Legislature(2015 - 2016)CAPITOL 106

03/23/2016 08:00 AM EDUCATION

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 156(EDC) Out of Committee
<Bill Hearing Rescheduled from 3/21/16>
Moved HCS CSSB 89(EDC) Out of Committee
         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                                                                          
     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                                                                    
     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                                                                    
8:33:00 AM                                                                                                                    
REPRESENTATIVE COLVER ascertained that this would be handled                                                                    
similar to any general obligation (GO) bond and require a public                                                                
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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                                                               
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