Legislature(2003 - 2004)

04/23/2003 01:05 PM RES

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 105-COMMERCIAL FISHING LOANS                                                                                               
Number 0591                                                                                                                     
CHAIR FATE  announced that  the next order  of business  would be                                                               
HOUSE BILL  NO. 105, "An  Act relating  to loans to  satisfy past                                                               
due federal  tax obligations of  commercial fishermen and  to the                                                               
commercial fishing loan program."                                                                                               
[The  bill was  sponsored  by  then-Representative Gary  Stevens.                                                               
However, the written sponsor statement  was prepared by the Joint                                                               
Legislative   Salmon  Industry   Task  Force,   on  which   then-                                                               
Representative Gary Stevens served as  vice chair and Senator Ben                                                               
Stevens served as chair.]                                                                                                       
Number 0726                                                                                                                     
JOSEPH  LANHAM testified  on his  own  behalf, informing  members                                                               
that he  had four  concerns.   First, if  this is  constructed so                                                               
that the  permit cannot  be seized,  in most  cases it  will just                                                               
delay the  inevitable.   The only  reason a  person needs  to pay                                                               
taxes is  because of  making profits; if  the person  made money,                                                               
then the  taxes should have come  out of those profits  first and                                                               
then been saved  [until the tax was paid].   Thus he suggested it                                                               
was  the person's  choice to  get  into that  situation, in  many                                                               
cases,  because the  person had  misallocated his  or her  funds.                                                               
Mr. Lanham added:                                                                                                               
     This being  said, there is  no policy in the  bill that                                                                    
     says that the  state loan officers for  the Division of                                                                    
     Investments  have  to  show any  kind  of  debt-service                                                                    
     ratios  that  show  that  the  fishermen  can  pay  the                                                                    
     estimated  taxes for  next year,  as well  as the  new,                                                                    
     current portion of long-term debt.                                                                                         
Number 0808                                                                                                                     
MR.  LANHAM  addressed his  second  concern,  what the  loan-loss                                                               
reserve is.  He explained:                                                                                                      
     It says that the program  was highly used, but does not                                                                    
     say   how   much  these   loans   cost   the  fund   in                                                                    
     delinquencies or  cost the fund in  constant deferrals.                                                                    
     And where are ... some  of these loans that were booked                                                                    
     back  then, when  the program  was  highly used,  still                                                                    
     receiving deferrals  and still only  receiving interest                                                                    
     payments?   I  may  be  wrong, but  I  have heard  from                                                                    
     several fishermen that they  receive deferrals from the                                                                    
     state constantly.                                                                                                          
MR. LANHAM noted that his third  concern relates to the waiver of                                                               
the  0.5 percent  loan fee:   he  disagrees with  it because  the                                                               
Division of Investments competes  with commercial banks; lowering                                                               
the fee will  make companies that lend to  the commercial fishing                                                               
industry  less  competitive  with  the  program.    Although  the                                                               
original intent  of the  [state] program  wasn't to  compete with                                                               
banks, he said  the state has become the lender  of first choice,                                                               
instead of  the lender of last  resort.  The state  can refinance                                                               
up  to $300,000,  which has  resulted in  the loss  of profitable                                                               
customers  who never  have missed  a  payment or  been late  with                                                               
their payments,  but who  now are  in jeopardy of  doing so.   He                                                               
     They do  this by subverting  the requirement to  have a                                                                    
     "decline letter" from the bank  and having the customer                                                                    
     qualify  for   bank  financing  through  the   bank  by                                                                    
     refinancing it back  to the state.  And  the state loan                                                                    
     officers instruct fishermen to come  to the bank to set                                                                    
     interim or  "bridge" financing.   What this is,  is the                                                                    
     customer actually comes  in, qualifies for conventional                                                                    
     financing,  and  does not  need  the  state.   But  the                                                                    
     state,  under the  [refinancing]  program,  pays off  a                                                                    
     good-performing  loan and  then takes  it over  from us                                                                    
     and  uses us,  in a  way,  to get  around the  $100,000                                                                    
     This is a deceptive  practice because it just disguises                                                                    
     the fact that they  are initiating loans over $100,000,                                                                    
     which is ...  the new money limit that they  have.  The                                                                    
     state  loan  officers  will  go   as  far  as  to  send                                                                    
     commitment letters  to the borrower assuring  them that                                                                    
     if  they   qualify  for   bank  financing,   they  will                                                                    
     refinance and do the deal.                                                                                                 
Number 0946                                                                                                                     
MR. LANHAM addressed his fourth  concern:  the only entities that                                                               
can foreclose on permits are  the Internal Revenue Service (IRS),                                                               
the  State  of  Alaska,  or   the  state's  authorized  financing                                                               
companies  such as  the Commercial  Fishing and  Agriculture Bank                                                               
(CFAB) or  the Division of  Investments.  By contrast,  banks are                                                               
prohibited  by the  state from  financing limited  entry permits.                                                               
He continued:                                                                                                                   
     The  phrase  in  HB  105   that  talks  about  stopping                                                                    
     creditors  is  really ...  referring  to  the IRS,  the                                                                    
     state, and  CFAB.   The state and  CFAB can  make their                                                                    
     own decision whether or not  to foreclose on the permit                                                                    
     in  the interest  of  the  state, as  they  are in  the                                                                    
     interest of  the fisherman in  the first place,  and if                                                                    
     it  is good  for the  fishing  community.   If the  IRS                                                                    
     forecloses  on the  permit, their  only interest  is to                                                                    
     turn it into  cash to pay a  tax bill.  To  do that, it                                                                    
     would have to  be resold, ... and the  only people that                                                                    
     would  buy a  limited  entry permit  are fishermen  who                                                                    
     would  fish it.    So  ... if  the  permits  are to  be                                                                    
     foreclosed on  and then sold,  there wouldn't  [be] the                                                                    
     dire consequences  referenced in the bill,  because the                                                                    
     permits would be fished.                                                                                                   
CHAIR FATE requested that Mr. Lanham stay on teleconference.                                                                    
Number 1058                                                                                                                     
SENATOR   GARY  STEVENS,   Alaska  State   Legislature,  sponsor,                                                               
explained that  HB 105 stemmed from the  Joint Legislative Salmon                                                               
Industry  Task  Force, appointed  by  the  House and  Senate  the                                                               
previous  year, which  met during  the summer  and fall  of 2002.                                                               
Out of  that task force came  half a dozen bills  that are moving                                                               
through  the legislature.    The  intent is  to  help the  salmon                                                               
industry, which  is in crisis,  face enormous  problems including                                                               
competition from farmed salmon and low  prices.  He said a lot of                                                               
fishermen are in jeopardy of going out of business.                                                                             
SENATOR GARY  STEVENS brought up  concerns voiced by  Mr. Lanham.                                                               
With regard to foreclosure, he said  it isn't in the state's best                                                               
interest  for fishermen  to go  out  of business  and lose  their                                                               
permits, among other  things.  Hence the purpose of  HB 105 is to                                                               
try to forestall that and  help fishermen with federal taxes when                                                               
they are  in a position of  jeopardy.  Noting that  the state had                                                               
this program from 1995-1997 and  2001-2003, he said it was widely                                                               
used and very  successful.  With respect  to delinquency, Senator                                                               
Stevens  said he  didn't  have those  figures  and suggested  the                                                               
Division of  Investments could  respond.  He  added that  the 0.5                                                               
percent waiver is to help fishermen  even more.  He urged members                                                               
to give  serious consideration to  the legislation.   In response                                                               
to a  question from Representative  Guttenberg, he said  it isn't                                                               
inevitable that  all of  these fishermen  who are  having trouble                                                               
paying  their  taxes will  go  out  of  business and  lose  their                                                               
permits; he cited the previous  two time periods during which the                                                               
program existed as evidence of that.                                                                                            
Number 1364                                                                                                                     
REPRESENTATIVE  MASEK  referred  to   the  fiscal  note  analysis                                                               
[prepared  by  Greg  Winegar  of  the  Division  of  Investments,                                                               
Department of  Community and Economic Development  (DCED)], which                                                               
read [original punctuation provided]:                                                                                           
     This legislation allows  Alaska harvesters to refinance                                                                    
     existing   Commercial  Fishing   Revolving  Loan   Fund                                                                    
     (CFRLF) loans.   Current law  requires the  Division to                                                                    
     charge a one-half percent fee  to refinance.  Section 1                                                                    
     of HB 105 removes  the one-half percent refinancing fee                                                                    
     and that  will result in  a reduction of income  to the                                                                    
     CFRLF.   Interest  rates are  currently at  record lows                                                                    
     and  as a  result,  the Division  anticipates that  the                                                                    
     majority of borrowers eligible to  refinance will do so                                                                    
     prior to  the effective date  of this legislation.   We                                                                    
     expect  approximately 180  refinancing applications  in                                                                    
     FY 04  and then approximately 80  applications per year                                                                    
     thereafter.   This will  result in  a reduction  to the                                                                    
     fund in  FY 04  of $30,150 and  a reduction  of $13,400                                                                    
     each year thereafter through FY 09.  These reductions                                                                      
     were calculated as follows:                                                                                                
     180 loans x $33,500 (average loan size) = $6,030,000 x                                                                     
     .005 = $30,150                                                                                                             
     80 loans x $33,500 = $2,680,000 x .005 = $13,400                                                                           
         These calculations are based on interest rates                                                                         
       remaining relatively flat or increasing gradually                                                                        
     through FY 09.                                                                                                             
REPRESENTATIVE MASEK  asked why language  was put in the  bill to                                                               
remove that [0.5 percent].                                                                                                      
Number 1397                                                                                                                     
SENATOR GARY STEVENS replied that  at this point he doesn't think                                                               
it's  necessary  [to include  the  0.5  percent].   He  said  the                                                               
program has been successful in the  past, and that this is just a                                                               
further encouragement  to fishermen  to use  this program  and to                                                               
make it less expensive.                                                                                                         
REPRESENTATIVE  MASEK responded  that she  is really  troubled by                                                               
the legislation because  many Alaskans have to  pay federal taxes                                                               
and are delinquent  on them, and yet the state  doesn't help them                                                               
out.   Calling it  self-serving in  this time  of a  state fiscal                                                               
crisis, she  said she isn't  happy to see  that Section 1  of the                                                               
bill removes  the 0.5 percent.   Representative  Masek questioned                                                               
the long-term  viability of fishing for  many people as a  way to                                                               
earn a  living, and  remarked that when  Canada had  trouble with                                                               
its  fishing  industry,  it  looked   at  helping  fishermen  get                                                               
training in other occupations.                                                                                                  
Number 1513                                                                                                                     
REPRESENTATIVE  HEINZE recalled  hearing this  bill in  the House                                                               
Special Committee  on Fisheries  and said she  supports it.   She                                                               
asked whether  the IRS  has seized limited  entry permits  in the                                                               
SENATOR  GARY  STEVENS  deferred  to Cheryl  Sutton,  who'd  been                                                               
working on  this bill [as  staff to the Joint  Legislative Salmon                                                               
Industry Task Force, which Senator Ben Stevens chairs].                                                                         
Number 1540                                                                                                                     
CHERYL  SUTTON, Staff  to the  Joint Legislative  Salmon Industry                                                               
Task Force, responded:                                                                                                          
     No.   Thus far, we  have been successful in  not having                                                                    
     the  IRS seize  any permits,  largely due  to the  fact                                                                    
     that  Bruce  Twomley  with CFEC  [Commercial  Fisheries                                                                    
     Entry  Commission] has  been  very  successful in  this                                                                    
     area.   And a large  portion of  this bill has  to deal                                                                    
     with  that  subject.   We  are  trying to  protect  the                                                                    
     state's  interests in  this, and  clearly  it's in  the                                                                    
     state's interest not to lose permits.                                                                                      
MS.  SUTTON,  in  response   to  Representative  Masek's  earlier                                                               
question, said  the task force  had recommended removing  the 0.5                                                               
percent refinancing  fee just  as an  additional help  for people                                                               
who want  to refinance  their loans and  take advantage  of lower                                                               
interest  rates.     She  pointed  out  that  this   is  a  self-                                                               
perpetuating revolving  loan fund.   It's  the borrowers  who are                                                               
putting money back into the fund,  and the last general fund (GF)                                                               
appropriation was in fiscal year 1985 (FY 85).                                                                                  
Number 1653                                                                                                                     
REPRESENTATIVE GATTO  asked whether  the 0.5  percent forgiveness                                                               
would be absorbed easily by the fund.   He suggested it is in the                                                               
state's best interest to prevent  defaults with the IRS, and that                                                               
part of the  loan capital therefore is being  invested [under the                                                               
bill] in trying to  avoid that.  He asked, when  the IRS comes to                                                               
collect from  a person who is  out of money, whether  it can take                                                               
the person's permit.                                                                                                            
MS.  SUTTON suggested  Mr. Twomley  of CFEC  could address  that.                                                               
She added, "Our whole objective is  not to allow the IRS to seize                                                               
a  state  asset,  which  is  the  limited  entry  permit."    She                                                               
clarified that the 0.5 percent  refinancing fee has nothing to do                                                               
with "the IRS  loans."  She also pointed out  that people who are                                                               
most  at  risk are  those  with  no  other "economy"  apart  from                                                               
commercial fishing, mostly  those in Western Alaska.   She added,                                                               
"I'm  sorry that  they're not  on line  to testify  to this  bill                                                               
today,  because  we  heard immense  testimony  through  the  task                                                               
force."   She emphasized that this  is a state loan  program that                                                               
is only for state residents, and  that the interest is in keeping                                                               
these permits  in rural  areas where there  is no  other economy.                                                               
She suggested it serves a dual purpose in that regard.                                                                          
Number 1812                                                                                                                     
REPRESENTATIVE  MASEK  referred  to  page  3,  lines  7-12  [sub-                                                               
subparagraphs (ii) and (iii)], which  relate to lack of training,                                                               
lack of employment  opportunities in the area  of residence, lack                                                               
of other  occupational opportunities besides  commercial fishing,                                                               
and economic dependence or a  traditional way of life.  Referring                                                               
to passage of the Alaska  Native Claims Settlement Act (ANCSA) as                                                               
well  as federal  funding through  the Bureau  of Indian  Affairs                                                               
(BIA),  she said  there  is  a lot  of  federal  and state  money                                                               
invested  through  nonprofit  and for-profit  organizations  that                                                               
have the ability to help folks who  live out in these areas.  She                                                               
recalled growing  up as an  Alaska Native  in a village  of fewer                                                               
than 100 people, relying on  fishing.  Now, however, her father's                                                               
fishing permit is useless.  She said:                                                                                           
     They  do have  other funding  to retrain  him, but  the                                                                    
     only jobs  that are available are  basically federal or                                                                    
     state or municipal,  or through tribal entities.   So I                                                                    
     just kind  of take that into  ... strong consideration,                                                                    
     because I don't  think that's a very  fair statement to                                                                    
     put  into  this  bill  here, because  there  are  other                                                                    
     opportunities  available.     It's   just  up   to  the                                                                    
     individual  person on  ... if  they  want to  [further]                                                                    
     their training in other areas.                                                                                             
REPRESENTATIVE MASEK  asked why  this language  was added  in the                                                               
Number 1933                                                                                                                     
SENATOR  GARY STEVENS  replied that  he could  speak for  the six                                                               
coastal  villages on  Kodiak Island  that depend  heavily on  the                                                               
salmon  industry and  traditionally  have fished  for salmon  for                                                               
years.  He agreed that  if fishing disappears, other programs can                                                               
help, but  said they're all "social  programs, giveaway programs"                                                               
to  provide  people  with  food  and  so  forth.    Speaking  for                                                               
fishermen  he  knows   on  Kodiak  Island  and   in  Old  Harbor,                                                               
specifically, he  said they don't  want those  giveaway programs,                                                               
but want  to compete  and want  help to  keep participating  in a                                                               
fishing industry  they know well  and have performed well  in for                                                               
years.   He suggested Representative  Masek's comments  play into                                                               
what he is saying.                                                                                                              
REPRESENTATIVE MASEK stated her preference for removing lines 7-                                                                
12 from  [page 3  of] the  bill, but left  it to  the committee's                                                               
Number 2032                                                                                                                     
REPRESENTATIVE  MORGAN  responded that  he  tends  to agree  with                                                               
lines 7-12 because  he sees no difference in  the timber industry                                                               
in Southeast Alaska.  He  asked, when that collapsed, who stepped                                                               
in to  provide training and  jobs.   Noting that he  represents a                                                               
lot of villages  in Bush Alaska, he voiced his  belief that it is                                                               
a fiduciary  responsibility of the state  and federal governments                                                               
to deal  with social issues.   He said  he sees nowhere  that the                                                               
state or federal  government asks a private company  to take over                                                               
the social problems.   Private companies exist to  make a profit,                                                               
he observed, whereas the state  and federal governments are there                                                               
to help socially, as much  as they can, whether through education                                                               
or food stamps or welfare.                                                                                                      
REPRESENTATIVE  MORGAN agreed  with  Senator  Gary Stevens  about                                                               
handouts,  saying  there  is  nothing  better  than  working  and                                                               
receiving a paycheck to make  a person feel good and independent.                                                               
He offered  his belief  that training  should exist,  although he                                                               
suggested looking into what kind of training it should be later.                                                                
Number 2138                                                                                                                     
CHAIR FATE  related his understanding  that HB 105  allows people                                                               
to borrow money from the revolving  loan fund in order to pay for                                                               
their income  tax.  He posed  a situation in which  an individual                                                               
files for  a late tax return,  which takes close to  nine months;                                                               
then the individual enters into  litigation over the tax and that                                                               
exceeds  the date  specified [when  the delay  was granted].   He                                                               
asked  if  there  are  any  remedies or  allowance  [for  such  a                                                               
SENATOR  GARY STEVENS  deferred  to the  representative from  the                                                               
Division of Investments.                                                                                                        
Number 2260                                                                                                                     
CHAIR FATE  asked how prudent businesspeople  allow themselves to                                                               
get  behind to  that extent.   He  asked, "How  can they  not pay                                                               
their taxes and save the  money out, because paying taxes implies                                                               
that  they've made  a net  income  that's $30,000,  which is  the                                                               
limit  here, which  we'll say  ... is  close to  a net  profit of                                                               
about $100,000."                                                                                                                
SENATOR  GARY  STEVENS turned  attention  to  factors beyond  the                                                               
control  of commercial  fishermen,  such as  the  market and  the                                                               
production of  farmed fish.   The  current situation  is probably                                                               
the worst  situation commercial  fishermen have  found themselves                                                               
in the  last 50 years, he  said.  Due  to the costs, even  a good                                                               
fishermen who does  everything correctly can be in  [debt] at the                                                               
end of the season.                                                                                                              
CHAIR FATE  suggested that if  the season was bad,  the fishermen                                                               
wouldn't have  much income  tax to  pay, especially  when writing                                                               
off  expenses  [for boats  and  equipment].    An income  tax  is                                                               
predicated on  one's net  income.  He  remarked that  whether the                                                               
fishermen is  using cash accounting  or accrual  accounting would                                                               
make a difference.                                                                                                              
Number 2406                                                                                                                     
GREG WINEGAR,  Director, Division  of Investments,  Department of                                                               
Community &  Economic Development  (DCED), responded.   In regard                                                               
to the two-year  requirement, Mr. Winegar said  he believes Chair                                                               
Fate  is referring  to  the eligibility  section.   The  two-year                                                               
requirement essentially  relates to  residency.   As far  as what                                                               
taxes can be  covered, the division can go back  several years if                                                               
CHAIR FATE asked if most fishermen  operate on a cash basis or an                                                               
accrual basis.                                                                                                                  
MR. WINEGAR answered that both are  used - and for some, neither,                                                               
which is part of  the problem.  Mr. Winegar said  that much of it                                                               
is an  education problem.   Since this program was  introduced in                                                               
1995, the division  has done what it can to  educate people about                                                               
necessary recordkeeping.  For instance,  the division created the                                                               
volunteer  tax and  loan program;  the  division, in  cooperation                                                               
with the  University of  Alaska and  the IRS,  goes to  areas and                                                               
helps people prepare  tax returns at no expense.   Over the years                                                               
there has been  quite a change, and the situation  is much better                                                               
now,  which is  in part  due to  this cooperative  effort.   This                                                               
legislation  would provide  another  tool.   He  added that  this                                                               
would apply  to about 15-20 loans  a year and thus  wouldn't be a                                                               
costly program.  This loan fund has done well, he added.                                                                        
MR. WINEGAR  informed the committee  that currently  this program                                                               
has  a  fairly  high  delinquency   rate  of  about  43  percent.                                                               
However, 79 loans  have actually been paid in full.   The program                                                               
began with  a total  of 307  loans that have  been made  over the                                                               
life of  the program; most  of the loans  were made in  the first                                                               
two to three  years of the program, when there  was a substantial                                                               
noncompliance problem.  In the  last three fiscal years, 20 loans                                                               
have been made.  Therefore, he  characterized it as a small tool.                                                               
A  total  of  $5  million  in  payments  has  been  obtained,  in                                                               
comparison with $6.4 million that  was loaned.  Mr. Winegar noted                                                               
that   the   division  will   work   with   borrowers  who   have                                                               
CHAIR FATE asked if those  [loans] are collateralized with assets                                                               
other than the limited entry permit.                                                                                            
MR.  WINEGAR replied  yes, in  some cases.   In  most cases,  the                                                               
permit is the primary collateral for the loan.                                                                                  
Number 2619                                                                                                                     
REPRESENTATIVE  GATTO directed  attention to  page 3  and pointed                                                               
out that  in order to  satisfy the loan,  either sub-subparagraph                                                               
(i), (ii),  or (iii) is  required.  He said  he sees it  from the                                                               
point of  view of a  loan's being refused because  satisfying one                                                               
of the three would make it  easy for an individual not to satisfy                                                               
any  of the  sub-subparagraphs.   For instance,  sub-subparagraph                                                               
(i) says,  "has had  a crewmember  or commercial  fishing license                                                               
under AS 16.05.480".                                                                                                            
MR. WINEGAR  clarified that  a lot  of individuals  qualify under                                                               
[sub-subparagraph (i)] because in order  to qualify, someone must                                                               
have a  limited entry permit that  is in jeopardy of  being taken                                                               
by the IRS.                                                                                                                     
REPRESENTATIVE GATTO  suggested it would be  difficult to satisfy                                                               
sub-subparagraph  (ii),  and  thus  one  would  default  to  sub-                                                               
subparagraph (iii).   He said,  "For me,  it seems like  for some                                                               
people who  might purposely not want  to give a loan  to for some                                                               
reason,  you could  find  somewhere  ... in  all  of these  three                                                               
things  where they  might  not  qualify."   However,  he said  he                                                               
understood that almost everyone would qualify under sub-                                                                        
subparagraph (i).                                                                                                               
MR. WINEGAR agreed  for this particular part of the  program.  He                                                               
explained  that sub-subparagraphs  (ii)-(iii) come  from language                                                               
already in  the statute for  [subparagraph (B)] loans,  which was                                                               
put  in  place  in  the  early to  mid-1980s.    He  related  his                                                               
understanding  that the  legislature  at the  time  felt that  in                                                               
order to  qualify for  this program, someone  would need  to have                                                               
some  sort   of  commercial  fishing  experience   or  the  other                                                               
specified conditions.                                                                                                           
Number 2754                                                                                                                     
REPRESENTATIVE  WOLF referred  to the  high delinquency  rate and                                                               
recalled hearing  about a  loss of  over $1  million.   He called                                                               
this proposal a handout.                                                                                                        
MR. WINEGAR  responded that he  wouldn't say $1 million  has been                                                               
lost because  the [division] is  working with  those individuals,                                                               
although these  are collateralized  loans and  some of  the money                                                               
could be  lost.  With regard  to the 0.5 percent  fee, it relates                                                               
to the  refinancing program.   In  the last  couple of  years the                                                               
rates have  dropped dramatically,  and thus  the majority  of the                                                               
portfolio has already refinanced.                                                                                               
MR. WINEGAR noted that during  [Joint Legislative Salmon Industry                                                               
Task  Force] hearings  a number  of  testifiers [requested]  that                                                               
they not  have to  pay the  0.5 percent  to refinance.   However,                                                               
there would  be some impact to  the fund; because the  rates have                                                               
decreased  so far,  most people  have already  financed.   If the                                                               
rates  drop further,  the fiscal  note  could be  adjusted.   The                                                               
fiscal note  is something on  the order  of $30,000 in  the first                                                               
year and $13,000 for the next couple  of years.  There will be an                                                               
impact, he said,  although he didn't believe it  would affect the                                                               
financial integrity of this particular loan fund.                                                                               
Number 2854                                                                                                                     
REPRESENTATIVE  WOLF pointed  out  that every  time the  interest                                                               
rates  decrease,  people  refinance,  and that  includes  a  loan                                                               
origination fee.  Representative Wolf  said he has a problem when                                                               
the  legislature is  cutting programs  and that  this is  already                                                               
capable of  being done by  CFAB.  In  1987, when the  economy hit                                                               
bottom, the  state didn't come  in and bail out  the contractors.                                                               
Although Representative Wolf said he  had no problems helping out                                                               
industry  in  the  state,  he  said he  finds  this  0.5  percent                                                               
MR. WINEGAR  said he wouldn't  argue with Representative  Wolf on                                                               
the 0.5 percent,  as it's a relatively small fee.   He noted that                                                               
the process has  been streamlined as best as  possible, but there                                                               
are costs associated with a refinance.                                                                                          
REPRESENTATIVE WOLF said it all adds up.                                                                                        
Number 2963                                                                                                                     
REPRESENTATIVE GUTTENBERG  inquired as to  the impact of  the 0.5                                                               
percent reduction on the revolving loan fund.                                                                                   
MR. WINEGAR answered  that the division forecast  that the impact                                                               
would be about $30,200 in  2004 and $13,400 each year thereafter.                                                               
This is really a factor of what interest rates do, he said.                                                                     
TAPE 03-33, SIDE B                                                                                                            
MR.  WINEGAR  continued by  saying  if  the rates  don't  decline                                                               
further,  it won't  be substantial.   If  the federal  government                                                               
cuts the  rate again  and the  rates drop,  then the  fiscal note                                                               
would increase  to some  extent because there  would be  a larger                                                               
group seeking refinancing.   Therefore, it's related  to what the                                                               
market rates do.                                                                                                                
Number 2965                                                                                                                     
REPRESENTATIVE MORGAN inquired  as to the impact to  the state if                                                               
these permits are lost to the IRS.                                                                                              
MR. WINEGAR  answered with his belief  that it would be  a fairly                                                               
substantial impact.   With this program and  through working with                                                               
the  IRS, the  intent  has  been to  avoid  [the  IRS taking  the                                                               
state's permits].                                                                                                               
Number 2920                                                                                                                     
REPRESENTATIVE  PAUL SEATON,  Alaska State  Legislature, informed                                                               
the committee that  in the House Special  Committee on Fisheries,                                                               
which he  chairs, it was  discovered that [fishermen]  have filed                                                               
tax  returns  and  have  made  arrangements with  the  IRS.    He                                                               
explained that  some people in  rural Alaska didn't  realize that                                                               
the IRS existed and had  accumulated IRS debt without maintaining                                                               
receipts to  write off expenses.   Therefore, this  population is                                                               
being aided by this program.   With regard to the 0.5 percent, he                                                               
said this program places no cost on the state general fund (GF).                                                                
REPRESENTATIVE SEATON  reported that  the task force  had related                                                               
to [the  House Special  Committee on Fisheries]  that one  of the                                                               
few  ways fishermen  could be  helped is  through refinancing  of                                                               
loans  at the  lower  interest  rates and  not  being charge  0.5                                                               
percent of the  whole loan fee as an upfront  fee.  Therefore, [a                                                               
fisherman's] ongoing expenses could be  lowered at this time when                                                               
the salmon prices are so low.                                                                                                   
REPRESENTATIVE GATTO asked whether any  of this IRS obligation is                                                               
allowed  to be  a result  of some  nonfishing obligation  such as                                                               
child support or whether it's restricted  to IRS debt as a result                                                               
of fishing.                                                                                                                     
Number 2796                                                                                                                     
MR. WINEGAR answered that this  particular language is restricted                                                               
to IRS  obligations.  He  noted that in the  original legislation                                                               
in 1995 a provision allowed this  to be used for child support as                                                               
well, which  created a lot  of concern.  Therefore,  the relating                                                               
language  was  removed  in  one  of the  first  hearings  on  the                                                               
original legislation.                                                                                                           
REPRESENTATIVE GATTO  asked, "Is it obligations  that are limited                                                               
to a  debt as a result  of fishing deficiencies or  losing years,                                                               
or can it be any debt?"                                                                                                         
MR. WINEGAR answered  that technically he believes it  can be any                                                               
debt,  although  he  didn't  recall   any  that  fell  into  that                                                               
CHAIR FATE  said that's a  good question because of  the two-year                                                               
timeframe.  He related his  understanding that the revolving loan                                                               
fund was initially funded with GF funds.                                                                                        
MR. WINEGAR  replied yes.   He explained  that when the  fund was                                                               
created in  1972, approximately $60  million went into  the fund.                                                               
About $74  million has  gone out  of the  fund since  fiscal year                                                               
1985, when the last appropriation was made.                                                                                     
CHAIR FATE  asked if CFAB also  lends money for the  same type of                                                               
MR. WINEGAR explained  that CFAB is a bit  different because it's                                                               
a  cooperative.   Although the  programs  do overlap  to a  small                                                               
extent, basically those qualifying for  a CFAB loan don't qualify                                                               
with the division.                                                                                                              
CHAIR FATE surmised,  then, that there is  no competition between                                                               
CFAB and the state.                                                                                                             
Number 2654                                                                                                                     
MR. WINEGAR reiterated that there are  a couple of areas in which                                                               
the  two program  overlap.    One is  in  the refinancing  arena.                                                               
Under current statute, the division  has the ability to refinance                                                               
existing vessel  and gear loans.   However, the  division doesn't                                                               
encourage someone to take out  bank loans and immediately come to                                                               
the  division.   In  fact,  the division  is  going to  implement                                                               
regulations to  make it clear that  someone would have to  have a                                                               
loan on  the books for  at least a  year before being  allowed to                                                               
refinance.      There   is   also    overlap   with   regard   to                                                               
[subparagraph (A)] permit loans.   By law, only  two entities can                                                               
take  a  permit as  collateral:    CFAB  and the  state  program.                                                               
However,  there is  language that  specifies that  the loans  are                                                               
intended for those who don't have other sources of financing.                                                                   
Number 2569                                                                                                                     
BRUCE TWOMLEY, Chairman/Commissioner,  Commercial Fisheries Entry                                                               
Commission  (CFEC), Alaska  Department  of Fish  & Game  (ADF&G),                                                               
recalled that fewer  than 10 years ago there was  an IRS official                                                               
in Anchorage who'd  attended a meeting of  the Alaska Association                                                               
of  Village  Council  Presidents;  afterward,  the  official  had                                                               
remarked that the IRS is trying  to collect taxes from people who                                                               
don't even know the IRS exists.   He said those in rural villages                                                               
who  don't know  of  their  tax obligations  and  don't file  tax                                                               
returns  can end  up having  enormous  tax debts  because of  the                                                               
penalties.     In  these  cases,  IRS   officials  thought  these                                                               
individuals were evading taxes and  thus went after limited entry                                                               
permits in some of  those cases.  The IRS has  seized a number of                                                               
limited entry permits and forced  the sale of those limited entry                                                               
permits.  Often, this has  resulted in these permits' being taken                                                               
out  of villages  and sold  at bargain  prices to  people out  of                                                               
state.    However,  for  one reason  or  another,  those  permits                                                               
haven't actually  transferred because the permits  go through the                                                               
[CFEC], and  often there is a  basis under state law  to deny the                                                               
transfer, which results in [CFEC's]  negotiating with the IRS and                                                               
resisting the forced sale of the limited entry permits.                                                                         
MR.  TWOMLEY  explained  that the  commission  has  resisted  the                                                               
forced  sale  of   the  limited  entry  permits   because  it  is                                                               
protecting  state law  in  the matter;  state  law declares  that                                                               
limited entry  permits are privileges  not subject to  the claims                                                               
of creditors.   The aforementioned is the case  for two important                                                               
reasons,  he said.   First  and foremost,  the legislature  wants                                                               
control  over this  privilege so  that it  can be  changed.   The                                                               
other reason this  is a privilege is to  keep [Alaskan fishermen]                                                               
in the water,  especially those in rural areas who  may depend on                                                               
fisheries as their only source of cash income.                                                                                  
MR. TWOMLEY  emphasized his belief  that it would  be devastating                                                               
to a number  of communities to lose  these particular privileges.                                                               
With  regard  to compliance  rates,  Mr.  Twomley indicated  he'd                                                               
recently  reviewed  statistics  which illustrate  that  fishermen                                                               
aren't less  compliant than other small  independent businessmen.                                                               
The limited  entry system and  permits make  fishermen especially                                                               
vulnerable to tax  enforcement.  Therefore, the  loan program has                                                               
helped  in  that it  allows  the  [commission] to  intervene  and                                                               
negotiate with the IRS and help those facing enormous claims.                                                                   
MR. TWOMLEY  noted that the state  has also made it  easy for the                                                               
IRS  to go  after the  earnings from  the limited  entry permits.                                                               
Since this program  has been in place, the IRS  has realized that                                                               
its patience  can pay off  and that fishermen and  their families                                                               
can retain  the benefits of  the local fisheries, he  said, which                                                               
is why [CFEC] supports HB 105.                                                                                                  
Number 2282                                                                                                                     
REPRESENTATIVE LYNN expressed shock that  some people in the U.S.                                                               
don't  know that  the IRS  exists.   He said  he hoped  something                                                               
would be  done to contact  [the state's] educational system  as a                                                               
method  of  informing Alaskans  that  the  IRS  exists.   In  the                                                               
meantime, he  asked if anything  is being done to  educate people                                                               
about the IRS.                                                                                                                  
MR. TWOMLEY  pointed out  that since [CFEC]  has become  aware of                                                               
the  problem, a  number of  forces  such as  the university,  the                                                               
Alaska Business  Development Center,  and the state  loan program                                                               
have brought  a lot of resources  to this matter.   The situation                                                               
has greatly  improved.  Mr.  Twomley related that  this situation                                                               
isn't totally  unique to Alaska.   As a  result of this  work, he                                                               
has been  appointed to  a national  taxpayer advocacy  panel from                                                               
which he has  learned that there are other  groups of individuals                                                               
who are  equally unaware  of the  IRS tax  obligations.   The IRS                                                               
joined the  educational effort.  Mr.  Twomley said that a  lot of                                                               
resources have gone  into education and a great  deal of progress                                                               
has  been made  and continues  to be  made.   The situation  that                                                               
existed in 1995 doesn't continue now.                                                                                           
REPRESENTATIVE  LYNN clarified  that  he blames  the system  that                                                               
allows this lack of knowledge about the IRS.                                                                                    
Number 2150                                                                                                                     
REPRESENTATIVE GATTO made the following  analogy.  He pointed out                                                               
that he  uses an office provided  by the government.   If he were                                                               
to be  kicked out and the  IRS said he  owed a lot of  money, the                                                               
IRS couldn't take his office and  rent it out, because the office                                                               
belongs  to  the state.    Similarly,  the limited  entry  permit                                                               
belongs  to the  state.   Therefore,  he questioned  how the  IRS                                                               
could take a permit to use something and sell it.                                                                               
MR. TWOMLEY said  Representative Gatto has put  forth the state's                                                               
theory.    This  permit  is  a  privilege,  and  it's  critically                                                               
important to the  state that it remains that way,  because it's a                                                               
means  of  enforcing  conservation   laws,  among  other  things.                                                               
However,  he acknowledged  that [the  permit] generates  property                                                               
REPRESENTATIVE GATTO inquired as to the resolution.                                                                             
MR.  TWOMLEY answered  that currently  there is  an agreement  to                                                               
disagree.  He emphasized that there are discussions.                                                                            
Number 2020                                                                                                                     
GERALD  McCUNE, Lobbyist  for United  Fishermen of  Alaska (UFA),                                                               
testified in support  of HB 105.  He informed  the committee that                                                               
UFA has worked with fishermen,  and advocates that people pay and                                                               
file taxes  on time.   Mr. McCune emphasized that  UFA's interest                                                               
in the tax loan obligation program  is the desire to keep the IRS                                                               
from taking these  permits.  For example, a permit  was seized in                                                               
Yakutat two days  before Christmas; there was an  attempt to sell                                                               
the permit for $5,000, although it was worth $15,000.                                                                           
MR.  McCUNE pointed  out that  other  assets can  be obtained  to                                                               
satisfy tax payments, such as a  paid-off boat.  The IRS seized a                                                               
boat in Cordova  to pay for an individual's taxes,  but since the                                                               
permit wasn't taken, the individual  could continue to fish.  Mr.                                                               
McCune likened  permits to a  carpenter's tools.  He  agreed with                                                               
earlier  testimony that  the education  process has  come a  long                                                               
way.    Mr. McCune  added  that  fishing  this year,  in  certain                                                               
arenas, isn't  looking too bad.   He  related his belief  that in                                                               
the  next two  to three  years there  is a  good chance  that the                                                               
industry will be  turned around so that people can  make a decent                                                               
wage and many of these difficulties will be eliminated.                                                                         
Number 1835                                                                                                                     
REPRESENTATIVE GUTTENBERG  acknowledged that the season  would be                                                               
one  factor [when  people don't  pay their  taxes].   However, he                                                               
suggested that  there are other  liabilities that  prevent people                                                               
from being able to pay their taxes.                                                                                             
MR.  McCUNE reiterated  that this  problem  has come  a long  way                                                               
since  10 years  ago.    He acknowledged  that  there  are a  few                                                               
problems because  of low [fish] runs  and low prices at  the same                                                               
REPRESENTATIVE GUTTENBERG pointed out  that a good season doesn't                                                               
necessarily mean  that someone will  make a profit or  even [have                                                               
money to] pay taxes.                                                                                                            
MR.  McCUNE said  people need  to be  responsible.   He clarified                                                               
that he  wasn't advocating bailing  out fishermen or  anyone else                                                               
who doesn't pay  taxes.  He reiterated that his  main interest is                                                               
to keep  the IRS  out of the  state program.   He noted  that the                                                               
program  has been  used less  each  year; he  surmised that  more                                                               
education  is  happening and  more  people  are aware  of  taxes.                                                               
Still,  it's the  loan program's  job to  review an  individual's                                                               
portfolio [to determine the risk], he said.                                                                                     
Number 1675                                                                                                                     
REPRESENTATIVE MORGAN asked about start-up  costs.  He noted that                                                               
like  farmers, fishermen  must have  the  necessary equipment  in                                                               
order to make a profit.                                                                                                         
MR.  McCUNE answered,  depending upon  the fishery,  that someone                                                               
can spend from $2,000  to $10,000 to gear up.   If the fish don't                                                               
return, the person will still owe  some kind of tax such as self-                                                               
employment tax at some point.                                                                                                   
CHAIR FATE closed public testimony.                                                                                             
Number 1604                                                                                                                     
REPRESENTATIVE KERTTULA moved [to report  HB 105 out of committee                                                               
with  individual  recommendations  and  the  accompanying  fiscal                                                               
notes].  There  being no objection, HB 105 was  reported from the                                                               
House Resources Standing Committee.                                                                                             

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