Legislature(2015 - 2016)HOUSE FINANCE 519
04/17/2016 09:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SJR2 | |
| HB245 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SJR 2 | TELECONFERENCED | |
| += | HB 250 | TELECONFERENCED | |
| += | HB 245 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE JOINT RESOLUTION NO. 2
Proposing an amendment to the Constitution of the
State of Alaska relating to contracting state debt for
postsecondary student loans.
KRISTEN PRATT, STAFF, SENATOR ANNA MACKINNON, conveyed
Senator MacKinnon's gratitude for the bill hearing. She
explained the resolution was a constitutional amendment
that would permit the issuance of general obligation bonds
for the purpose of funding postsecondary student loans. The
bill would amend Article IX, sec. 8, of the Alaska
Constitution, which currently allowed state debt to be
contracted for capital improvements and housing loans for
veterans. The intent of the legislation was to access lower
cost loans to have lower interest rates for borrowers as
well as to give the Alaska Student Loan Corporation (ASLC)
more flexibility with its underwriting criteria.
Vice-Chair Saddler asked what it meant that the bill would
allow increased criteria flexibility.
Ms. Pratt deferred the question to the Department of
Education and Early Development.
DIANE BARRANS, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON
POSTSECONDARY EDUCATION (ACPE) and EXECUTIVE OFFICER,
ALASKA STUDENT LOAN CORPORATION, DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT, responded that currently a minimum
credit criteria was required in order for the underlying
assets (the student loans themselves) to be of sufficient
quality to use in the issuance of bonds or revenue bonds.
The credit criteria was currently a 680 FICO credit score.
She detailed that if the state's credit backed the bonds in
the terms of a general obligation bond, the existing credit
criteria could be somewhat modified, which would allow a
larger group of students to qualify.
9:44:57 AM
Vice-Chair Saddler asked for verification the corporation
could offer loans to students with lower credit scores. Ms.
Barrans responded in the affirmative.
Vice-Chair Saddler asked for background information about
the number of loans the commission issued for postsecondary
tuition per year. Additionally, he wondered how many loan
applications were approved and rejected.
Ms. Barrans responded on an annual basis the student loans
had been issued to as many as 12,000 students in a year.
Currently, the numbers had dropped substantially to several
hundred loans per year. The decrease was due in part to the
interest rates, which consumers were concerned were
excessive. Additionally, approximately 40 percent of the
applicants did not qualify for the credit criteria and were
unable to obtain a cosigner who met the criteria.
9:46:08 AM
Vice-Chair Saddler asked about the commission's current
interest rate compared to other financial loans available
elsewhere.
Ms. Barrans responded that the interest rate charged in the
past two to three years was 6.25 percent, which was a
fairly good rate for unsecured credit. Other non-federal
student loan programs throughout the country had similar
rates, although some had higher credit criteria. The
commission expected it could decrease the interest on its
loans by a full percent (i.e. to a 5 percent rate) if the
state was able to maintain its AAA credit rating. She
detailed the decreased rate would be very attractive and
amongst the best in the nation.
Representative Gara relayed his support for the bill, given
interest rates charged by the state. He recalled that
during the country's financial crisis in 2008 the criteria
had changed to require applicants to have a cosigner. He
wondered if the criteria was still necessary. He spoke
specifically about a situation where a student did not have
a parent with money.
Ms. Barrans answered that a creditworthy cosigner was
required if a student did not have sufficiently high
credit. She elaborated it was not something she expected to
change. She detailed that even with a general obligation
bond there was an expectation the assets of the corporation
would be sufficient to ensure cash flow on the loans and
repay the debt. There was no expectation the corporation
would look to the state to have general funds paying down
the bonds. The corporation believed lowering the credit
score requirement would be very helpful in allowing
students to qualify on their own credit; however, a
creditworthy cosigner would still be required if a student
did not have sufficiently high credit.
Representative Gara remarked the issue was obviously a
problem, but it was not a problem that could be solved in
the current bill. He noted intent to work on the issue
separately.
9:48:49 AM
Representative Kawasaki spoke in support of the bill. He
noted that when the bill had first been introduced the
state had a great credit rating. He wondered about the
impact if the state's credit rating was downgraded in the
near future. He questioned whether it would be worth
opening up the state's constitution to change the
particular article.
Ms. Barrans responded that the corporation had asked its
financial advisor to analyze the impact if the state were
to experience an entire step downgrade. She relayed it
would still allow the corporation to reduce the interest
cost by about 95 basis points, which would still offer a
substantial benefit.
Co-Chair Thompson thanked Ms. Barrans for her testimony. He
OPENED public testimony.
9:50:24 AM
STERLING GALLAGHER, SELF, ANCHORAGE (via teleconference),
shared that he was a former commissioner of the Department
of Revenue (DOR) who had worked to put together the
Permanent Fund. He had also worked as a bond underwriter
for the state for Alaska Housing Finance Corporation (AHFC)
and Alaska Industrial Development and Export Authority
(AIDEA). Additionally, he had been the underwriter on the
bond issue addressed by the bill. He shared that he had put
together the original loan for the student loan authority.
He elaborated that the program had worked for 25 years as
intended. He explained the agency was designed around cash
flow, which was a problem. Currently the agency had an
overall loan default rate of 28 percent. He stated the
agency had a total expenditure of $15 million to
administrate $350 million in loans the previous year (4
percent). He specified the loans from the past year only
originated $3.2 million. He calculated that the cost of
administration was four times every loan the program made.
He believed the agency's performance needed a serious
review before general obligation bonds were considered.
Mr. Gallagher continued that general obligation bonds
should be preserved for the state's first line of defense
for major areas of finance. He provided the occurrence of
another major earthquake as an example. He believed the
agency wanted to start cutting away at the numbers and the
state's flexibility on general obligation by urging "these
sorts of debts" that had a 28 percent default rate. He
reiterated the cost of the administration of the program.
He remarked that the current structure could also
accommodate a lowering of interest rates. He noted the
state had a AA rating and because of the moral obligation
attached the agency would trail 10 or 15 basis points
behind it. He believed it was a small price to pay for
maintaining the state's flexibility on general obligation
debt. He opined the agency could work out its problems. He
stated the agency needed more collateral and did not
necessarily need more cash. He suggested taking loans from
AHFC or any other program. He emphasized the program needed
quality cash flow. He restated the 28 percent default rate
and noted the national default rate was 40 percent. He
referred to a recent case where the State of New York had
allowed the debts to be charged off bankruptcy. He
concluded the entire area was influx nationally. He
restated the program's accomplishments needed a review. He
believed it was dangerous to attach the loans to the
state's general obligation debt, which would result in a
loss of flexibility.
9:55:22 AM
Co-Chair Thompson CLOSED public testimony.
Representative Wilson referred to Mr. Gallagher's statement
that it cost $15 million to administrate the program. She
asked how much the cost influenced the interest rates
offered to students.
Ms. Barrans relayed that the corporation did a calculation
on the interest rate. She deferred to the commission's
chief financial officer who had recently done the
calculation to set the 2016-2017 interest rates.
CHARLENE MORRISON, CHIEF FINANCIAL OFFICER, ALASKA
COMMISSION ON POSTSECONDARY EDUCATION and ALASKA STUDENT
LOAN CORPORATION, DEPARTMENT OF EDUCATION AND EARLY
DEVELOPMENT (via teleconference), replied that the
calculation referred to by Ms. Barrans included the cost of
administration of approximately 2.5 percent of the interest
rate.
Representative Wilson asked for detail on the new
calculation Ms. Morrison had recently completed [for 2016-
2017]. She wondered what the interest would be on a new
loan at present. Ms. Morrison replied the interest rate was
6.25 percent for the coming academic year.
9:57:57 AM
Representative Wilson asked for verification the 6.25
percent included the 2.5 percent administration cost. Ms.
Morrison answered in the affirmative.
Representative Wilson surmised that if bonds enabled the
rate to drop to 5.25 percent it would not include the 2.5
percent administration cost. Ms. Morrison responded in the
negative. She detailed that if the state maintained its AAA
credit rating and if the market remained steady at its
recent level, the interest rate could drop as low as 5.25
percent.
Representative Wilson was trying to understand the
administrative cost percentage of 2.5. She reasoned the 2.5
percent was almost as much as the amount charged to
students. She wondered if there would be a limit on how
much money could be put into the bonds if the bill passed
and was approved by voters.
Ms. Barrans replied that if voters approved the
modification of the state's constitution, the legislature
would then be required to authorize the operating rules
allowing the corporation to proceed, which would include a
cap similar to the caps AHFC had in place on the issuance
of debt for the veterans' home loan program.
Representative Wilson remarked that 28 percent [default
rate] was pretty scary. She surmised the corporation would
have to show it could cover the bond with receipts (and not
state general funds).
Ms. Barrans responded in the affirmative. It would be
similar to the corporation's current process, when it went
into the market, of providing cash flows to the ratings
agencies in order for the agencies to verify and rate the
issuance of the bonds. She noted the corporation had
successfully issued $1.6 billion in debt since 1988.
Additionally, the corporation had always had the support of
the state's moral obligation and had never needed to ask
the state for any cash support. Several years back the
legislature had authorized a bridge loan to assist the
corporation for a short period of time. She specified the
corporation had used the loan and had fully repaid it to
the state. The corporation had never needed to place a call
on the legislature for support and did not anticipate that
changing in the future.
10:01:10 AM
Representative Gara stated that the cost of administration
would go down because the conference committee had cut a
couple of positions within the corporation. He reasoned the
corporation needed to do outreach to make students aware of
the student loan program. He noted that banks did outreach
for their businesses. He asked about the corporation's
administration cost compared to other state student loan
agencies or financial institutions.
Ms. Barrans answered she could not speak to the costs of
other organizations. The scale of operation was an issue.
The decline of the corporation's loan volume over the last
several years impacted the scale. She responded to Mr.
Gallagher's public comment and relayed that the loan
default rate was not 28 percent. She detailed the rate was
calculated on an annual basis and the most recent rates
were around 7.8 percent. She stated it was a factor in the
cost of administering the loans, which also impacted
servicing costs.
Co-Chair Thompson commented that the 28 percent to 7.8
percent default rates were quite a variation. He asked
about the differential.
Ms. Barrans responded she had testified in the past that
default rates had been very high (in the 20 percent range)
in the late 1980s and early 1990s. She could not speak to
Mr. Gallagher's source of information. She explained the
rate had been substantially reduced over years, in part due
to putting collection levers in place (authorized by the
legislature) and implementing credit criteria. She
explained there had been no credit criteria or cosigner
requirements when the rates had been that high.
10:03:39 AM
Co-Chair Neuman provided a scenario where the legislature
came back in the following year and determined a change
needed to be made to the corporation after determining its
administrative costs. He wondered if passage and voter
approval of the bill would lock the legislature into any
future commitments around how the fund was managed.
Ms. Barrans responded not that she was aware of.
Co-Chair Neuman believed the costs needed to be looked into
further. He thought the program operation costs were
between $1.2 million and $1.4 million. e asked//.
Ms. Barrans answered that the program's administrative
costs had reduced over the past two years. There were some
increased costs, but they were relative to pass through
funds. The WWAMI (Washington, Wyoming, Alaska, Montana, and
Idaho) program budget was included in the corporation's
organizational budget. She elaborated there had been some
increases until the past year or so, which had flattened
out. The other new money was pass through funds for
scholarships and grants.
Vice-Chair Saddler asked if it could be assumed ACPE and
ASLC were on the same side (different entities with the
same mission).
Ms. Barrans answered in the affirmative. The entities
shared a mission - the corporation was the fiduciary of the
funds, which directed investments and determined terms and
conditions on loans, whereas, ACPE represented the policy-
setting side responsible for controlling student aid
programs or outreach activities. The agencies worked
essentially as an integrated organization.
Vice-Chair Saddler surmised the current consumer rate of
6.25 percent included a cost of 3.75 percent on the open
market and the 2.5 percent administrative cost. He asked
for verification if the corporation was able to obtain a
2.75 percent market rate as envisioned by the legislation,
the rate [offered to students] would reduce to 5.25
percent.
Ms. Barrans responded in the affirmative.
10:07:00 AM
Vice-Chair Saddler referred to Ms. Barrans' testimony the
commission had never needed to ask for cash assistance from
the state. He noted Ms. Barrans had also referred to a
bridge loan the commission had received. He thought she had
testified the loan had been to pay back the state. He asked
for detail.
Ms. Barrans answered that after the bond market collapsed
in 2007 the student loan backed bonds had been tainted by
the mortgage industry [crisis]. Investors had become very
wary of certain asset backed bonds, which included student
loans. She detailed that the cost on the bonds had become
exorbitant for anyone in the market at the time. Therefore,
ACPE had not been able to go into the market to issue debt
for a period of time. In order for the commission to
continue to meet loan demand during the two or three years
after the collapse, the legislature had authorized DOR to
enter into a loan agreement with ACPE. She furthered that
DOR had to structure it as an investment of the state,
which required DOR to charge an interest rate similar to
what the department would have otherwise received on other
investments. The corporation had used about $68 million of
a $100 million line of credit and had subsequently paid it
back. She believed the interest ACPE paid on the debt to
the state was around 3.8 or 4 percent.
Vice-Chair Saddler referred to the bond market collapse in
2007. He wondered if the circumstances had been considered
an extraordinary condition that may happen every 50 to 100
years.
Ms. Barrans responded the situation had been considered a
once-in-a-generation collapse. She elaborated it had
occurred due to the result of extended subprime mortgage
lending activity.
Vice-Chair Saddler asked for clarification on what Ms.
Barrans meant by once-in-a-generation. He wondered if the
legislature should expect that kind of thing to happen
every 20 years.
Co-Chair Thompson interjected "next time we have a
recession."
Vice-Chair Saddler wondered how often Ms. Barrans thought a
situation may call into question the corporation's ability
to carry its loan debt on its own.
Ms. Barrans replied she would not expect to see the
circumstance happen again. She detailed the situation had
led to a series of changes in the market's structure by
rating agencies and bond insurers. The collapse had been
catastrophic and had led to a changing of the "rules of
play" in the market.
Co-Chair Thompson asked Vice-Chair Saddler to address the
fiscal note.
10:10:40 AM
AT EASE
10:11:16 AM
RECONVENED
Vice-Chair Saddler reviewed the bill's zero fiscal note
from the Office of the Governor for the Division of
Elections. He remarked there were no position changes
included in the note.
Co-Chair Neuman MOVED to report SJR 2 out of Committee with
individual recommendations and the accompanying fiscal
note. There being NO OBJECTION, it was so ordered.
SJR 2 was REPORTED out of committee with a "do pass"
recommendation and with a previously published zero fiscal
note: FN1 (GOV).
10:12:06 AM
AT EASE
10:51:01 AM
RECONVENED
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 250 CSWORKDRAFT vW.pdf |
HFIN 4/17/2016 9:30:00 AM |
HB 250 |
| HB 245 CS WORKDRAFT FIN vN.pdf |
HFIN 4/17/2016 9:30:00 AM |
HB 245 |
| HB 245 CS vN APFC procurement.pdf |
HFIN 4/17/2016 9:30:00 AM |
HB 245 |
| HB 245 Sectional Analysis vN.pdf |
HFIN 4/17/2016 9:30:00 AM |
HB 245 |
| HB 245 HCS vN 4 17 16 PF Bill Payout Limit.pdf |
HFIN 4/17/2016 9:30:00 AM |
HB 245 |