Legislature(1999 - 2000)
03/02/2000 03:07 PM House HES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 373 - STUDENT LOAN CORP PAYMENTS TO STATE CHAIRMAN DYSON announced the next order of business as House Bill No. 373, "An Act relating to return of contributed capital, or payment of a dividend, to the state by the Alaska Student Loan Corporation; and providing for an effective date." DIANE BARRANS, Executive Director, Postsecondary Education Commission, Department of Education & Early Development, came forward to testify. She noted that the Alaska Student Loan Corporation endorses this bill and asked Sheila King to present it. Number 2319 SHEILA KING, Finance Officer, Division of Finance, Postsecondary Education Commission, Department of Education & Early Development, came forward to present HB 373. The Alaska Student Loan Corporation board endorsed this bill as another step as an enterprise agency of the state. The corporation's return of capital payment under this bill would be based on a percentage of net income when net income is in excess of $2 million. The structure of the payment was crafted to allow the corporation to continue to issue new low-interest student loans to Alaskan residents that would meet the criteria of the loan program while continuing to increase their financial stability to continue to provide services in the future. While the corporation's efforts through this bill is focused on making a return to the state general fund, she mentioned that when the Governor introduced the bill, he expressed a desire to use the payment to provide a fund source for the Alaska Scholars Program. REPRESENTATIVE KEMPLEN asked Ms. King to explain how this payment to the state works providing students with low-interest rates and this return of capital to the state. The purpose is to provide affordable education to Alaskan students so interest rates should be kept as low as possible, and one way is to take the money recovered from loans and plow it back into the principal. He asked if capital is moved to something else, are lower interest rates to students given up. Number 2223 MS. KING answered that the calculation on the interest rate on the loans is driven by the cost of the program with the component of the administrative cost and the cost of borrowing to provide funds for the loans. Loan receipts are recycled to provide a portion of the loans, and the remaining portion is bonded. This payment to the state would not affect those numbers significantly. The only effect it would have to the income statement would be an investment earning component on that portion which is not considered in the calculation of the loan rate. The loan rate is made up of two components: 1) the administrative cost of running the program and 2) cost of borrowing to fund the loans. The majority of the funds are recycled back into the program to keep the borrowing at a manageable level. There are requirements in the indenture that require certain tests are met before any money could be taken out of the trust which would be taking it out of the program. The levels projected for this payment are in the range of $600,000 to $2.2 million each year over the next five years. REPRESENTATIVE KEMPLEN asked if she had any written information so he could actually see the model that has been developed for those calculations. MS. KING said she would get that for him. Number 2122 REPRESENTATIVE BRICE believes it is a real novel approach for paying for the Alaska Scholars Program. He appreciates it was put forth by the Administration and the University of Alaska. Number 2102 REPRESENTATIVE WHITAKER commented that the Alaska Scholars Program has nothing to do with the student loan program. MS. KING said in developing the idea of the dividend, the corporation board has expressed an interest that the funds be used for an educational purpose. The desire to use it for the Alaska Scholars Program came from the Governor's office and that is an educational purpose which is under the broad purview of what the board has expressed. REPRESENTATIVE WHITAKER said certainly the scholars program is admirable, but he is concerned that it may be asking those who would be utilizing an educational loan to somehow help fund the Alaska Scholars Program with students that may not have the financial need that those intended to be helped by the loan program would have. MS. KING answered the structure of the payment wouldn't impact the interest rate on the loans. The payment would be considered a return of capital and under the parameters in the indenture, it can be taken out and passed on. Number 2024 REPRESENTATIVE WHITAKER said the loan program is designed to help those in financial need; the Alaska Scholars Program is not necessarily designed to help those in financial need. If the two cost factors are the cost of administration and the cost of borrowing, certainly the proceeds from past borrowing could be utilized to offset administrative costs, therefore the cost to the borrower could be decreased. If funds are not borrowed but rather earnings utilized for lending purposes, certainly again the rate charged to those borrowing the money could be reduced. MS. KING reiterated that cash is recycled to the extent to reduce the borrowing to a manageable level. The amount of the dividend with the parameters keeps it at a level that would not pass that cost on to the borrowers. The amount of the dividend is not included in expense calculation so it doesn't inflate that interest rate to the borrower. Additionally, the program is open to all Alaska residents whether they're in financial need or not. It has a minimal impact on the corporation's bottom line on the net income. Not everything in the net income computation is considered in the rate charged on the loans. Number 1851 REPRESENTATIVE BRICE said the state legislature established the interest rate that students pay a couple of years ago. He understood the ability to turn the profits of the corporation into lower rates would not be possible without a separate piece of legislation. MS. BARRANS answered the corporation board could have chosen to recycle all of its net income into new loans. Philosophically a couple of different issues were on the table when this idea was endorsed. One is that the corporation has asked this legislature and the administration to treat it as an enterprise organization. Toward that end, the corporation was interested in having the state have "a share of the positive return." The corporation board wanted to do that in terms of moving this symbolic level of money back to the general fund to be used as the legislature and administration saw fit. If in turn the legislature wanted to reappropriate these funds back to the corporation and create some offset for existing interest rates, it could do that. The corporation is not seeking that because it's offering very competitive interest rates as it is. However, that is something that could be done. She noted that the interest rates are fixed. Those can't be reduced without creation of a fund that would actually pay the corporation to offset those rates. Going forward it can reduce interest rates as has been done for the last two years and hopefully will be done in the future because the program costs portion are reducing the interest rate formula. REPRESENTATIVE BRICE asked what the interest rate is for next fall semester. Number 1749 MS. BARRANS answered the note rate is 8 percent, and there is still the interest free period while someone is in school so the effective rate of interest is below 8 percent when the six-months grace period is calculated. MS. BARRANS explained that the interest rate is calculated based on the average of the last five years program costs. It is an average thing moving forward and it's all fairly speculative. It presumes that interest rates on bonds are going up when actually the corporation has gotten very good rates on bonds. One of the ways it has been able to reduce interest rates on loans is there have been better rates on the bonds sold. The bonds have been upgraded to AA and are very competitive as those are sold. It wouldn't necessarily reduce the interest costs. REPRESENTATIVE KEMPLEN asked if it is possible to create another fund to help reduce the interest rates. MS. BARRANS said if the corporation received an appropriation from the state to pay in lieu of the borrowers paying their fixed rate of interest, then the state could give those funds. There would need to be an external revenue source in order for that to actually be feasible. The interest rates borrowers are paying on the notes are reflected in all of the corporation's official statements. Those rates are fixed and cannot be arbitrarily reduced. As far as the cash flow, certain warranties have been made to the bond holders that the corporation will charge that rate on those loans without an infusion of cash; it wouldn't be able to just arbitrarily reduce the rate on those loans. REPRESENTATIVE KEMPLEN asked why the capital can't be recycled and use that money to lower the interest rate on those old loans. Number 1603 MS. BARRANS answered if this bill passes and $2.2 million is returned to the state in the form of general funds, and if the legislature were to reappropriate those funds to the corporation for that purpose, the corporation could do that. REPRESENTATIVE KEMPLEN asked if she was saying that the existing statute prohibits the corporation from recycling the return on capital into reducing the interest rates on existing loans. MS. BARRANS answered no. She is suggesting that the indenture on the bonds prevents that. The corporation has made a commitment to run the program with these financial terms and conditions in place. If the corporation were to arbitrarily just reduce its net income in order to offset those rates, it would be in violation of the bond covenants. REPRESENTATIVE KEMPLEN said he is concerned that they are taking money away from students and putting it into the general fund where it can be used for road maintenance. Number 1532 CHAIRMAN DYSON asked what the cash balance is this week. MS. KING answered about $240 million. CHAIRMAN DYSON asked what that is invested in. MS. KING said a large portion is invested in investment agreements that are similar to repurchase agreements. There are some short-term repurchase agreements and a few government securities. CHAIRMAN DYSON asked if additional appropriations were needed during the years the collections weren't very good. Number 1483 MS. KING said she believes that 1993 was the last year there was any general fund appropriations received. CHAIRMAN DYSON asked Ms. King if she would get information on those amounts that were made from the general fund to the corporation. REPRESENTATIVE KEMPLEN requested additional information about exactly what prohibits the corporation from using this return on capital to lower interest rates on existing loans and future loans. REPRESENTATIVE GREEN asked what was the sudden change from running in the red to running in the black around 1993. He wondered if it had anything do with garnishing permanent fund dividends (PFD). Number 1411 MS. KING replied that the change really came from legislation passed that gave the corporation additional collection tools such as credit checking and credit reporting; wage garnishing will be implemented soon. The collection department has been beefed up and some electronic devices to help contact people have been added. MS. BARRANS added that occupational licensing has been a leverage tool for several years as well as an internal policy shift. The PFD garnishment tool has been in effect since the late 1980s. The garnishments have risen dramatically with the increase of the dollar amount of the PFDs. In the past, the commission would take the amount that was past due on the borrower's original schedule; now the entire amount is taken. CHAIRMAN DYSON asked if the corporation is able to go after Native corporation dividends. Number 1306 MS. BARRANS answered there is probably an ability to issue an order to withhold and deliver; the commission hasn't gotten to that stage of flexing the administrative garnishment authority right now. The wage garnishing is the "big bang for our buck." The commission will continue to explore what that authority allows us to do. CHAIRMAN DYSON announced that HB 373 would be held over.
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