Legislature(2015 - 2016)HOUSE FINANCE 519

04/17/2016 09:30 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+ SJR 2 CONST. AM: G.O. BONDS FOR STUDENT LOANS TELECONFERENCED
Moved SJR 2 Out of Committee
+= HB 250 INDIV. INCOME TAX: CREDITS; RETURNS TELECONFERENCED
Scheduled but Not Heard
+= HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE JOINT RESOLUTION NO. 2                                                                                                 
                                                                                                                                
     Proposing an amendment to the Constitution of the                                                                          
     State of Alaska relating to contracting state debt for                                                                     
     postsecondary student loans.                                                                                               
                                                                                                                                
KRISTEN  PRATT,  STAFF,  SENATOR  ANNA  MACKINNON,  conveyed                                                                    
Senator  MacKinnon's gratitude  for  the  bill hearing.  She                                                                    
explained  the  resolution  was a  constitutional  amendment                                                                    
that would  permit the issuance of  general obligation bonds                                                                    
for the purpose of  funding postsecondary student loans. The                                                                    
bill  would  amend  Article  IX,   sec.  8,  of  the  Alaska                                                                    
Constitution,  which  currently  allowed state  debt  to  be                                                                    
contracted for  capital improvements  and housing  loans for                                                                    
veterans. The intent of the  legislation was to access lower                                                                    
cost loans  to have  lower interest  rates for  borrowers as                                                                    
well as to  give the Alaska Student  Loan Corporation (ASLC)                                                                    
more flexibility with its underwriting criteria.                                                                                
                                                                                                                                
Vice-Chair Saddler asked  what it meant that  the bill would                                                                    
allow increased criteria flexibility.                                                                                           
                                                                                                                                
Ms.  Pratt  deferred  the  question  to  the  Department  of                                                                    
Education and Early Development.                                                                                                
                                                                                                                                
DIANE  BARRANS,  EXECUTIVE  DIRECTOR, ALASKA  COMMISSION  ON                                                                    
POSTSECONDARY  EDUCATION   (ACPE)  and   EXECUTIVE  OFFICER,                                                                    
ALASKA  STUDENT LOAN  CORPORATION,  DEPARTMENT OF  EDUCATION                                                                    
AND EARLY  DEVELOPMENT, responded  that currently  a minimum                                                                    
credit  criteria was  required in  order for  the underlying                                                                    
assets (the  student loans themselves)  to be  of sufficient                                                                    
quality to  use in the  issuance of bonds or  revenue bonds.                                                                    
The credit criteria  was currently a 680  FICO credit score.                                                                    
She detailed that if the  state's credit backed the bonds in                                                                    
the terms of a general  obligation bond, the existing credit                                                                    
criteria  could be  somewhat modified,  which would  allow a                                                                    
larger group of students to qualify.                                                                                            
                                                                                                                                
9:44:57 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler asked  for verification  the corporation                                                                    
could offer loans to students  with lower credit scores. Ms.                                                                    
Barrans responded in the affirmative.                                                                                           
                                                                                                                                
Vice-Chair  Saddler asked  for background  information about                                                                    
the number of loans  the commission issued for postsecondary                                                                    
tuition per  year. Additionally,  he wondered how  many loan                                                                    
applications were approved and rejected.                                                                                        
                                                                                                                                
Ms. Barrans responded  on an annual basis  the student loans                                                                    
had been  issued to as  many as  12,000 students in  a year.                                                                    
Currently, the numbers had  dropped substantially to several                                                                    
hundred loans per year. The decrease  was due in part to the                                                                    
interest   rates,  which   consumers  were   concerned  were                                                                    
excessive.  Additionally, approximately  40  percent of  the                                                                    
applicants did not qualify for  the credit criteria and were                                                                    
unable to obtain a cosigner who met the criteria.                                                                               
                                                                                                                                
9:46:08 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  asked  about the  commission's  current                                                                    
interest rate  compared to  other financial  loans available                                                                    
elsewhere.                                                                                                                      
                                                                                                                                
Ms. Barrans responded that the  interest rate charged in the                                                                    
past  two to  three  years  was 6.25  percent,  which was  a                                                                    
fairly  good rate  for unsecured  credit. Other  non-federal                                                                    
student  loan programs  throughout the  country had  similar                                                                    
rates,  although  some  had   higher  credit  criteria.  The                                                                    
commission expected  it could decrease  the interest  on its                                                                    
loans by  a full percent (i.e.  to a 5 percent  rate) if the                                                                    
state  was  able to  maintain  its  AAA credit  rating.  She                                                                    
detailed  the decreased  rate would  be very  attractive and                                                                    
amongst the best in the nation.                                                                                                 
                                                                                                                                
                                                                                                                                
Representative Gara relayed his  support for the bill, given                                                                    
interest  rates  charged  by the  state.  He  recalled  that                                                                    
during the  country's financial crisis in  2008 the criteria                                                                    
had changed  to require  applicants to  have a  cosigner. He                                                                    
wondered  if  the criteria  was  still  necessary. He  spoke                                                                    
specifically about a situation where  a student did not have                                                                    
a parent with money.                                                                                                            
                                                                                                                                
Ms.  Barrans  answered  that  a  creditworthy  cosigner  was                                                                    
required  if  a  student  did  not  have  sufficiently  high                                                                    
credit. She elaborated it was  not something she expected to                                                                    
change.  She detailed  that even  with a  general obligation                                                                    
bond there was an expectation  the assets of the corporation                                                                    
would be  sufficient to  ensure cash flow  on the  loans and                                                                    
repay  the debt.  There was  no expectation  the corporation                                                                    
would look  to the state  to have general funds  paying down                                                                    
the  bonds. The  corporation  believed  lowering the  credit                                                                    
score  requirement   would  be  very  helpful   in  allowing                                                                    
students  to  qualify  on  their   own  credit;  however,  a                                                                    
creditworthy cosigner  would still be required  if a student                                                                    
did not have sufficiently high credit.                                                                                          
                                                                                                                                
Representative  Gara  remarked  the issue  was  obviously  a                                                                    
problem, but  it was not a  problem that could be  solved in                                                                    
the  current bill.  He noted  intent  to work  on the  issue                                                                    
separately.                                                                                                                     
                                                                                                                                
9:48:49 AM                                                                                                                    
                                                                                                                                
Representative  Kawasaki spoke  in support  of the  bill. He                                                                    
noted  that when  the  bill had  first  been introduced  the                                                                    
state  had a  great  credit rating.  He  wondered about  the                                                                    
impact if  the state's credit  rating was downgraded  in the                                                                    
near  future.  He  questioned  whether  it  would  be  worth                                                                    
opening   up  the   state's  constitution   to  change   the                                                                    
particular article.                                                                                                             
                                                                                                                                
Ms.  Barrans responded  that the  corporation had  asked its                                                                    
financial advisor  to analyze the  impact if the  state were                                                                    
to  experience  an entire  step  downgrade.  She relayed  it                                                                    
would  still allow  the corporation  to reduce  the interest                                                                    
cost by  about 95  basis points, which  would still  offer a                                                                    
substantial benefit.                                                                                                            
                                                                                                                                
Co-Chair Thompson thanked Ms.  Barrans for her testimony. He                                                                    
OPENED public testimony.                                                                                                        
                                                                                                                                
9:50:24 AM                                                                                                                    
                                                                                                                                
STERLING  GALLAGHER, SELF,  ANCHORAGE (via  teleconference),                                                                    
shared that he  was a former commissioner  of the Department                                                                    
of  Revenue  (DOR)  who  had  worked  to  put  together  the                                                                    
Permanent Fund.  He had  also worked  as a  bond underwriter                                                                    
for the state for  Alaska Housing Finance Corporation (AHFC)                                                                    
and  Alaska  Industrial  Development  and  Export  Authority                                                                    
(AIDEA). Additionally,  he had  been the underwriter  on the                                                                    
bond issue addressed by the bill.  He shared that he had put                                                                    
together the  original loan for the  student loan authority.                                                                    
He elaborated  that the program  had worked for 25  years as                                                                    
intended. He  explained the agency was  designed around cash                                                                    
flow,  which was  a  problem. Currently  the  agency had  an                                                                    
overall  loan default  rate  of 28  percent.  He stated  the                                                                    
agency   had  a   total  expenditure   of  $15   million  to                                                                    
administrate  $350 million  in  loans the  previous year  (4                                                                    
percent). He  specified the  loans from  the past  year only                                                                    
originated  $3.2 million.  He  calculated that  the cost  of                                                                    
administration was  four times every loan  the program made.                                                                    
He  believed  the  agency's  performance  needed  a  serious                                                                    
review before general obligation bonds were considered.                                                                         
                                                                                                                                
Mr.  Gallagher  continued   that  general  obligation  bonds                                                                    
should be  preserved for the  state's first line  of defense                                                                    
for major  areas of finance.  He provided the  occurrence of                                                                    
another  major earthquake  as an  example.  He believed  the                                                                    
agency wanted to  start cutting away at the  numbers and the                                                                    
state's flexibility  on general obligation by  urging "these                                                                    
sorts  of debts"  that had  a  28 percent  default rate.  He                                                                    
reiterated the  cost of the  administration of  the program.                                                                    
He   remarked  that   the  current   structure  could   also                                                                    
accommodate  a  lowering of  interest  rates.  He noted  the                                                                    
state had  a AA rating  and because of the  moral obligation                                                                    
attached  the  agency would  trail  10  or 15  basis  points                                                                    
behind  it. He  believed it  was a  small price  to pay  for                                                                    
maintaining  the state's  flexibility on  general obligation                                                                    
debt. He opined  the agency could work out  its problems. He                                                                    
stated  the  agency  needed  more  collateral  and  did  not                                                                    
necessarily need  more cash. He suggested  taking loans from                                                                    
AHFC or any other program.  He emphasized the program needed                                                                    
quality cash flow.  He restated the 28  percent default rate                                                                    
and  noted the  national  default rate  was  40 percent.  He                                                                    
referred to  a recent case where  the State of New  York had                                                                    
allowed  the   debts  to  be  charged   off  bankruptcy.  He                                                                    
concluded  the   entire  area  was  influx   nationally.  He                                                                    
restated the  program's accomplishments needed a  review. He                                                                    
believed  it  was  dangerous  to attach  the  loans  to  the                                                                    
state's  general obligation  debt, which  would result  in a                                                                    
loss of flexibility.                                                                                                            
                                                                                                                                
9:55:22 AM                                                                                                                    
                                                                                                                                
Co-Chair Thompson CLOSED public testimony.                                                                                      
                                                                                                                                
Representative Wilson referred  to Mr. Gallagher's statement                                                                    
that it  cost $15 million  to administrate the  program. She                                                                    
asked  how  much  the cost  influenced  the  interest  rates                                                                    
offered to students.                                                                                                            
                                                                                                                                
Ms. Barrans  relayed that the corporation  did a calculation                                                                    
on  the  interest rate.  She  deferred  to the  commission's                                                                    
chief   financial  officer   who  had   recently  done   the                                                                    
calculation to set the 2016-2017 interest rates.                                                                                
                                                                                                                                
CHARLENE   MORRISON,   CHIEF   FINANCIAL   OFFICER,   ALASKA                                                                    
COMMISSION  ON POSTSECONDARY  EDUCATION  and ALASKA  STUDENT                                                                    
LOAN   CORPORATION,  DEPARTMENT   OF  EDUCATION   AND  EARLY                                                                    
DEVELOPMENT   (via   teleconference),   replied   that   the                                                                    
calculation referred to by Ms.  Barrans included the cost of                                                                    
administration of approximately 2.5  percent of the interest                                                                    
rate.                                                                                                                           
                                                                                                                                
Representative   Wilson  asked   for  detail   on  the   new                                                                    
calculation Ms.  Morrison had recently completed  [for 2016-                                                                    
2017].  She wondered  what the  interest would  be on  a new                                                                    
loan at present. Ms. Morrison  replied the interest rate was                                                                    
6.25 percent for the coming academic year.                                                                                      
                                                                                                                                
9:57:57 AM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked   for  verification  the  6.25                                                                    
percent included  the 2.5  percent administration  cost. Ms.                                                                    
Morrison answered in the affirmative.                                                                                           
                                                                                                                                
Representative  Wilson surmised  that if  bonds enabled  the                                                                    
rate to  drop to 5.25 percent  it would not include  the 2.5                                                                    
percent administration  cost. Ms. Morrison responded  in the                                                                    
negative. She detailed that if  the state maintained its AAA                                                                    
credit  rating and  if  the market  remained  steady at  its                                                                    
recent level,  the interest rate  could drop as low  as 5.25                                                                    
percent.                                                                                                                        
                                                                                                                                
Representative   Wilson  was   trying   to  understand   the                                                                    
administrative cost percentage of  2.5. She reasoned the 2.5                                                                    
percent  was  almost  as  much  as  the  amount  charged  to                                                                    
students.  She wondered  if there  would be  a limit  on how                                                                    
much money  could be put into  the bonds if the  bill passed                                                                    
and was approved by voters.                                                                                                     
                                                                                                                                
Ms.   Barrans   replied   that  if   voters   approved   the                                                                    
modification  of the  state's constitution,  the legislature                                                                    
would  then be  required  to authorize  the operating  rules                                                                    
allowing the  corporation to proceed, which  would include a                                                                    
cap similar  to the caps AHFC  had in place on  the issuance                                                                    
of debt for the veterans' home loan program.                                                                                    
                                                                                                                                
Representative  Wilson  remarked  that 28  percent  [default                                                                    
rate] was  pretty scary. She surmised  the corporation would                                                                    
have to show it could cover  the bond with receipts (and not                                                                    
state general funds).                                                                                                           
                                                                                                                                
Ms.  Barrans  responded  in the  affirmative.  It  would  be                                                                    
similar to  the corporation's current process,  when it went                                                                    
into  the market,  of providing  cash flows  to the  ratings                                                                    
agencies in  order for the  agencies to verify and  rate the                                                                    
issuance  of  the  bonds.  She  noted  the  corporation  had                                                                    
successfully  issued  $1.6  billion   in  debt  since  1988.                                                                    
Additionally, the corporation had  always had the support of                                                                    
the state's  moral obligation  and had  never needed  to ask                                                                    
the  state for  any  cash support.  Several  years back  the                                                                    
legislature  had  authorized a  bridge  loan  to assist  the                                                                    
corporation for  a short period  of time. She  specified the                                                                    
corporation had  used the  loan and had  fully repaid  it to                                                                    
the state. The corporation had  never needed to place a call                                                                    
on the legislature  for support and did  not anticipate that                                                                    
changing in the future.                                                                                                         
                                                                                                                                
10:01:10 AM                                                                                                                   
                                                                                                                                
Representative Gara  stated that the cost  of administration                                                                    
would go  down because  the conference  committee had  cut a                                                                    
couple of positions within the  corporation. He reasoned the                                                                    
corporation needed to do outreach  to make students aware of                                                                    
the student loan  program. He noted that  banks did outreach                                                                    
for  their  businesses.  He asked  about  the  corporation's                                                                    
administration  cost compared  to other  state student  loan                                                                    
agencies or financial institutions.                                                                                             
                                                                                                                                
Ms. Barrans  answered she  could not speak  to the  costs of                                                                    
other organizations.  The scale  of operation was  an issue.                                                                    
The decline of  the corporation's loan volume  over the last                                                                    
several  years  impacted the  scale.  She  responded to  Mr.                                                                    
Gallagher's  public  comment  and   relayed  that  the  loan                                                                    
default rate was  not 28 percent. She detailed  the rate was                                                                    
calculated  on an  annual basis  and the  most recent  rates                                                                    
were around 7.8  percent. She stated it was a  factor in the                                                                    
cost  of  administering  the   loans,  which  also  impacted                                                                    
servicing costs.                                                                                                                
                                                                                                                                
Co-Chair  Thompson  commented that  the  28  percent to  7.8                                                                    
percent  default  rates were  quite  a  variation. He  asked                                                                    
about the differential.                                                                                                         
                                                                                                                                
Ms. Barrans  responded she  had testified  in the  past that                                                                    
default rates had  been very high (in the  20 percent range)                                                                    
in the  late 1980s and early  1990s. She could not  speak to                                                                    
Mr.  Gallagher's source  of information.  She explained  the                                                                    
rate had been substantially reduced  over years, in part due                                                                    
to  putting collection  levers in  place (authorized  by the                                                                    
legislature)   and   implementing   credit   criteria.   She                                                                    
explained  there had  been no  credit  criteria or  cosigner                                                                    
requirements when the rates had been that high.                                                                                 
                                                                                                                                
10:03:39 AM                                                                                                                   
                                                                                                                                
Co-Chair Neuman  provided a  scenario where  the legislature                                                                    
came  back in  the following  year and  determined a  change                                                                    
needed to be  made to the corporation  after determining its                                                                    
administrative  costs.  He  wondered if  passage  and  voter                                                                    
approval of  the bill  would lock  the legislature  into any                                                                    
future commitments around how the fund was managed.                                                                             
                                                                                                                                
Ms. Barrans responded not that she was aware of.                                                                                
                                                                                                                                
Co-Chair Neuman believed the costs  needed to be looked into                                                                    
further.  He  thought  the   program  operation  costs  were                                                                    
between $1.2 million and $1.4 million. e asked//.                                                                               
                                                                                                                                
                                                                                                                                
Ms.  Barrans  answered  that  the  program's  administrative                                                                    
costs had reduced  over the past two years.  There were some                                                                    
increased  costs, but  they were  relative  to pass  through                                                                    
funds. The WWAMI (Washington,  Wyoming, Alaska, Montana, and                                                                    
Idaho)  program budget  was  included  in the  corporation's                                                                    
organizational budget.  She elaborated  there had  been some                                                                    
increases until  the past  year or  so, which  had flattened                                                                    
out.  The  other  new  money  was  pass  through  funds  for                                                                    
scholarships and grants.                                                                                                        
                                                                                                                                
Vice-Chair Saddler  asked if  it could  be assumed  ACPE and                                                                    
ASLC  were on  the same  side (different  entities with  the                                                                    
same mission).                                                                                                                  
                                                                                                                                
Ms.  Barrans  answered  in  the  affirmative.  The  entities                                                                    
shared a mission - the  corporation was the fiduciary of the                                                                    
funds, which  directed investments and determined  terms and                                                                    
conditions on  loans, whereas, ACPE represented  the policy-                                                                    
setting  side   responsible  for  controlling   student  aid                                                                    
programs  or   outreach  activities.  The   agencies  worked                                                                    
essentially as an integrated organization.                                                                                      
                                                                                                                                
Vice-Chair  Saddler surmised  the current  consumer rate  of                                                                    
6.25 percent  included a  cost of 3.75  percent on  the open                                                                    
market  and the  2.5 percent  administrative cost.  He asked                                                                    
for verification  if the  corporation was  able to  obtain a                                                                    
2.75 percent  market rate as envisioned  by the legislation,                                                                    
the  rate  [offered  to  students]   would  reduce  to  5.25                                                                    
percent.                                                                                                                        
                                                                                                                                
Ms. Barrans responded in the affirmative.                                                                                       
                                                                                                                                
10:07:00 AM                                                                                                                   
                                                                                                                                
Vice-Chair Saddler  referred to  Ms. Barrans'  testimony the                                                                    
commission had never needed to  ask for cash assistance from                                                                    
the  state. He  noted Ms.  Barrans  had also  referred to  a                                                                    
bridge loan the commission had  received. He thought she had                                                                    
testified the loan had been to  pay back the state. He asked                                                                    
for detail.                                                                                                                     
                                                                                                                                
Ms. Barrans  answered that after  the bond  market collapsed                                                                    
in 2007  the student loan  backed bonds had been  tainted by                                                                    
the mortgage  industry [crisis].  Investors had  become very                                                                    
wary of  certain asset backed bonds,  which included student                                                                    
loans. She  detailed that the  cost on the bonds  had become                                                                    
exorbitant for anyone in the  market at the time. Therefore,                                                                    
ACPE had not  been able to go into the  market to issue debt                                                                    
for  a  period of  time.  In  order  for the  commission  to                                                                    
continue to meet  loan demand during the two  or three years                                                                    
after the  collapse, the legislature  had authorized  DOR to                                                                    
enter into  a loan agreement  with ACPE. She  furthered that                                                                    
DOR  had to  structure it  as  an investment  of the  state,                                                                    
which required  DOR to  charge an  interest rate  similar to                                                                    
what the  department would have otherwise  received on other                                                                    
investments. The  corporation had used about  $68 million of                                                                    
a $100 million  line of credit and had  subsequently paid it                                                                    
back. She  believed the  interest ACPE paid  on the  debt to                                                                    
the state was around 3.8 or 4 percent.                                                                                          
                                                                                                                                
Vice-Chair Saddler  referred to the bond  market collapse in                                                                    
2007. He  wondered if the circumstances  had been considered                                                                    
an extraordinary condition  that may happen every  50 to 100                                                                    
years.                                                                                                                          
                                                                                                                                
Ms. Barrans  responded the situation  had been  considered a                                                                    
once-in-a-generation   collapse.  She   elaborated  it   had                                                                    
occurred  due to  the result  of extended  subprime mortgage                                                                    
lending activity.                                                                                                               
                                                                                                                                
Vice-Chair  Saddler  asked  for clarification  on  what  Ms.                                                                    
Barrans meant  by once-in-a-generation.  He wondered  if the                                                                    
legislature  should  expect that  kind  of  thing to  happen                                                                    
every 20 years.                                                                                                                 
                                                                                                                                
Co-Chair  Thompson   interjected  "next   time  we   have  a                                                                    
recession."                                                                                                                     
                                                                                                                                
Vice-Chair Saddler wondered how  often Ms. Barrans thought a                                                                    
situation may  call into question the  corporation's ability                                                                    
to carry its loan debt on its own.                                                                                              
                                                                                                                                
Ms.  Barrans  replied  she  would  not  expect  to  see  the                                                                    
circumstance happen  again. She  detailed the  situation had                                                                    
led  to a  series of  changes in  the market's  structure by                                                                    
rating  agencies and  bond insurers.  The collapse  had been                                                                    
catastrophic  and had  led to  a changing  of the  "rules of                                                                    
play" in the market.                                                                                                            
                                                                                                                                
Co-Chair Thompson  asked Vice-Chair  Saddler to  address the                                                                    
fiscal note.                                                                                                                    
                                                                                                                                
10:10:40 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:11:16 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Vice-Chair  Saddler reviewed  the  bill's  zero fiscal  note                                                                    
from  the  Office  of  the  Governor  for  the  Division  of                                                                    
Elections.  He  remarked  there  were  no  position  changes                                                                    
included in the note.                                                                                                           
                                                                                                                                
Co-Chair Neuman MOVED to report  SJR 2 out of Committee with                                                                    
individual  recommendations  and   the  accompanying  fiscal                                                                    
note. There being NO OBJECTION, it was so ordered.                                                                              
                                                                                                                                
SJR  2  was REPORTED  out  of  committee  with a  "do  pass"                                                                    
recommendation and  with a previously published  zero fiscal                                                                    
note: FN1 (GOV).                                                                                                                
                                                                                                                                
10:12:06 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:51:01 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                

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