Legislature(2015 - 2016)CAPITOL 106
03/23/2016 08:00 AM House EDUCATION
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| Audio | Topic |
|---|---|
| Start | |
| SB89 | |
| SJR2 | |
| HB156 | |
| HB298 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SJR 2 | TELECONFERENCED | |
| *+ | HB 298 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 156 | TELECONFERENCED | |
| += | SB 89 | TELECONFERENCED | |
SJR 2-CONST. AM: G.O. BONDS FOR STUDENT LOANS
8:32:12 AM
CHAIR KELLER announced that the next order of business would be
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.
8:32:20 AM
KRISTEN PRATT, Staff, Senator Anna MacKinnon, Alaska State
Legislature, introduced SJR 2, paraphrasing from the sponsor
statement, which read as follows [original punctuation
provided]:
Senate Joint Resolution 2 proposes to place a
constitutional amendment before the voters during the
fall 2016 general election. This bill amends Article
IX, sec. 8, of the Alaska Constitution and would
authorize state General Obligation (GO) debt for the
purpose of funding state education loans for Alaska
students.
Currently, state General Obligation debt may only be
authorized for capital improvements or housing loans
for veterans.
Financial market conditions once allowed the Alaska
Student Loan Corporation (ASLC) to offer competitive,
low-cost education loans to a significant percentage
of Alaska students without State support. However,
those conditions no longer exist and appear unlikely
to occur again in the foreseeable future. As a result
of these changed conditions, Alaska students and
families are receiving decreasing levels of state
support, at a higher cost, in meeting postsecondary
education expenses.
Senate Joint Resolution 2 will establish a cost-
effective way to finance state education loans by
leveraging the State's outstanding general obligation
credit ratings. Doing so will not only achieve lower
costs of funds than what is otherwise available
through current alternative financing structures, but
will also permit some flexibility of the loan
underwriting criteria which currently results in a 43%
denial rate on loan applications.
These loan programs represent a critical component of
the State's student financial aid system and its
efforts to enhance the workforce development pipeline
in order to build and maintain a healthy state
economy.
8:33:00 AM
REPRESENTATIVE COLVER ascertained that this would be handled
similar to any general obligation (GO) bond and require a public
vote.
8:34:21 AM
DIANE BARRANS, Executive Director, Postsecondary Education
Commission, Department of Education and Early Development (EED),
stated support for SJR 2, and said the expectation is that
[following voter approval] the commission would be returning to
the legislature to support a bill describing the way in which
the bonds would be issued, including, potentially, a cap on the
amount of bonds allowed, as supported under the GO.
8:35:40 AM
REPRESENTATIVE COLVER asked what the maximum length of authority
for the GO would be prior to subsequent voting being
requirements. Also, what would be the savings in interest rates
by adopting the use of free GO bonds.
MS. BARRANS responded that statute would be established by the
legislature through passage of a support bill to provide
specifications regarding the length of time that the corporation
would be able to enjoy the ability to issue bonds, as well as
the total amount of debt that would be approved. Texas is
another state that employs the use of GO bonds for educational
loans, where the program functions under a cap. Regarding the
interest rate, she said 1-1.5 percent would be the expectation.
Another benefit of issuing this type of debt, is the underlying
scrutiny required to issue a loan, which lowers the cost of the
loan to the consumer.
8:38:02 AM
REPRESENTATIVE VAZQUEZ queried how the student loans are
currently being financed.
MS. BARRANS responded that loans are financed via cash reserves,
with loans issued previous to 2008 held as bond debt. To a
follow-up question she said the bond debt is approximately $130
million. However, since 1988, she stressed, the corporation has
issued, and successfully repaid, $1.8 billion in bonds.
8:39:25 AM
REPRESENTATIVE DRUMMOND expressed concern, regarding the
financial leverage expectations of SJR 2, considering the
state's current fiscal situation and the possibility that
Alaska's credit rating may continue to fall.
MS. BARRANS assured members that the GO debt has been discussed
and the 1-1.5 percent interest rate is based on the state
maintaining a credit rating of AA; recently devalued from AAA.
8:41:09 AM
REPRESENTATIVE SEATON noted that the sponsor statement mentions
flexibility for the loan underwriting criteria, which currently
results in a 43 percent, loan application denial rate, as based
on the FICO [formerly Fair Isaac Company] rating. He asked what
the current default rate is on student loans, and whether any
effects on the default levels are anticipated, by lowering the
FICO score requirement.
MS. BARRANS opined that underwriting criteria, when based on a
credit score, may be misleading. A credit score does not
necessarily reflect less of an ability to repay, as much as the
lack of a credit history. The minimum FICO score currently used
by the corporation is 680, which is slightly higher than the
average Alaskan score of 650. By lowering the rate to 650, she
explained, it will align with the average score without
impacting default rates adversely. The current annual default
rate is about 8 percent, and fluctuates in accordance with the
national economic and employment levels.
8:43:16 AM
REPRESENTATIVE COLVER asked how a newly emancipated, 18 year old
student could receive a FICO score and, lacking a credit
history, be eligible for a loan.
MS. BARRANS responded that a qualified co-signer is required for
anyone who lacks a personal credit standing. The average
University of Alaska (UA) student's age is 26, thus, the
majority of applicants have a credit score, she said, but 43
percent of the time it's not sufficiently high enough to
qualify. She recalled that loans were initially provided
through the state's general fund (GF), carried no credit
requirements, and demonstrated a default rate as high as 20
percent. Further, early on in the history of the program, a
"credit ready" standard was implemented to support students who
lacked a credit score, again resulting in higher default rates.
8:46:28 AM
REPRESENTATIVE COLVER pointed out the difficulty in building a
credit history, particularly for young adults who haven't had
opportunities to exercise credit. He opined that it represents
a discriminatory process, and, although debt repayment is
important, a fairness question arises. He asked a series of
questions regarding the typical authority granted the GO bonds
for veteran housing loans, which included: duration of
authority, amounts granted, and balloting interval requirements.
8:48:02 AM
MS. PRATT offered to provide further information.
REPRESENTATIVE COLVER expressed concern for establishing an open
ended bond authority.
8:49:05 AM
MS. BARRANS opined that a reasonable voting interim time frame
would be five years, which would provide a frequent enough cycle
for voters to become familiar with the program, note the
benefits, and provide continued support or not. She said this
will also be helpful to older students, who may exercise
refinance opportunities.
8:50:28 AM
REPRESENTATIVE VAZQUEZ asked who establishes the FICO score.
MS. BARRANS responded that it's handled through the Alaska
Student Loan Corporation (ASLC), via regulation. To a follow-up
question, she said the corporation is governed by a five member
board, comprised of the commissioners from Department of Revenue
(DOR), Department of Commerce, Community & Economic Development
(DCCED), Department of Administration (DOA), and two members of
the Postsecondary Secondary Commission appointed by the
governor.
REPRESENTATIVE VAZQUEZ surmised that the board has the authority
to change the FICO score requirement.
MS. BARRANS concurred, and reiterated that the 680 score is a
barrier, and 650 will mitigate the denial rate.
8:52:06 AM
REPRESENTATIVE VAZQUEZ directed attention to the committee
packet, and the sponsor statement, paragraph three, which read
as follows:
Financial market conditions once allowed the Alaska
Student Loan Corporation (ASLC) to offer competitive,
low-cost education loans to a significant percentage
of Alaska students without State support.
REPRESENTATIVE VAZQUEZ noted that interest rates have been at
historic lows since 2008, and asked what market conditions are
being referred to in this statement.
MS. BARRANS pointed out that the cost of funds to banks and
lending organizations, reflected in the historically low rates,
are not relative to the cost of bonds issued in the market. The
interest rates on the bonds themselves would need to be
reviewed, rather than the interest rate of funds to lending
organizations.
REPRESENTATIVE VAZQUEZ asked what the bonds have to do with the
interest rate being charged by the ASLC, if, as mentioned
earlier, the loans are currently being backed by cash.
MS. BARRANS answered that the loans the corporation makes must
be of sufficient quality to be used as assets to issue bonds in
the market. When the corporation considers its interest rate
sets, it looks at what the rate in the market would be today, if
debt was being issued. In that manner, she explained, the
interest rates on the loans will be appropriate to support the
use of the loans as assets, when the corporation re-enters the
market.
REPRESENTATIVE VAZQUEZ asked what the amount of revenues and
expenditures were for ASLC in 2015.
MS. BARRANS deferred.
8:55:13 AM
CHARLENE MORRISON, Chief Finance Officer, Postsecondary
Education Commission, Department of Education and Early
Development (EED), responded that the 2015 ASLC revenues totaled
$18 million, and expenditures were $17 million.
REPRESENTATIVE VAZQUEZ asked for the 2016 revenue and
expenditure estimates, the corporation's cash value, and reserve
totals.
MS. MORRISON said 2016 estimates have not been established,
although the first six months figures show revenues of just over
$9 million and expenditures approximating $8.8 million, for a
net income of just under $700,000. The unencumbered cash
available for loans is roughly $28 million, which also funds the
operating budget and other corporation expenditures. The
unreserved equity, as of 6/30/15, was $95 million.
8:58:31 AM
REPRESENTATIVE SEATON clarified that the question is whether GO
bonds should be presented to the voters to decide whether or not
to allow tax free, lower cost loans to students.
MS. BARRANS concurred, and added that the structure being
contemplated proposes that the corporation would continue to
pledge assets to the bonds for repayment. The action would not
represent a debt to the state; however, it leverages the states
credit to good advantage relative to the market cost of bonds.
REPRESENTATIVE SEATON said with five commissioners on the board,
and the process requiring legislative reauthorization, the
appropriate protections appear to be in place to support this
bill. He opined on the importance for continued support of
education in the state.
9:01:17 AM
REPRESENTATIVE VAZQUEZ stated an assumption that a resolution
was passed by the board of directors to proceed with this
request for a change in statute.
MS. BARRANS said a formal resolution was not put forward;
however, general agreement on the board exists to support the
action in light of the benefits to the constituents of the
corporation.
REPRESENTATIVE VAZQUEZ asked whether the board has considered
lowering the FICO scores through existing authority.
MS. BARRANS answered that the interest rate has not been
revisited since it was established in 2008. At this point, she
explained that, absent the support that a GO bond authority
would provide, it would be imprudent to take the action to lower
the rate, thus requiring the corporation to substantially over
collateralize the trust from which the bonds are issued. Such
action would create an inefficiency in the use of the corporate
assets.
REPRESENTATIVE VAZQUEZ asked about outstanding bonds issued by
the corporation.
MS. BARRANS answered that the last bond issue for new money
occurred in 2007; however, refinancing and restructuring of
outstanding debt has occurred since that time.
9:03:50 AM
CHAIR KELLER closed public testimony.
9:04:35 AM
REPRESENTATIVE COLVER expressed reservations for passing the
bill from committee, and said legislative intent needs to be
clarified. The proposed legislation lacks a clear and concise
record of expected terms and conditions regarding exercising the
authority to put a GO bond on the ballot. The record should
include the anticipated length of the GO bond authority, the
anticipated amount, as well as an accounting of similar
exercises of the constitutional authority regarding veteran's
housing loans, as administered by the Alaska Housing
Corporation. Creating an open ended authority without
appropriate sideboards may result, he opined, and acknowledged
that statutory authority will still exist. A major missing link
is a statement of interest and support from the ASLC board.
9:08:51 AM
REPRESENTATIVE VAZQUEZ noted that the reason to issue the GO
bonds is to allow additional accessibility to loans for
students. The benefit could be garnered by lowering the FICO
score, she said, and pointed out that the ASLC board has the
authority to implement that change. She expressed concern for
issuing bonds, which isn't an uncostly undertaking, and opined
that the justifications for passage of SJR 2 don't appear to
fit.
9:11:12 AM
CHAIR KELLER announced SJR 2 as held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB298 Fiscal Note.pdf |
HEDC 3/23/2016 8:00:00 AM HEDC 4/1/2016 8:00:00 AM |
HB 298 |
| CS HB156 Sponsor Statment.pdf |
HEDC 3/23/2016 8:00:00 AM |
HB 156 |