as one with 24-hour access.
1:51:28 PM
Mr. Winegar responded that Haines did qualify under the
existing statute.
Representative Fairclough referenced the the indeterminate
fiscal note with zeroes and asked whether costs were
anticipated for the incentive rate rebate. Mr. Leonard
responded that overall he did not expect cost increases
because of the agency's capacity to increase its portfolio
balance on new loans. He pointed out that new loans (even
with the 100 basis points reduction) would be more than the
opportunity cost of investing internal funds.
Representative Fairclough queried the current capacity of
the Gas-To-Liquids (GTL) plant. Mr. Leonard replied that
current statute allows $400 million over a rolling 12-month
period. He noted that the House had passed HB 90, which
would take out refunding bonds and result in more capacity.
1:54:07 PM
Representative Fairclough referred to a bill exempting
AIDEA from procurement code and asked how investment
strategies would be affected. Mr. Leonard did not know and
offered to get the information.
Representative Doogan questioned how loan costs would be
affected by Section 1. Mr. Leonard responded that AIDEA was
considering several different indexes set through
regulation, such as the Federal Home Loan Bank index with
5, 10, 15, and 30-year indexes for cost to funds. In
addition, AIDEA has a minimum floor for the five-year
annualized rate of return to protect the loan portfolio and
the state dividend. The authority uses the index plus
operation cost on a normal daily rate; if the rate went
below that, they would look at the minimum floor. He
emphasized that the legislation would set the minimum and
allow AIDEA (based on other factors that could come into
play, such as loan risk) to have a higher rate. The index
would be the minimum rate and would be set by regulation.
He added that the index could be changed if a better index
came along.
Representative Doogan queried fund costs under the proposed
legislation.
MARK DAVIS, ECONOMIC DEVELOPMENT OFFICER, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMERCE,
COMMUNITY AND ECONOMIC DEVELOPMENT, responded that using
the 20-year rate of the Federal Home Loan Bank of Seattle
against what AIDEA charges currently would amount to 1.04
percent. Over 20 years, AIDEA is essentially charging a
point that it does not need to charge in order to recover
the rate of funds. He added that the statute currently
requires AIDEA to use a cost of funds tied historically to
bonds, which are no longer stable. The agency wants to
shift to more a more stable and transparent index. He
suggested checking the Federal Home Loan Bank on the
Internet to figure out the loan rate; currently Goldman and
Sachs calculates the rate. He thought the rates would be
lowered over time and be protected against anomalies in the
market. The treasury bill is currently at 4.75 for 30
years; 18 months ago it was at minus one, illustrating the
instability of the bond market.
1:59:39 PM
Representative Doogan turned to Section 2 in the sectional
analysis, related to establishing a new program that could
create jobs, promote rural development, and "foster other
economic development criteria." He asked what fostering
criteria meant. Mr. Davis responded that the item is the
result of AIDEA's effort over the past two years to work on
a strategic economic plan. The plan has been released. The
agency studied the criteria used by similar industrial
development banks in 44 other states. The statute uses job
creation because the preamble stipulates the elimination of
unemployment. He noted that most development organizations
put an emphasis on distressed areas, and that unemployment
in rural Alaska tends to be high. Other criteria could
relate to distressed economic zones within cities (such as
Anchorage), which would track the current federal practices
under the Build America Bonds (BABs) and other types of
instruments. Alaska could also look at new technology
developments that could spur further job creation. The
criteria could be adopted through regulation by the AIDEA
board.
Representative Doogan pointed to Sections 4 and 5, which he
understood as a substantial loosening of loan requirements,
both in terms of getting people more money, lower interest
rates, and the ability to get more than one loan. He asked
why the agency wanted the changes. Mr. Winegar replied that
based on public input and internal discussions about lower
rates, AIDEA hoped to provide a better rate for businesses,
which are creating jobs. The agency would be allowed to
create regulations to lower the rate; currently the floor
by statute is 6 percent. Other successful programs such as
Small Business Development allow rates down to 4 percent.
He added that the same holds true for the loan amount.
Rates have gone up significantly in the past several years,
so the thinking was to provide a higher minimum. Regarding
making more than one loan, a business that was successful
after getting a small loan ($10,000 to $20,000) would not
currently be able to borrow more. The agency thought it
made more sense to have the limit based on an amount as
opposed to the number of loans.
2:04:13 PM
Representative Doogan questioned how the agency will be
able to monitor the effect of the changes and what it could
do if the changes were not financially viable. Mr. Winegar
replied that AIDEA carefully monitors all programs. He
emphasized that the changes would not be required, but
would provide flexibility. He detailed that the lifetime
delinquency rate on the program since origination was 4.3
percent. He assured the committee that the agency could
make adjustments as needed through the regulation process
as well as through the lending decision process.
Representative Kelly wondered why he had not heard about
changes related to credit worthiness or about adjusting for
risk. Mr. Winegar answered that there would be no
difference in evaluation in terms of risk.
Co-Chair Hawker queried the 4.3 percent delinquency
statistic. He asked how many Rural Development Initiative
Fund loans were outstanding at any given time. Mr. Winegar
replied that AIDEA currently had 41 loans out totally $4
million and $1.7 million available to lend. Historically,
62 loans totaling $7.2 million have been made through the
program since the program started in 2000.
2:07:37 PM
Representative Foster directed attention to Section 3
regarding old language about AIDEA owning an entire
project. He queried the minimum amount of a project and
possible ramifications. Mr. Leonard answered that the issue
had been discussed, but a minimum was not considered. He
believed using due diligence and project feasibility would
result in the percentage of ownership that would maximize
the potential of the project.
Mr. Davis commented that the section was a clarification.
One statute preamble (AS 44.88.010(a)) currently reads
"incur debt to own and operate facilities," which has been
interpreted to mean that the entire facility has to be
owned and operated. On the other hand, AS 44.88.085 states
that "to acquire an interest in a project as necessary or
appropriate," which seemed to indicate that AIDEA could own
an interest in a project and have partners. House Bill 410
would clarify the language to say that owning an interest
was the appropriate way to read the statute.
Representative Fairclough asked whether AIDEA would be
allowed to participate in an in-state gasline project. Mr.
Davis replied that the agency could invest in any project
with rate of return consistent with statute. He noted that
the agency had looked at gas projects in the past and would
do so again in the future.
CRAIG DAHL, PRESIDENT/CEO, ALASKA PACIFIC BANK and VICE
CHAIR, FEDERAL HOME LOAN BANK OF SEATTLE BOARD, testified
in support of the legislation on behalf of the institutions
as well as the Alaska Bankers Association. He stated that
AIDEA had proven over the years to be a pillar of the
state's economic development activity. The various
participation loan programs have been successful because of
a competitive rate structure that helped induce a lot of
business loans and project lending, creating many jobs and
helping the economy develop.
Mr. Dahl described the Alaska Pacific Bank as one of the
smallest institutions in the state; however, it currently
had over $30 million in loans and has managed to work in
concert with the various programs through AIDEA. He
believed the same was true for all the state's banks. He
felt that AIDEA should be competitive and responsive to the
market. He stressed that Alaska has managed to avoid most
of the serious impacts from the recession and underlined
the importance of the state's economy remaining stable and
moving forward. He felt that AIDEA was a critical piece in
the success of the state's economy.
2:12:40 PM
HB 410 was HEARD and HELD in Committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Letter from Governor HB410.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 410 |
| Sectional Analysis HB410.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 410 |
| HB 412 Sectional Analysis.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 412 |
| HB 412 Transmittal Letter.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 412 |
| Micro loans.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 412 |
| Microloan Support Letters.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 412 |
| HB 412 Support Letter.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 412 |
| admin@aidea org_20100401_145122.pdf |
HFIN 3/30/2010 1:30:00 PM |
HB 410 |