Legislature(2009 - 2010)HOUSE FINANCE 519

03/30/2010 01:30 PM FINANCE

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Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 410                                                                                                            
     "An   Act   relating   to   loan   participations   and                                                                    
     development finance  projects of the  Alaska Industrial                                                                    
     Development  and  Export  Authority;  and  relating  to                                                                    
    loans from the rural development initiative fund."                                                                          
1:36:58 PM                                                                                                                    
TED   LEONARD,   EXECUTIVE   DIRECTOR,   ALASKA   INDUSTRIAL                                                                    
DEVELOPMENT  AND  EXPORT  AUTHORITY (AIDEA),  DEPARTMENT  OF                                                                    
COMMERCE,  COMMUNITY  AND  ECONOMIC  DEVELOPMENT,  explained                                                                    
that three  of the bill's  sections deal with AIDEA  and one                                                                    
part  deals  with an  AIDEA  fund  run  by the  Division  of                                                                    
Investments. He  detailed that the  changes requested  by HB
410  would deal  with  the first  part  of implementing  the                                                                    
strategic plan,  the effectiveness of AIDEA  programs, and a                                                                    
new development tool related to the loan program.                                                                               
     Section  1. AS  44.88.159(e) is  amended to  change the                                                                    
     method by  which AIDEA determines the  minimum interest                                                                    
     rate to  be charged  on loan participations  that AIDEA                                                                    
     finances with  AIDEA assets rather than  bond proceeds.                                                                    
     Current method  requires AIDEA  to establish  a minimum                                                                    
     by estimating the  true interest cost in  AIDEA were to                                                                    
     use bond proceeds. The proposed  method would allow the                                                                    
     minimum to be based on  the greater of either the rates                                                                    
     achieved by  a type  of category of  financial security                                                                    
     in a  published nationally  recognized market  index or                                                                    
     the 5-year rate of return on AIDEA's investments.                                                                          
Mr. Leonard  detailed that Section  1 would address  how the                                                                    
minimum interest  rate is  set when  AIDEA funds  loans with                                                                    
internal funds. Currently,  AIDEA sets the rate  by going to                                                                    
the bond  market and  asking an  expert like  Goldman Sachs.                                                                    
When the  municipal bond market had  problems, AIDEA's rates                                                                    
went  from the  6 percent  range up  to the  high 9  percent                                                                    
range; the rates have come  down but are still shifting. The                                                                    
agency was considering  going to an index  so that customers                                                                    
and partners could have a more steady interest rate.                                                                            
     Section  2. AS  44.88.159 is  amended by  adding a  new                                                                    
     subsection   that   allows   AIDEA  to   establish   in                                                                    
     regulation  a new  program  to  provide incentive  rate                                                                    
     rebates  to  certain  loan participations  that  create                                                                    
     jobs,  promote   rural  development  or   foster  other                                                                    
     economic development criteria.                                                                                             
        · Rate rebates are limited to no more than 1% of                                                                        
          the interest rate charged to AIDEA's portion of                                                                       
          the loan participation.                                                                                               
        · The balance of loans subject to rebates would be                                                                      
          limited to no more than 5 % of the outstanding                                                                        
          balance of all loan participations.                                                                                   
        · The authority may not commit to pay an incentive                                                                      
          rebate for more than 5 years.                                                                                         
        · Allows AIDEA to establish a separate account for                                                                      
          this program.                                                                                                         
Mr. Leonard reported that Section 2  would set up a new tool                                                                    
under  the commercial  finance program  that would  allow an                                                                    
incentive rebate  program to  give incentives  to businesses                                                                    
meeting certain  criteria. For example,  if a  criterion was                                                                    
to develop 25 new jobs  with the investment, AIDEA would not                                                                    
give the rebate unless the jobs were in fact created.                                                                           
Co-Chair Hawker  pointed out that the  provision would bring                                                                    
extreme latitude  to the agency because  the criteria listed                                                                    
are authorized  to be established in  regulations adopted by                                                                    
AIDEA.  Mr.   Leonard  agreed.  He  added   that  AIDEA  had                                                                    
considered putting  the criteria  in statute, but  they felt                                                                    
they needed the flexibility to  tailor to the areas in which                                                                    
they were trying to incentivize investment.                                                                                     
Representative Kelly asked whether  the AIDEA board approved                                                                    
regulations. Mr.  Leonard responded  in the  affirmative. He                                                                    
added that the agency was  in the process of modernizing the                                                                    
organizational  structure   so  that   loans  would   go  to                                                                    
investment committees made of  private sector and management                                                                    
before going to the board.                                                                                                      
1:42:57 PM                                                                                                                    
Mr. Leonard continued with Section 3:                                                                                           
     AS 44.88.172(a)  is amended to  clarify that  AIDEA can                                                                    
     own  or operate  a percentage  of a  project -  not the                                                                    
     entire project.                                                                                                            
Mr. Leonard  detailed that currently there  are two sections                                                                    
in  statute; an  intent section  stipulating that  AIDEA can                                                                    
own an  interest in a  project, and another  section stating                                                                    
that  AIDEA  has  to  own the  project.  The  request  would                                                                    
clarify that  AIDEA has the  ability to  own a portion  of a                                                                    
project.  He   noted  that  the   price  tags   on  economic                                                                    
infrastructures are  increasing. For example, a  plant could                                                                    
be  in the  $1 billion  to  $2 billion  range, past  AIDEA's                                                                    
capacity;  AIDEA could  help the  project  be successful  by                                                                    
owning  a  portion  of  it.   In  addition,  evaluating  the                                                                    
practices  of other  development  finance organizations  has                                                                    
revealed that partnering with the  private sector shares the                                                                    
Co-Chair  Hawker  clarified  that  the  intent  was  not  to                                                                    
prohibit the  practice of  full ownership  but to  widen the                                                                    
latitude  to  allow AIDEA  to  be  a component  investor  in                                                                    
projects. He  thought the existing  language was  not clear,                                                                    
but seemed to preclude ownership  of the entire project. Mr.                                                                    
Leonard acknowledged the need for more clarity.                                                                                 
     Section  4.   AS  44.88.610(a)  is  amended   to  allow                                                                    
     borrowers to have  multiple Rural Development Revolving                                                                    
     Loan Fund  loans and increases the  cumulative amount a                                                                    
     person  may  borrow  from   $100,000  to  $150,000  and                                                                    
     increases  the cumulative  amount two  or more  persons                                                                    
     may borrow from $200,000 to $300,000.                                                                                      
Mr.  Leonard explained  that the  section  addresses a  fund                                                                    
that  AIDEA  financed  in  the  past  and  the  Division  of                                                                    
Investments currently operates.  The fund is one  of the few                                                                    
that  AIDEA  has  under  its   umbrella  that  is  a  direct                                                                    
participation loan  program. The authority had  searched for                                                                    
ways  to utilize  the money  to  get more  loans into  rural                                                                    
areas.  The  division  suggested changing  the  limits  from                                                                    
$100,000 to $150,000  for one business and  from $200,000 to                                                                    
$300,000  for more  than two  businesses, and  then changing                                                                    
the rate  from 6  percent to  4 percent  (more in  line with                                                                    
other  programs  run  by the  Division  of  Investment).  He                                                                    
stressed that  the change would allow  a successful business                                                                    
to have more than one loan as it grows.                                                                                         
1:47:34 PM                                                                                                                    
Co-Chair  Hawker  clarified  that   the  provision  was  not                                                                    
changing the rate from 6  percent to 4 percent, but changing                                                                    
the minimum rate. Mr. Leonard agreed.                                                                                           
Vice-Chair  Thomas referred  to  page 3,  line 23  adressing                                                                    
business located where  the population is 5,000  or less and                                                                    
not  connected by  road  or rail.  He  asked whether  Haines                                                                    
would  qualify  since  the   connecting  road  went  through                                                                    
another country.                                                                                                                
GREG  WINEGAR,  DIRECTOR,  ALASKA DIVISION  OF  INVESTMENTS,                                                                    
DEPARTMENT OF COMMERCE,  COMMUNITY AND ECONOMIC DEVELOPMENT,                                                                    
answered that  that the  key is being  connected by  road or                                                                    
rail; it does not matter  that the road goes through another                                                                    
Vice-Chair Thomas  thought the  language should  be changed.                                                                    
Mr.  Winegar offered  to  work to  change  the language  and                                                                    
acknowledged discussion about the  where the lines should be                                                                    
drawn.  He   thought  the  upcoming  census   could  make  a                                                                    
difference in which communities would qualify.                                                                                  
Vice-Chair  Thomas recalled  other legislation  that defined                                                                    
"resident" and wanted clarification.                                                                                            
Representative  Austerman  queried  the position  of  Haines                                                                    
regarding the definition.                                                                                                       
Vice-Chair Thomas  replied that  in the past  the fact  of a                                                                    
foreign  country had  excluded Haines  because a  connecting                                                                    
road was defined as one with 24-hour access.                                                                                    
1:51:28 PM                                                                                                                    
Mr.  Winegar responded  that Haines  did  qualify under  the                                                                    
existing statute.                                                                                                               
Representative Fairclough  referenced the  the indeterminate                                                                    
fiscal  note  with  zeroes  and  asked  whether  costs  were                                                                    
anticipated  for  the  incentive rate  rebate.  Mr.  Leonard                                                                    
responded  that overall  he did  not  expect cost  increases                                                                    
because of  the agency's capacity to  increase its portfolio                                                                    
balance on  new loans. He  pointed out that new  loans (even                                                                    
with the 100 basis points  reduction) would be more than the                                                                    
opportunity cost of investing internal funds.                                                                                   
Representative  Fairclough queried  the current  capacity of                                                                    
the  Gas-To-Liquids (GTL)  plant. Mr.  Leonard replied  that                                                                    
current statute allows $400 million  over a rolling 12-month                                                                    
period.  He noted  that the  House had  passed HB  90, which                                                                    
would take out refunding bonds and result in more capacity.                                                                     
1:54:07 PM                                                                                                                    
Representative  Fairclough  referred  to  a  bill  exempting                                                                    
AIDEA  from  procurement  code   and  asked  how  investment                                                                    
strategies would be  affected. Mr. Leonard did  not know and                                                                    
offered to get the information.                                                                                                 
Representative  Doogan questioned  how loan  costs would  be                                                                    
affected by Section 1. Mr.  Leonard responded that AIDEA was                                                                    
considering   several   different    indexes   set   through                                                                    
regulation, such  as the Federal  Home Loan Bank  index with                                                                    
5,  10,  15, and  30-year  indexes  for  cost to  funds.  In                                                                    
addition,  AIDEA  has  a minimum  floor  for  the  five-year                                                                    
annualized rate of return to  protect the loan portfolio and                                                                    
the  state  dividend.  The authority  uses  the  index  plus                                                                    
operation  cost on  a normal  daily rate;  if the  rate went                                                                    
below  that,  they  would  look at  the  minimum  floor.  He                                                                    
emphasized that  the legislation  would set the  minimum and                                                                    
allow AIDEA  (based on  other factors  that could  come into                                                                    
play, such  as loan risk) to  have a higher rate.  The index                                                                    
would be  the minimum rate  and would be set  by regulation.                                                                    
He added that  the index could be changed if  a better index                                                                    
came along.                                                                                                                     
Representative Doogan queried fund  costs under the proposed                                                                    
MARK DAVIS, ECONOMIC  DEVELOPMENT OFFICER, ALASKA INDUSTRIAL                                                                    
DEVELOPMENT  AND EXPORT  AUTHORITY, DEPARTMENT  OF COMMERCE,                                                                    
COMMUNITY  AND ECONOMIC  DEVELOPMENT,  responded that  using                                                                    
the 20-year  rate of the  Federal Home Loan Bank  of Seattle                                                                    
against what  AIDEA charges currently  would amount  to 1.04                                                                    
percent.  Over 20  years, AIDEA  is  essentially charging  a                                                                    
point that  it does not need  to charge in order  to recover                                                                    
the  rate of  funds.  He added  that  the statute  currently                                                                    
requires AIDEA to  use a cost of funds  tied historically to                                                                    
bonds,  which are  no  longer stable.  The  agency wants  to                                                                    
shift  to  more a  more  stable  and transparent  index.  He                                                                    
suggested  checking  the  Federal  Home  Loan  Bank  on  the                                                                    
Internet to figure out the  loan rate; currently Goldman and                                                                    
Sachs calculates  the rate.  He thought  the rates  would be                                                                    
lowered over time and be  protected against anomalies in the                                                                    
market.  The  treasury bill  is  currently  at 4.75  for  30                                                                    
years; 18 months  ago it was at minus  one, illustrating the                                                                    
instability of the bond market.                                                                                                 
1:59:39 PM                                                                                                                    
Representative Doogan  turned to Section 2  in the sectional                                                                    
analysis, related  to establishing a new  program that could                                                                    
create jobs,  promote rural  development, and  "foster other                                                                    
economic  development  criteria."  He asked  what  fostering                                                                    
criteria meant.   Mr. Davis  responded that the item  is the                                                                    
result of AIDEA's effort over the  past two years to work on                                                                    
a strategic economic  plan. The plan has  been released. The                                                                    
agency  studied  the  criteria used  by  similar  industrial                                                                    
development banks in  44 other states. The  statute uses job                                                                    
creation because the preamble  stipulates the elimination of                                                                    
unemployment. He  noted that most  development organizations                                                                    
put an  emphasis on distressed areas,  and that unemployment                                                                    
in  rural Alaska  tends  to be  high.  Other criteria  could                                                                    
relate to  distressed economic zones within  cities (such as                                                                    
Anchorage), which would track  the current federal practices                                                                    
under  the Build  America Bonds  (BABs) and  other types  of                                                                    
instruments.  Alaska  could  also  look  at  new  technology                                                                    
developments  that  could  spur further  job  creation.  The                                                                    
criteria could  be adopted through  regulation by  the AIDEA                                                                    
Representative Doogan pointed to Sections  4 and 5, which he                                                                    
understood as a substantial  loosening of loan requirements,                                                                    
both in terms  of getting people more  money, lower interest                                                                    
rates, and the  ability to get more than one  loan. He asked                                                                    
why the agency wanted the  changes. Mr. Winegar replied that                                                                    
based on  public input and internal  discussions about lower                                                                    
rates, AIDEA hoped to provide  a better rate for businesses,                                                                    
which  are creating  jobs. The  agency would  be allowed  to                                                                    
create regulations  to lower the  rate; currently  the floor                                                                    
by statute is  6 percent. Other successful  programs such as                                                                    
Small Business  Development allow  rates down to  4 percent.                                                                    
He  added that  the same  holds  true for  the loan  amount.                                                                    
Rates have gone up significantly  in the past several years,                                                                    
so the thinking  was to provide a  higher minimum. Regarding                                                                    
making more  than one loan,  a business that  was successful                                                                    
after getting  a small loan  ($10,000 to $20,000)  would not                                                                    
currently  be able  to borrow  more. The  agency thought  it                                                                    
made more  sense to  have the  limit based  on an  amount as                                                                    
opposed to the number of loans.                                                                                                 
2:04:13 PM                                                                                                                    
Representative  Doogan questioned  how  the  agency will  be                                                                    
able to monitor the effect of  the changes and what it could                                                                    
do if the  changes were not financially  viable. Mr. Winegar                                                                    
replied  that  AIDEA  carefully monitors  all  programs.  He                                                                    
emphasized  that  the changes  would  not  be required,  but                                                                    
would  provide flexibility.  He detailed  that the  lifetime                                                                    
delinquency rate  on the program  since origination  was 4.3                                                                    
percent.  He assured  the committee  that  the agency  could                                                                    
make adjustments  as needed  through the  regulation process                                                                    
as well as through the lending decision process.                                                                                
Representative  Kelly wondered  why he  had not  heard about                                                                    
changes related to credit worthiness  or about adjusting for                                                                    
risk.  Mr.   Winegar  answered  that   there  would   be  no                                                                    
difference in evaluation in terms of risk.                                                                                      
Co-Chair   Hawker  queried   the  4.3   percent  delinquency                                                                    
statistic. He  asked how  many Rural  Development Initiative                                                                    
Fund loans were  outstanding at any given  time. Mr. Winegar                                                                    
replied that  AIDEA currently  had 41  loans out  totally $4                                                                    
million and  $1.7 million  available to  lend. Historically,                                                                    
62 loans  totaling $7.2 million  have been made  through the                                                                    
program since the program started in 2000.                                                                                      
2:07:37 PM                                                                                                                    
Representative  Foster  directed   attention  to  Section  3                                                                    
regarding  old   language  about  AIDEA  owning   an  entire                                                                    
project.  He queried  the minimum  amount of  a project  and                                                                    
possible ramifications. Mr. Leonard  answered that the issue                                                                    
had been  discussed, but  a minimum  was not  considered. He                                                                    
believed using  due diligence and project  feasibility would                                                                    
result in  the percentage  of ownership that  would maximize                                                                    
the potential of the project.                                                                                                   
Mr. Davis  commented that the  section was  a clarification.                                                                    
One  statute  preamble  (AS  44.88.010(a))  currently  reads                                                                    
"incur debt to  own and operate facilities,"  which has been                                                                    
interpreted  to mean  that  the entire  facility  has to  be                                                                    
owned and operated.  On the other hand,  AS 44.88.085 states                                                                    
that "to  acquire an interest  in a project as  necessary or                                                                    
appropriate," which seemed to  indicate that AIDEA could own                                                                    
an interest in  a project and have partners.  House Bill 410                                                                    
would clarify  the language to  say that owning  an interest                                                                    
was the appropriate way to read the statute.                                                                                    
Representative  Fairclough  asked  whether  AIDEA  would  be                                                                    
allowed to  participate in an in-state  gasline project. Mr.                                                                    
Davis replied  that the agency  could invest in  any project                                                                    
with rate of  return consistent with statute.  He noted that                                                                    
the agency had looked at gas  projects in the past and would                                                                    
do so again in the future.                                                                                                      
CRAIG  DAHL, PRESIDENT/CEO,  ALASKA  PACIFIC  BANK and  VICE                                                                    
CHAIR, FEDERAL  HOME LOAN BANK  OF SEATTLE  BOARD, testified                                                                    
in support of the legislation  on behalf of the institutions                                                                    
as well  as the Alaska  Bankers Association. He  stated that                                                                    
AIDEA  had proven  over  the years  to be  a  pillar of  the                                                                    
state's   economic   development   activity.   The   various                                                                    
participation loan programs have  been successful because of                                                                    
a competitive  rate structure  that helped  induce a  lot of                                                                    
business loans  and project lending, creating  many jobs and                                                                    
helping the economy develop.                                                                                                    
Mr. Dahl  described the  Alaska Pacific Bank  as one  of the                                                                    
smallest institutions  in the  state; however,  it currently                                                                    
had over  $30 million in  loans and  has managed to  work in                                                                    
concert  with   the  various  programs  through   AIDEA.  He                                                                    
believed the  same was  true for all  the state's  banks. He                                                                    
felt that AIDEA should be  competitive and responsive to the                                                                    
market. He  stressed that Alaska  has managed to  avoid most                                                                    
of  the serious  impacts from  the recession  and underlined                                                                    
the importance  of the state's economy  remaining stable and                                                                    
moving forward. He  felt that AIDEA was a  critical piece in                                                                    
the success of the state's economy.                                                                                             
2:12:40 PM                                                                                                                    
HB  410  was  HEARD  and   HELD  in  Committee  for  further                                                                    

Document Name Date/Time Subjects
Letter from Governor HB410.pdf HFIN 3/30/2010 1:30:00 PM
HB 410
Sectional Analysis HB410.pdf HFIN 3/30/2010 1:30:00 PM
HB 410
HB 412 Sectional Analysis.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
HB 412 Transmittal Letter.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
Micro loans.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
Microloan Support Letters.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
HB 412 Support Letter.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
admin@aidea org_20100401_145122.pdf HFIN 3/30/2010 1:30:00 PM
HB 410