Legislature(2015 - 2016)CAPITOL 106
03/23/2016 08:00 AM EDUCATION
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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.
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