Legislature(2009 - 2010)HOUSE FINANCE 519

03/17/2009 01:30 PM House FINANCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 172 STATE INVESTMENT IN EDUCATION FUND TELECONFERENCED
Moved CSHB 172(FIN) Out of Committee
+ HB 90 AIDEA: BONDING LIMITS; CONFIDENTIALITY TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 172                                                                                                            
     "An Act relating to an investment in the education loan                                                                    
     fund; relating to authority for the commissioner of                                                                        
     revenue to enter into a bond purchase agreement and                                                                        
     letter of credit with the Alaska Student Loan                                                                              
     Corporation; and providing for an effective date."                                                                         
                                                                                                                                
1:39:28 PM                                                                                                                    
                                                                                                                                
DIANE  BARRANS, EXECUTIVE  DIRECTOR, POSTSECONDARY  EDUCATION                                                                   
COMMISSION,  DEPARTMENT OF  EDUCATION signified  that HB  172                                                                   
changes  a   Department  of  Revenue  statute   allowing  the                                                                   
Commissioner   of  Revenue   to  assist   the  student   loan                                                                   
corporation with financing help  over the next two years. For                                                                   
the past  20 years, the  Student Loan Corporation  has issued                                                                   
tax exempt  revenue bonds in the  capital market, but  due to                                                                   
the capital market disruption,  this bill would allow them to                                                                   
continue  issuing  bonds  to  offer  low  interest  education                                                                   
loans. This  assistance prevents  an interruption  of lending                                                                   
services  without returning  to the  pre-corporation days  of                                                                   
coming  before  the  legislature  to  ask  for  general  fund                                                                   
appropriations.  The  recommendation  is  for a  three  prong                                                                   
strategy.  The first,  to provide  immediate  relief for  the                                                                   
2009 tenure, the Commissioner  of Revenue would enter into an                                                                   
agreement with the corporation  to directly finance education                                                                   
loans. The bill allows an extension  of credit capped at $100                                                                   
million to allow immediate use  of those funds. The last time                                                                   
the corporation was  successfully able to issue  bonds was in                                                                   
2007.  Last  year  there was  sufficient  available  cash  to                                                                   
finance all  the 2008-2009  loans. The  total amount  for the                                                                   
current loan year  is about $95 million, but  the corporation                                                                   
has suspended loan applications at this time.                                                                                   
                                                                                                                                
1:42:36 PM                                                                                                                    
                                                                                                                                
Ms. Barrans  indicated that  the second  part of bill  allows                                                                   
the  Commissioner of  Revenue to  create a  method of  credit                                                                   
enhancement  to the  student  loan corporation.  This  credit                                                                   
enhancement is in the form of  a liquidity facility or letter                                                                   
of  credit that  would underwrite  bonds issued  in the  next                                                                   
year. Bonds currently attractive  to investors have some form                                                                   
of liquidity facility  so that if the investor  wants to sell                                                                   
the bonds, it would be possible.                                                                                                
                                                                                                                                
1:44:00 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker asked  for questions  and  noted that  Jerry                                                                   
Burnett would  be coming  forward to  give the Department  of                                                                   
Revenue's position on this bill.                                                                                                
                                                                                                                                
Representative  Gara   remarked  that  the   recently  passed                                                                   
student  loan bill,  HB  109, made  it  impossible for  young                                                                   
people with  no credit to  get a loan.  He wondered  if there                                                                   
was some way around that by having  the Department of Revenue                                                                   
use state  money to  finance loans  so that  it would  not be                                                                   
necessary   to    follow   rules   of   credit    worthiness.                                                                   
Representative Gara  indicated that he would  welcome support                                                                   
in removing  the $1000  cap on  the Post Secondary  Education                                                                   
Financial Aid program.  He asked Ms. Barrans how  much is the                                                                   
Post  Secondary  Commission's  total portfolio  in  terms  of                                                                   
outstanding loans.  Ms. Barrans replied it was  $660 million.                                                                   
Representative  Gara  inquired  about  the  referred  to  $95                                                                   
million. Ms.  Barrans remarked  that the $95 million  covered                                                                   
new  loans  to  borrowers  for   the  2008-2009  loan  years.                                                                   
Representative   Gara  asked  if   there  was  any   way  the                                                                   
Department  of  Revenue could  back  loans for  those  people                                                                   
without a credit  history. Ms. Barrans remarked  that depends                                                                   
on the will of the legislative  body since she considered the                                                                   
only way for  that plan to work  would be if it  was directly                                                                   
funded by the  general fund. The loan would  be directly from                                                                   
the State of Alaska without investor  interests, but it would                                                                   
require them  to come before  the legislature every  year for                                                                   
funds.                                                                                                                          
                                                                                                                                
1:47:54 PM                                                                                                                    
                                                                                                                                
Representative  Gara inquired if  the loans were  once backed                                                                   
by the state general fund. Ms.  Barrans replied that was true                                                                   
until  1988.  Representative   Gara  asked  if  it  would  be                                                                   
feasible to  have a system that  limited the draw  on general                                                                   
fund, a  secondary loan  for those who  do not qualify  under                                                                   
the standards in  HB 109. Ms. Barrans could  not speculate on                                                                   
the  financial  burden  from   one  year  to  the  next.  She                                                                   
suggested  there were  alternatives for  students who  do not                                                                   
qualify  for  a  supplemental  education  loan  such  as  the                                                                   
federal education loan program entitlement program.                                                                             
                                                                                                                                
1:50:05 PM                                                                                                                    
                                                                                                                                
Representative  Gara   contended  this  special   loan  would                                                                   
involve  a small number  of students.  Ms. Barrans  signified                                                                   
that she  was not sure which  students would not  qualify for                                                                   
at least  one of the  loans. The  only people denied  federal                                                                   
education loans  are those convicted  of a drug  felony while                                                                   
taking out  federal loans  or draft-age  males who  failed to                                                                   
register.  Representative  Gara asked  if  there were  income                                                                   
limits. Ms. Barrans said no.                                                                                                    
                                                                                                                                
1:51:16 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker interjected  that the purpose of  the bill is                                                                   
driven by  the lack of liquidity  in the market and  the lack                                                                   
of money  which would  suspend operations  for this  year. He                                                                   
stressed  that timing  was  of  the essence  to  stay in  the                                                                   
business of  making loans. House  Bill 172 would be  a bridge                                                                   
facility  until the capital  markets return  and the  program                                                                   
can continue as  an independent business entity.  Ms. Barrans                                                                   
agreed.                                                                                                                         
                                                                                                                                
1:52:08 PM                                                                                                                    
                                                                                                                                
Representative Austerman asked  about the average yearly loan                                                                   
portfolio. Ms.  Barrans replied  that there have  been annual                                                                   
double  digit  increases for  the  past  few years.  This  is                                                                   
attributed  to the growth  of the  federally guaranteed  loan                                                                   
activity which  borrowers enter into master  promissory notes                                                                   
which  they  continue  to  borrow from  each  year.  The  $95                                                                   
million loaned this  year is the highest volume  in 18 years;                                                                   
it  usually   ranges  from  $65   to  $70  million   a  year.                                                                   
Representative  Austerman asked  if future  years will  level                                                                   
out. Ms. Barrans agreed the growth  should level off over the                                                                   
next  two to  three  years  to a  $90  to $100  million  loan                                                                   
volume.                                                                                                                         
                                                                                                                                
1:54:10 PM                                                                                                                    
                                                                                                                                
Representative   Kelly   referred   to   page  2,   line   3,                                                                   
"…commissioner  may require  the  corporation  to secure  the                                                                   
investment of  state money." He  inquired why not  insert the                                                                   
word "shall"  instead of "may."  He then referred to  page 2,                                                                   
line  23-24,   "…0.15  percent   of  the  average   principal                                                                   
outstanding and  interest covered by the bond  purchase…" and                                                                   
page 2,  line 29,  "...rate of interest  not to exceed  three                                                                   
percent on the bonds held…" He  wondered if there should be a                                                                   
requirement for the security and  if this set rate was a good                                                                   
deal for the corporation.                                                                                                       
                                                                                                                                
1:55:37 PM                                                                                                                    
                                                                                                                                
JERRY  BURNETT, DEPUTY  COMMISSIONER,  DIVISION OF  TREASURY,                                                                   
DEPARTMENT   OF  REVENUE   answered  Representative   Kelly's                                                                   
question regarding  page 2, line  3. He indicated  that "may"                                                                   
is  a permissive  statement  for  the corporation  to  secure                                                                   
investments on  a negotiated deal  with a specific  portfolio                                                                   
of student  loans or the general  credit of the  student loan                                                                   
corporation. It would probably  be a secured credit, but that                                                                   
would  be  negotiated.  Mr. Burnett  judged  using  the  word                                                                   
"shall"  instead of  "may"  would not  harm  anything in  the                                                                   
bill.  He emphasized  that the  Department  of Revenue  would                                                                   
make  certain that  investment  grade securities  were  being                                                                   
purchased.                                                                                                                      
                                                                                                                                
1:57:19 PM                                                                                                                    
                                                                                                                                
Ms. Burnett remarked that setting  the rate, the 0.15 percent                                                                   
fee for the credit facility, is  the average cost of a credit                                                                   
facility  prior  to  the  current   credit  meltdown.  It  is                                                                   
intended to  be affordable,  not to  make a profit,  although                                                                   
there are  some costs  to keep money  available in  a shorter                                                                   
term investment  portfolio.  The three  percent is a  penalty                                                                   
for the student  loan in case the bond  repurchases agreement                                                                   
is used.  The intent of  the bill is for  this to be  a short                                                                   
term program.                                                                                                                   
                                                                                                                                
1:58:58 PM                                                                                                                    
                                                                                                                                
Representative  Kelly  voiced  his  concern  regarding  three                                                                   
areas he mentioned earlier, especially  his hope this program                                                                   
would not be  permanent. Mr. Burnett agreed.   Representative                                                                   
Kelly reiterated  his desire to use the word  "shall" instead                                                                   
of "may."                                                                                                                       
                                                                                                                                
1:59:25 PM                                                                                                                    
                                                                                                                                
Representative  Crawford  believed  that  liquidity  for  the                                                                   
bonds  contradicts  the  premise behind  bonds.  Ms.  Barrans                                                                   
remarked  that  the  type  of bonds  issued  to  finance  the                                                                   
federally guaranteed  student loans are variable  rate bonds.                                                                   
The investor  buys bonds  knowing a  market exists  to accept                                                                   
those  bonds if cash  is needed.  The problem  in the  market                                                                   
today is that  the bonds previously issued were  auction rate                                                                   
securities  that  did  not have  a  liquidity  facility,  but                                                                   
depended  on  a  functioning  market  place  with  sufficient                                                                   
buyers for  sellers to  unload their bonds  to get  cash out.                                                                   
That market fell apart and has  not functioned since February                                                                   
2008  and  there  is an  agreement  this  market  will  never                                                                   
recover.                                                                                                                        
                                                                                                                                
2:01:47 PM                                                                                                                    
                                                                                                                                
Representative  Crawford  reiterated  his  confusion  on  who                                                                   
funds the  liquidity or how.  Mr. Burnett replied  that these                                                                   
bonds are held by corporations,  pension funds, and states. A                                                                   
liquidity facility  works so that after a period  of time the                                                                   
buyer puts  the bonds back into  the market and  someone else                                                                   
buys  them. Under  this bill,  if  there are  no buyers,  the                                                                   
state would  buy the bonds  and then  put them back  into the                                                                   
market.  The state  would be the  buyer of  last resort,  but                                                                   
this would ensure the bond holder that there was a buyer.                                                                       
                                                                                                                                
2:02:56 PM                                                                                                                    
                                                                                                                                
Representative  Crawford  asked  what would  be  the  maximum                                                                   
amount of exposure the state would  have at any one time. Mr.                                                                   
Burnett  remarked that  under this legislation  a maximum  of                                                                   
$100 million  would be  owned directly by  the state  with an                                                                   
exposure up to $106 million. The  pool of funds used would be                                                                   
the  general  fund  and  non-segregated  investments.  As  of                                                                   
January 31, 2009, this pool had $7.5 billion.                                                                                   
                                                                                                                                
2:04:22 PM                                                                                                                    
                                                                                                                                
Representative  Austerman indicated that  there is  no sunset                                                                   
on  the  bill except  where  it  states  a  5 year  term.  He                                                                   
questioned if  this would be a  one or two 5 year  terms. Mr.                                                                   
Burnett understood the intent was for one 5 year term.                                                                          
                                                                                                                                
2:05:04 PM                                                                                                                    
                                                                                                                                
Representative Gara  questioned which class of  student needs                                                                   
this  state loan  if  everyone,  except those  with  criminal                                                                   
records,  qualifies  for  the   federal  loans.  Ms.  Barrans                                                                   
replied  that students  attending a high  cost program  where                                                                   
there  is the  need  to borrow  beyond  the  federal loan  of                                                                   
$13,000.  State  funds  have been  marketed  as  supplemental                                                                   
loans,  although many  students go  to the  state loan  first                                                                   
because it  is easier to  acquire. Representative  Gara asked                                                                   
if it was correct  then that only students  needing more than                                                                   
$13,000 would  require this loan.  He also asked  if everyone                                                                   
can  receive  the full  $13,000  value  of federal  aid.  Ms.                                                                   
Barrans replied it varies depending  on the student's year in                                                                   
school and whether they were a  dependent of their parents or                                                                   
independent.  Representative Gara remarked  that there  was a                                                                   
small  group  of  students  who may  not  receive  enough  in                                                                   
federal  loans or do  not have  a credit  history to  get the                                                                   
state loan.                                                                                                                     
                                                                                                                                
2:07:50 PM                                                                                                                    
                                                                                                                                
Representative   Gara  thought  there   should  be   a  small                                                                   
supplemental  loan   program  for  those  students   who  had                                                                   
exhausted their  federal loans, but  who did not  qualify for                                                                   
the state  loans. Ms.  Barrans replied that  there will  be a                                                                   
better  picture after  the new loans  are implemented  should                                                                   
this bill pass. The question remains  to either make a change                                                                   
to the  loans or simply  forgo the loans  in the  future. She                                                                   
suggested  that the  federal plus  program  is available  for                                                                   
students who have  a co-signer that does not  meet the credit                                                                   
worthy standards for the state program.                                                                                         
                                                                                                                                
2:09:28 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  opened the  discussion to public  testimony.                                                                   
There being none, public testimony was closed.                                                                                  
                                                                                                                                
2:10:09 PM                                                                                                                    
                                                                                                                                
Representative  Austerman  commented  if  oil  returns  to  a                                                                   
higher  price,  this  program  should come  back  before  the                                                                   
legislature from an investment  by the state into a revolving                                                                   
loan  program that  does not  require bonding  every year  to                                                                   
handle these programs. Representative  Crawford reported that                                                                   
his  children were  not eligible  for  any federal  programs,                                                                   
only  the  state program.  He  saw  the possibility  of  some                                                                   
students falling  between the  cracks and not  being eligible                                                                   
for any  sort of  loan. He  expressed the  desire to  explore                                                                   
ways to help those  people who may want to go  to college but                                                                   
are held back financially.                                                                                                      
                                                                                                                                
2:13:06 PM                                                                                                                    
                                                                                                                                
Representative Kelly MOVED to  ADOPT conceptual Amendment #1:                                                                   
                                                                                                                                
          Page 2, line 3:                                                                                                       
          Delete: "may"                                                                                                         
          Insert: "shall"                                                                                                       
                                                                                                                                
Co-Chair Hawker OBJECTED.                                                                                                       
                                                                                                                                
Representative  Gara believed  consideration should  be given                                                                   
for  a supplemental  program for  students who  would not  be                                                                   
eligible for federal or state loans.                                                                                            
                                                                                                                                
Co-Chair  Hawker  WITHDREW  his  OBJECTION.  There  being  NO                                                                   
further OBJECTION, it was so ordered.                                                                                           
                                                                                                                                
2:15:39 PM                                                                                                                    
                                                                                                                                
Representative  Gara  suggested  the  Department  of  Revenue                                                                   
propose a bridge  or secondary loan for students  who are not                                                                   
able to  qualify for the  other loan categories.  Mr. Burnett                                                                   
expressed that within  this bill there is the  desire to keep                                                                   
it an investment  grade for the state of Alaska.  Mr. Burnett                                                                   
noted that the  type of loan Representative  Gara referred to                                                                   
would require  an appropriation  to a  special fund  specific                                                                   
for that purpose.  He believed it would not be  prudent to do                                                                   
it simply  as a loan. Representative  Gara qualified  that he                                                                   
was asking for  help and advice on an estimate  and structure                                                                   
for a last resort loan fund concept.                                                                                            
                                                                                                                                
2:18:26 PM                                                                                                                    
                                                                                                                                
Mr.  Burnett  noted that  he  would  have  to work  with  Ms.                                                                   
Barrans  to see  how  that  could work.  Representative  Gara                                                                   
expressed  his  concern for  the  cap  on grants  the  Alaska                                                                   
Commission on  Postsecondary Education  is allowed  to issue.                                                                   
The cap is in AS 14.43.420                                                                                                      
                                                                                                                                
2:20:37 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  questioned the purpose of bill.  Mr. Burnett                                                                   
replied the bill's  purpose is authorizing the  Department of                                                                   
Revenue to  provide direct investment  in the  education loan                                                                   
fund  and   the  credit   facility  for   the  student   loan                                                                   
corporation.                                                                                                                    
                                                                                                                                
2:21:27 PM                                                                                                                    
                                                                                                                                
Representative Kelly commented  that the United State economy                                                                   
is on  its knees because  grants have  been called  loans and                                                                   
money  has  been  loaned  to people  who  should  never  have                                                                   
received it. He  wanted Ms. Barrans to remain  a loan officer                                                                   
and  not a  grant distributor.  He emphasized  that he  looks                                                                   
directly  at the  student, not  the parents  or the  parent's                                                                   
situation.                                                                                                                      
                                                                                                                                
2:24:06 PM                                                                                                                    
                                                                                                                                
Representative  Fairclough  asked Ms.  Barrans  if there  was                                                                   
money that had been lapsing, not  going out under the current                                                                   
cap.  Ms. Barrans  replied  that  the money  the  legislature                                                                   
appropriated  to  the commission  was  put  in as  a  capital                                                                   
appropriation. Rather than expend  the full $2.5 million in a                                                                   
single year, it was determined  that dispersing half of those                                                                   
additional  funds in  2009 and  half  in 2010  would be  most                                                                   
beneficial.  There was no  lapse because  those funds  do not                                                                   
lapse. The student  loan corporation has been  using earnings                                                                   
from  an origination  fee  account  to  fund the  program  to                                                                   
$500,000 a year for the last 4  years. The new money from the                                                                   
state and  capital budget  last year was  the first  and only                                                                   
time that program has received  general funds. The plan is to                                                                   
deploy it over  a two year period of time. The  family income                                                                   
of the  recipient was  cut off  at $40,000  a year with  over                                                                   
1200  applicants  granted  from $1,000  to  $2,000.  Co-Chair                                                                   
Hawker  reminded the committee  they were  straying from  the                                                                   
bill.   Representative   Fairclough   acknowledged   she   is                                                                   
preparing  for  a  possible  amendment   on  the  floor.  Her                                                                   
reaction  to taking  the cap off  is that  less people  would                                                                   
qualify  for the program  if more  money was  given out  to a                                                                   
targeted group of students. She  questioned if the program is                                                                   
limited by funds or the cap.                                                                                                    
                                                                                                                                
2:27:14 PM                                                                                                                    
                                                                                                                                
Ms. Barrans  replied that when  the need based  grant program                                                                   
was designed that  concept informed the design  where the cap                                                                   
is $2000 a year; $1000 as a base  grant or $2000 for academic                                                                   
performers or  certain high needs  categories. The  old state                                                                   
program  was very  difficult to  get general  funds from  one                                                                   
year  to  the  next  for  the   grant  program.  The  concern                                                                   
regarding  a high  cap would be  that large  grants would  be                                                                   
given to 100 students, instead  of reasonably sized grants to                                                                   
up to a thousand students.                                                                                                      
                                                                                                                                
2:28:24 PM                                                                                                                    
                                                                                                                                
Ms. Barrans  explained the  fiscal note  speaks to  the costs                                                                   
the Department  of Revenue  expects to  incur. The  amount in                                                                   
the fiscal note starting in FY2010 is $20,000.                                                                                  
                                                                                                                                
2:29:56 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  noted when putting both listed  fiscal notes                                                                   
side by side, the Department of  Revenue has their $20,000 in                                                                   
FY2010 appropriation  and then  the student loan  corporation                                                                   
has $20,000 a year for five years.  Co-Chair Hawker asked for                                                                   
an explanation.  Mr.  Burnett explained  that the  Department                                                                   
appropriation in  FY2010 is an  interagency receipt  which is                                                                   
already  appropriated in  the RSA.  Co-Chair Hawker  believed                                                                   
Mr.  Burnett  intends  to  conduct   a  transaction  for  the                                                                   
authority granted under this bill  during FY2010. Mr. Burnett                                                                   
agreed. Co-Chair  Hawker continued  that beyond that  it will                                                                   
be a "depend" situation. Mr. Burnett  agreed. Co-Chair Hawker                                                                   
reported  that  both  fiscal   notes  should  be  changed  to                                                                   
indeterminate   fiscal  notes.   Ms.   Barrans  agreed   that                                                                   
modification  could be  made. Co-Chair  Hawker directed  that                                                                   
both fiscal notes be treated as indeterminate fiscal notes.                                                                     
                                                                                                                                
2:32:29 PM                                                                                                                    
                                                                                                                                
Representative Austerman  MOVED to report CSHB  172 (FIN) out                                                                   
of  committee  as  amended  with  amended  fiscal  notes  and                                                                   
individual recommendations. There  being NO OBJECTION, it was                                                                   
so ordered.                                                                                                                     
                                                                                                                                
CSHB  172 (FIN)  was REPORTED  out  of Committee  with a  "do                                                                   
pass"   recommendation  and   new  fiscal   notes  from   the                                                                   
Department of Education and the Department of Revenue.                                                                          
                                                                                                                                
2:33:37 PM                                                                                                                    
                                                                                                                                

Document Name Date/Time Subjects
07 HB90 AIDEA Description of Bonds Terms.pdf HFIN 3/17/2009 1:30:00 PM
HB 90
03 HB90 0043-CED-AIDEA-12-12-08.pdf HFIN 3/17/2009 1:30:00 PM
HB 90
CSHB 90 - LC Sectional Analysis.pdf HFIN 3/17/2009 1:30:00 PM
HB 90
Gov Transmittal Letter HB90.pdf HFIN 3/17/2009 1:30:00 PM
HB 90
HB172-DOR-TRE-3-11-09 revised.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172 Testimony 31309.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172 Sponsor Statement.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172 Sec Analysis.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172 Loan Funding Articles.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172 ASLC Background 31309.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
ASLC gov memo.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
Charter Ltr of Support.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172-DOR-TRE-3-13-09 revised.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
HB172-EED-ACPE-03-13-09.pdf HFIN 3/17/2009 1:30:00 PM
HB 172
Ltr. to Reps. Hawker and Stoltze 02.26.09.pdf HFIN 3/17/2009 1:30:00 PM
HB 90
Stoltze 031309.pdf HFIN 3/17/2009 1:30:00 PM
HB 172