Legislature(2009 - 2010)BARNES 124

03/15/2010 03:15 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved Out of Committee
Moved Out of Committee
                       HB 410-AIDEA LOANS                                                                                   
3:36:12 PM                                                                                                                    
CHAIR OLSON announced  that the final order of  business would be                                                               
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."                                                                                             
3:36:19 PM                                                                                                                    
TED LEONARD,  Executive Director, explained that  this bill would                                                               
make  changes to  the Alaska  Industrial  Development and  Export                                                               
Authority  (AIDEA)   loan  participation  and   loan  development                                                               
programs.   The AIDEA  is requesting the  changes.   He explained                                                               
that   the  Division   of  Investments   administers  the   Rural                                                               
Development  Investment Fund.   He  offered that  AIDEA has  been                                                               
conducting  a strategic  plan in  the  past year  to improve  its                                                               
effectiveness.   These changes are  the first steps  to implement                                                               
the  plan.   In doing  so,  AIDEA hopes  to protect  the rate  of                                                               
return; the  dividend.   He anticipated  that the  changes should                                                               
increase  the   dividend.    He  provided   a  section-by-section                                                               
analysis of  the bill.   Section 1  is intended to  modernize the                                                               
3:38:28 PM                                                                                                                    
MR. LEONARD related  that Section 2 adds an  interest rate rebate                                                               
program AIDEA's  commercial finance division lending  programs to                                                               
help  incentivize   businesses  to  invest  in   areas  that  are                                                               
economically distressed, such  as rural areas or  that meet other                                                               
economic criteria set in regulation.                                                                                            
3:38:53 PM                                                                                                                    
MR. LEONARD  pointed out  that Section 3  would add  an important                                                               
provision  to  clarify that  AIDEA  can  own  a percentage  of  a                                                               
project and  not have to own  the full project.   He related that                                                               
AIDEA's  purpose  states that  it  can  own  an interest  in  the                                                               
project.    However,  the  statutes  that  pertain  to  finances,                                                               
specifies that AIDEA  will own "a" project.   Thus, weaknesses in                                                               
statute exist and AIDEA would  like to have this language amended                                                               
to comport with AIDEA's purpose statement.                                                                                      
3:39:33 PM                                                                                                                    
MR. LEONARD  stated that  Sections 4  and 5  relate to  the Rural                                                               
Development Initiative Fund funded by  AIDEA, which is on AIDEA's                                                               
balance   sheet,  but   is  administered   by  the   Division  of                                                               
Investments,  Department  of   Commerce,  Community,  &  Economic                                                               
Development.    He  explained  that Mr.  Davis  is  charged  with                                                               
reviewing the effectiveness of AIDEA's programs.                                                                                
3:40:26 PM                                                                                                                    
MARK  DAVIS,  Economic  Development  Officer,  Alaska  Industrial                                                               
Development & Export  Authority (AIDEA), stated that  HB 410 does                                                               
three things.   First, it would  amend the method by  which AIDEA                                                               
determines  minimum interest  rates  for  the Commercial  Finance                                                               
Program.     He   related  that   AIDEA   works  with   financial                                                               
institutions  to  make  loans   and  participation  with  private                                                               
borrowers.   The  bank and  AIDEA negotiate  how much  AIDEA will                                                               
invest in the  project, up to 90 percent.   Currently, the method                                                               
AIDEA uses to  set the interest rate is based  on the bond market                                                               
and per  its statute,  the cost  of funds.   Over time,  that has                                                               
been interpreted  to mean the cost  that AIDEA would incur  if it                                                               
"floated a  brand new  bond to  fund the money  it would  need to                                                               
lend."  Over  time, what AIDEA has been doing  is lending its own                                                               
money, which  has the  effect of  a revolving  loan fund.   Thus,                                                               
AIDEA would like  to change the system, and  particularly now due                                                               
to anomalies  in the bond market.   In May 2009,  the bond market                                                               
essentially disappeared  and is  slowly recovering.   However, at                                                               
one point  AIDEA's minimum loan  participation rate rose  to 9.64                                                               
percent, while  the average  lending rate was  5.48 percent.   He                                                               
said,  "That's large  spread,  even today  the  spread is  1.33."                                                               
Thus,  AIDEA would  like to  tie  the cost  of funds  to a  money                                                               
market index  so the  bill would  allow AIDEA  to use  a national                                                               
index to set the rate  rather than having Goldman Sachs calculate                                                               
the artificial  cost of  a bond.   AIDEA  could use  a nationally                                                               
recognized index such  as the federal Home Loan  Bank of Seattle,                                                               
Treasury Bills, or Federal Farm  Credit Banks Funding Corporation                                                               
funding cost index.   He said he thought the  rates will go down,                                                               
which  would make  the program  more competitive.   Additionally,                                                               
the program would be more  transparent since currently AIDEA must                                                               
calculate the  interest rate monthly,  the cost  of administering                                                               
the loan,  and publishes  a rate.   He said that  if an  index is                                                               
used a bank  or potential borrower could go to  the index and see                                                               
essentially what AIDEA  would charge.  It would  also set AIDEA's                                                               
rate  to the  money  market  rather than  the  bond  market.   He                                                               
remarked that  the bond  market has  a disconnection  between how                                                               
bonds are being sold and the cost of funds.                                                                                     
3:43:42 PM                                                                                                                    
REPRESENTATIVE NEUMAN asked for  clarification on the differences                                                               
between money markets and the bond market.                                                                                      
MR. DAVIS  explained that the  bond market is what  investors are                                                               
willing to pay  for certain bond issuances.  The  two major types                                                               
are  municipal  tax  free  bonds and  private  bonds,  which  are                                                               
taxable.   Traditionally,  these  bonds were  the  basis of  most                                                               
portfolios.    Other  private  bonds could  be  done  by  private                                                               
distribution  or  public  auction.   What  has  happened  is  the                                                               
municipal bond  market has essentially disappeared.   Although it                                                               
is slowly  coming back the  market is  not robust.   The American                                                               
Recovery and  Reinvestment Act of  2009 (ARRA), the  Congress has                                                               
enacted eight new forms of bonds,  which do not yet have a steady                                                               
market.    Thus, more  private  placement  bonds exist,  but  the                                                               
interest rates  on these  bonds are  hard to  track.   People are                                                               
trying to find safe havens and  the extreme of that was raised in                                                               
November  2008, when  the Treasury  Bills went  negative.   Those                                                               
bonds sold  in less than  a week  since people would  rather lose                                                               
one dollar than ten to twelve  percent of their investment in the                                                               
market.    The  market  is  still  unstable,  he  remarked.    He                                                               
commented that the  relationship between the bond  market and the                                                               
stock  market  is  usually  an   inverse  relationship,  but  the                                                               
correlations are not longer holding true.                                                                                       
3:45:21 PM                                                                                                                    
MR. DAVIS suggested  that AIDEA could track its  rates and become                                                               
more competitive  with these changes.   Since 2002,  AIDEA's Loan                                                               
Participation   Program  has   created  4,720   jobs  and   2,900                                                               
construction jobs.  Currently, its  portfolio is at $376 million,                                                               
with $24 million  in pending applications.  This  is used largely                                                               
for  commercial  real  estate  so  this  program  helps  Alaska's                                                               
economy.   He characterized the  process as a  fairly complicated                                                               
mechanism but offered that it would adjust the rates.                                                                           
3:46:07 PM                                                                                                                    
REPRESENTATIVE   BUCH  asked   whether   AIDEA   has  done   this                                                               
MR.  DAVIS responded  that under  the old  system, Goldman  Sachs                                                               
adjusted its  rate every  30 days.   Since  1987, the  market has                                                               
gone up and  down.  Traditionally the bond market  was low and it                                                               
worked well.   One reason  for this change  is the change  in the                                                               
bond  market.   In further  response to  Representative Buch,  he                                                               
explained that  the bill has  built in flexibility.   Since AIDEA                                                               
is considering  a nationally published index,  AIDEA could choose                                                               
an  index  that  helps  the  program.   Next,  he  explained  the                                                               
Incentive  Rebate  Program  in the  Loan  Participation  Program.                                                               
Currently,  no  matter  what  the   project  does,  the  borrower                                                               
receives the same rate.  The  proposed change would offer up to a                                                               
one percent rebate for the first  five years of the loan in cases                                                               
in  which  the project  met  certain  criteria,  such as  if  the                                                               
project would lead to jobs,  development in rural areas, or based                                                               
on  other economic  development criteria.   This  would encourage                                                               
people to  bring in projects that  met the criteria.   He offered                                                               
that  by  regulation,  AIDEA  could   set  up  criteria  such  as                                                               
development  stressed  areas,  which  would  mirror  the  federal                                                               
Rehabilitation  Loans,  such as  for  alternative  energy.   This                                                               
measure would allow AIDEA to offer  rebates in cases in which the                                                               
loans met  certain economic development  criteria and  would move                                                               
the Loan Participation Program  more toward economic development,                                                               
which is part of AIDEA's strategic plan.                                                                                        
3:48:28 PM                                                                                                                    
REPRESENTATIVE NEUMAN  asked what  types of  economic development                                                               
projects AIDEA might participate in for this program.                                                                           
MR.  DAVIS  pointed out  that  AIDEA  is currently  monitoring  a                                                               
series of projects  such as possible plant or energy  issues.  He                                                               
remarked  that  he  will  meet  with  consultants  for  the  U.S.                                                               
Department  of  Energy  to discuss  the  federal  guarantee  loan                                                               
program.   He noted that  AIDEA is seeking  to be qualified  as a                                                               
development finance organization for up  to $6 billion in federal                                                               
guaranteed loans to develop alternative energy in the state.                                                                    
3:49:37 PM                                                                                                                    
MR. DAVIS moved to the Development  Finance Program.  This is the                                                               
program  in which  AIDEA  owns  an entire  project,  such as  the                                                               
Skagway Ore Terminal.  Currently,  AIDEA cannot parse out a piece                                                               
of the  project, but must  own the  entire project.   Thus, AIDEA                                                               
must calculate what it can own  and allow another investor to buy                                                               
a  segment.   "This is  awkward,"  he said.   He  referred to  AS                                                               
44.88.010(a),  which  allows  AIDEA  to incur  debt  to  own  and                                                               
operate  facilities.   However, AS  44.88.080 (5)  conflicts with                                                               
this relating  that the  authority can acquire  an interest  in a                                                               
project as necessary  and appropriate, which appears  to refer to                                                               
a portion  of a  project.   This bill  would clarify  and specify                                                               
that AIDEA  can own a  portion of a  project.  He  explained that                                                               
this change would allow AIDEA to  be a partner with another firm,                                                               
which would  make it easier  to invest  and obtain partners.   If                                                               
the  authority has  a partner,  it also  enhances the  chance the                                                               
project  will succeed  and would  reduce  risk.   Currently if  a                                                               
connected project  fails, it is  difficult for AIDEA  to succeed.                                                               
He  restated  that  this  would   allow  AIDEA  to  partner  with                                                               
investors  and leverage  funds,  allowing the  private market  or                                                               
federal government to fund a portion of the project.                                                                            
3:52:00 PM                                                                                                                    
REPRESENTATIVE NEUMAN referred  to on page 3, to  lines 23-24, he                                                               
pointed  out the  language allows  AIDEA  to make  loans, but  is                                                               
limited to  areas not connected by  road or rail to  Anchorage or                                                               
Fairbanks.  He asked for clarification.                                                                                         
3:52:55 PM                                                                                                                    
CATHY  JEANS, Systems  Branch  Manager,  Division of  Investments                                                               
(DOI), Department of Commerce,  Community, & Economic Development                                                               
(DCCED),  explained  that  the   Division  of  Investments  (DOI)                                                               
administers a number  of state loan programs  including the Rural                                                               
Development Initiative Program.   This program was established in                                                               
2000,  to  encourage rural  businesses,  which  is similar  to  a                                                               
program  that  was administered  for  many  years by  the  former                                                               
Department  of   Community  and   Regional  Affairs.     The  DOI                                                               
administers the  program for  AIDEA, which  consists of  about 40                                                               
loans totaling  $4.1 million.   The program  is a  revolving loan                                                               
fund, which  means all  repayments and  earnings are  retained in                                                               
the  fund, and  all operating  expenses are  paid from  the fund.                                                               
The  RDIP currently  has  $1.5  million to  lend.   The  proposed                                                               
changes came  about from public  input and  internal discussions.                                                               
This bill would  remove the restriction that a  borrower can have                                                               
no  more  than  one  loan  and increases  the  dollar  amount  of                                                               
proposed loans  from $100,000  to $150,000  per person,  and from                                                               
$200,000 to $300,000 for two or  more persons.  Section 5 reduces                                                               
the minimum  rate of interest  from six percent to  four percent.                                                               
The DOI  supports the  changes because  the division  believes it                                                               
will increase the utilization of  the program, which creates more                                                               
jobs, and benefits the economic  conditions in rural communities.                                                               
The DOI submitted a zero fiscal note.                                                                                           
3:55:18 PM                                                                                                                    
REPRESENTATIVE NEUMAN offered his belief  that the purpose of the                                                               
changes is  to expand  the ability to  provide smaller  loans and                                                               
more  diversified  loans to  Alaskans.    He asked  whether  more                                                               
opportunities would  be provided  to Alaskans if  the restriction                                                               
on page  3, lines 22-25, that  limit it to rural  communities was                                                               
MS. JEANS  agreed that it may  provide more loans, but  this fund                                                               
is  a  smaller   "pot  of  money"  and  is   targeted  to  assist                                                               
communities of 5,000 or fewer, not  connected to the road or rail                                                               
system  in Anchorage  or Fairbanks.   Thus,  this is  intended to                                                               
create more jobs for eligible rural communities.                                                                                
3:56:48 PM                                                                                                                    
CHAIR OLSON offered that the  program is aimed at the communities                                                               
that do not have access to loan facilities or commercial banks.                                                                 
MS. JEANS  suggested that  applicants may  have access  to banks,                                                               
but the goal is assist  in creating long-term employment in rural                                                               
REPRESENTATIVE  NEUMAN offered  that people  in communities  like                                                               
Cantwell,  which  is  a  remote area,  also  have  difficulty  in                                                               
starting businesses.   He said he thinks the state  should do all                                                               
it  can  for  as  many  Alaskans.   He  expressed  concern  about                                                               
equality in the bill in its current form.                                                                                       
MS.  JEANS responded  that the  program limit  to rural  areas is                                                               
current statutory language.                                                                                                     
CHAIR OLSON  pointed out that the  only change to the  program in                                                               
HB 410 is to increase the amount of the loans.                                                                                  
3:59:30 PM                                                                                                                    
MS.  JEANS  noted  that  this language  originally  came  from  a                                                               
program contained in the DCRA.   She related that it has been "on                                                               
the books" for quite awhile.                                                                                                    
3:59:55 PM                                                                                                                    
MR. LEONARD  mentioned the program language  is current statutory                                                               
language for the program.  He  recalled that another bill will be                                                               
before  the  committee that  relates  to  microloans, which  will                                                               
target  loans for  small businesses  across the  state.   If this                                                               
bill were to be changed and  expanded to the Railbelt, that AIDEA                                                               
would need to contemplate how  to capitalize the fund, he stated.                                                               
He  offered his  belief  that  AIDEA is  restricted  to fund  the                                                               
program,  although he  did not  have the  details on  the program                                                               
funding.  He  surmised that if the program were  expanded that it                                                               
would be  used up in a  couple of months.   He expressed interest                                                               
in  considering ways  to provide  working capital  for businesses                                                               
across the state.                                                                                                               
4:02:11 PM                                                                                                                    
REPRESENTATIVE  NEUMAN  remarked  that  he wants  to  reach  more                                                               
Alaskans.   He  recalled  criticism he  has  heard about  AIDEA's                                                               
inability to  reach out to small  businesses.  He said  he wanted                                                               
to ensure  that certain people  do not get  left out and  to take                                                               
care of all Alaskans equally.                                                                                                   
4:03:30 PM                                                                                                                    
REPRESENTATIVE   NEUMAN  expressed   concern   about  the   rural                                                               
preference in HB 410.                                                                                                           
CHAIR OLSON remarked  that the bill has a good  chance of passage                                                               
with a zero fiscal note.                                                                                                        
MR. LEONARD  commented that  AIDEA has  faced many  challenges in                                                               
its  efforts  to assist  businesses.    He related  that  AIDEA's                                                               
programs  typically  partner  with   banks  and  result  in  loan                                                               
participation.  He  explained that AIDEA is working  to find ways                                                               
to  offer  direct  loans  and  has  been  with  the  Division  of                                                               
Investments to find ways to  provide loans for working capital to                                                               
small businesses.                                                                                                               
CHAIR OLSON  related that it  is possible  to have AIDEA  come in                                                               
and discuss the issue of  encouraging small businesses and how to                                                               
provide loans to assist them.                                                                                                   
4:05:47 PM                                                                                                                    
CHAIR  OLSON,  after first  determining  no  one else  wished  to                                                               
testify, closed public testimony on HB 410.                                                                                     
REPRESENTATIVE NEUMAN  remarked that  this is an  opportunity for                                                               
AIDEA to expand  its program.  He characterized HB  410 as a good                                                               
4:06:40 PM                                                                                                                    
REPRESENTATIVE NEUMAN  moved to  report HB  410 out  of committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes.   There being no objection,  HB 410 was reported  from the                                                               
House Labor and Commerce Standing Committee.                                                                                    

Document Name Date/Time Subjects
Mar 15 Packet Info.pdf HL&C 3/15/2010 3:15:00 PM
HB376 ver R.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB376 Sponsor Statement ver R.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB376 Supporting Documents - BPPAE Audit Summary.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB376 Supporting Documents BPPAE Legislative Audit.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB376 Supporting Documents - BPPAE info.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB376 Supporting Documents Letter Phillip Baker 3-10-10.pdf HL&C 3/15/2010 3:15:00 PM
HB 376
HB410 Fiscal Note-CED-AIDEA-3-1-10.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB410 Sectional Analysis.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB410 ver A.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB410 Fiscal Note-DOTPF-3-1-022610-N.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB410 Fiscal Note-REV-1-022610-N.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB410 Letter ABA 3-08-10.pdf HL&C 3/15/2010 3:15:00 PM
HB 410
HB376 Fiscal Note-CED-CBPL-3-12-10.pdf HL&C 3/15/2010 3:15:00 PM
HB 376