Legislature(2009 - 2010)

04/08/2009 04:35 PM Senate FIN


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HOUSE BILL NO. 172                                                                                                            
                                                                                                                                
     "An  Act relating  to an  investment  in the  education                                                                    
     loan fund;  relating to authority for  the commissioner                                                                    
     of revenue to enter into  a bond purchase agreement and                                                                    
     letter of credit with the Alaska Student Loan                                                                              
    Corporation; and providing for an effective date."                                                                          
                                                                                                                                
4:36:36 PM                                                                                                                    
                                                                                                                                
DIANE BARRANS,  EXECUTIVE DIRECTOR,  POSTSECONDARY EDUCATION                                                                    
COMMISSION, DEPARTMENT  OF EDUCATION AND  EARLY DEVELOPMENT,                                                                    
explained  that the  legislation allows  the Alaska  Student                                                                    
Loan Corporation  (ASLC) to partner  with the  Department of                                                                    
Revenue  to provide  interim financing  for  the purpose  of                                                                    
originating  student loans.  As a  result of  the continuing                                                                    
disruption of the  capital markets, ASLC has  been unable to                                                                    
issue  student  loan backed  bonds  to  finance new  student                                                                    
loans. Internal  liquidity was used  to finance  $95 million                                                                    
in new  originated loans  for 2008 -  2009, but  these funds                                                                    
will be  exhausted by  the 2009-2010  loan year.  House Bill                                                                    
172 allows the commissioner of  the Department of Revenue to                                                                    
invest directly in  student loans with an  investment cap of                                                                    
$100 million.  The ASLC would  have to repay  the obligation                                                                    
in no more than five years.                                                                                                     
                                                                                                                                
Ms. Barrans said that this  legislation would also authorize                                                                    
the commissioner  to provide a liquidity  facility or letter                                                                    
of  credit. Under  current market  conditions,  the cost  to                                                                    
acquire a  letter of credit  or liquidity facility  in order                                                                    
to issue variable  rate bonds is so high that  ASLC would be                                                                    
unable to make student loans  available on an economic basis                                                                    
under existing statute. The liquidity  facility or letter of                                                                    
credit would act  as a standby bond  purchase agreement that                                                                    
would allow ASLC to issue  bonds that would be attractive to                                                                    
investors.                                                                                                                      
                                                                                                                                
4:40:42 PM                                                                                                                    
                                                                                                                                
Ms.  Barrans   noted  that  the  department   has  suspended                                                                    
applications   for   the   2009-2010  academic   year.   The                                                                    
suspension will continue until  the loan financing situation                                                                    
is resolved.                                                                                                                    
                                                                                                                                
JERRY  BURNETT, DEPUTY  COMMISSIONER, DIVISION  OF TREASURY,                                                                    
DEPARTMENT  OF REVENUE,  explained that  the Alaska  Student                                                                    
Loan Corporation had come to  the department over a year ago                                                                    
for  assistance in  securing funding  and liquidity  for the                                                                    
loan program. Mr. Burnett  furthered that discussions ensued                                                                    
with the  Office of  Management and  Budget and  all options                                                                    
were carefully  considered. A direct appropriation  from the                                                                    
General Fund,  specifically the  GeFONSI pool  (General Fund                                                                    
and  Other Non-segregated  Investments) up  to $100  million                                                                    
was  concluded to  be the  workable solution.  He elaborated                                                                    
that the plan would use  GeFONSI funds to directly invest in                                                                    
the Corporation's loan fund and  create a liquidity facility                                                                    
to back the  loans.  The GeFONSI pool has  a current balance                                                                    
of $7.2 billion  and in the last 14 years  has never dropped                                                                    
below  $600 million.  The department  is confident  the pool                                                                    
could  support   the  $206  million  provided   for  in  the                                                                    
legislation  as illiquid  investments.  He  stated that  the                                                                    
department would  charge the corporation interest  at market                                                                    
rates on the loan, and still  earn the 15 basis point fee on                                                                    
the credit  facility, which  would allow  it to  continue to                                                                    
invest in other securities.                                                                                                     
                                                                                                                                
4:43:26 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman asked  if  Power  Cost Equalization  (PCE)                                                                    
funds  were  included  in  the  GeFONSI  fund.  Mr.  Burnett                                                                    
replied that the  PCE endowment is not in  the fund, however                                                                    
some PCE funds are in the baseline group.                                                                                       
                                                                                                                                
Co-Chair  Stedman  asked  for  clarification  regarding  the                                                                    
baseline  group. Mr.  Burnett  responded  that the  baseline                                                                    
group  contains  funds  that   retain  a  relatively  stable                                                                    
balance over  time, such  as the  Oil &  Hazardous Substance                                                                    
Response   Account.   The   GeFONSI   fund   also   contains                                                                    
approximately 100  other funds, including the  general fund,                                                                    
the  statutory   budget  reserve  and  the   capital  income                                                                    
account.                                                                                                                        
                                                                                                                                
Co-Chair  Stedman requested  additional backup  and detailed                                                                    
information regarding the composition of the GeFONSI Fund.                                                                      
Mr. Burnett replied that he  would obtain and distribute the                                                                    
information. He  added that  GeFONSI is  currently comprised                                                                    
of $2.4 billion unrestricted  general funds and $4.8 billion                                                                    
of other encumbered  funds. He emphasized that  GeFONSI is a                                                                    
pooled  investment fund.  Co-Chair Stedman  inquired if  the                                                                    
$2.4  billion  fund   contained  the  Constitutional  Budget                                                                    
Reserve (CBR)  and the Statutory  Budget Reserve  (SBR). Mr.                                                                    
Burnett replied  that only the  SBR is included in  the $4.8                                                                    
billion pool of other  funds. Co-Chair Stedman remarked that                                                                    
the  committee  has  concerns  regarding  liquidity  of  the                                                                    
funds.                                                                                                                          
                                                                                                                                
4:46:29 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  asked  what  the  returns  on  the  funds                                                                    
amounted to over the last  year. Mr. Burnett replied that he                                                                    
did not  have that  information with him  but would  make it                                                                    
available to the committee.  Co-Chair Hoffman requested that                                                                    
Mr. Burnett  estimate the amount. Mr.  Burnett reported that                                                                    
the returns  were positive; mostly short  term, fixed income                                                                    
investments.                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  reiterated  his questions  regarding  PCE                                                                    
funds.  Mr.  Burnett clarified  that  PCE  was removed  from                                                                    
GeFONSI and a separate PCE endowment was created in 2005.                                                                       
                                                                                                                                
4:47:36 PM                                                                                                                    
                                                                                                                                
Co-Chair   Hoffman   asked   for  details   concerning   the                                                                    
guidelines and  schedule ASLC has  to repay the  loan funds.                                                                    
Mr. Burnett  replied that the  details of repayment  had not                                                                    
been negotiated. The  funds will be backed  by student loans                                                                    
and  the intent  is to  have the  corporation refinance  the                                                                    
loans as soon as capital markets allow.                                                                                         
                                                                                                                                
Co-Chair Hoffman  noted the breakdown  of student  loans; 60                                                                    
percent in  state and 40 percent  out of state. He  asked if                                                                    
the  same ratio  is expected  if the  plan is  approved. Ms.                                                                    
Barrans remarked that she did  not expect the composition of                                                                    
borrowers  or  borrowing  behavior  to  change  due  to  the                                                                    
funding source. She suggested that  there may be an increase                                                                    
in  the  percentage  of  loans   for  attendance  in  Alaska                                                                    
primarily due to the impact  the current economic crisis has                                                                    
on families.                                                                                                                    
                                                                                                                                
Co-Chair  Hoffman  asked  if  a  preference  were  given  to                                                                    
students  who remain  in Alaska.  Ms. Barrans  reported that                                                                    
there is no  preference to students to access  the loans but                                                                    
a preferred interest rate of  one-half percent is granted to                                                                    
students who return to or attend in Alaska.                                                                                     
                                                                                                                                
4:50:26 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman  wondered what the number  of student loans                                                                    
is  anticipated  to be  issued  by  next June.  Ms.  Barrans                                                                    
estimated  12,000 loans  would  be issued  at  a total  loan                                                                    
volume of $85 - $95  million. Co-Chair Stedman asked if $100                                                                    
million will  be sufficient. Ms. Barrans  expounded that the                                                                    
corporation believes this approach  is significant enough to                                                                    
avoid another  appropriation request  next year.  She stated                                                                    
that if the market  disruption continues and the corporation                                                                    
could not successfully issue bonds  in the interim that this                                                                    
proposal,  allowing  for  the  internal  receipt  of  funds,                                                                    
potentially  provides  enough  funds through  the  2010-2011                                                                    
cycle. She believes  ASLC will be able to  issue debt within                                                                    
the next six months via variable rate demand bonds.                                                                             
                                                                                                                                
Co-Chair Stedman  cited the  Department of  Revenue's fiscal                                                                    
note (DOR 4)  analysis and asked for an  explanation of what                                                                    
fiduciary duties  apply and how  that will earn a  return to                                                                    
the  state. Mr.  Burnett  explained that  the bill  requires                                                                    
that  the  bridge  loan  to the  corporation  be  backed  by                                                                    
student loans.  Therefore, the department will  enter into a                                                                    
contractual  agreement with  ASLC that  states the  terms of                                                                    
repayment of  the principle with  interest. The loan  to the                                                                    
corporation will be over collateralized  with respect to the                                                                    
default rate  on student loans  and an origination  fee will                                                                    
be charged.                                                                                                                     
                                                                                                                                
Co-Chair Stedman asked how  internal policies and procedures                                                                    
will  be addressed.  Mr. Burnett  stated  that new  policies                                                                    
will  be  created  to  be   consistent  with  the  fiduciary                                                                    
requirements of  the legislation. He explained  that current                                                                    
policies would  not allow  for the  investment concentration                                                                    
in one asset [student loans] that the bill establishes.                                                                         
                                                                                                                                
4:53:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman  requested  the  schedule  of  outstanding                                                                    
student loans. Ms.  Barrans replied that as  of December 31,                                                                    
2007 the  balance of  outstanding alternative  student loans                                                                    
was  $561  million with  $81  million  of student  loans  in                                                                    
default.  She  explained that  she  could  provide a  report                                                                    
containing  additional  characteristic   information  and  a                                                                    
summary of the status of the outstanding student loans.                                                                         
                                                                                                                                
Co-Chair  Hoffman   requested  the  information   include  a                                                                    
breakdown  between in-state  and out-of-state  students. Co-                                                                    
Chair Hoffman  asked what other  states provide  state loans                                                                    
that  allow students  to  attend out-of-state  institutions.                                                                    
Ms. Barrans replied that all  other state's alternative loan                                                                    
programs  allow portability.  Co-Chair  Hoffman wondered  if                                                                    
they were  similar to the  ASLC program. Ms.  Barrans stated                                                                    
that they are all similar  in many respects. She exemplified                                                                    
New  York  State's loan  program  that  contains a  fund  to                                                                    
guarantee  those loans  against default  as an  example that                                                                    
while  some  elements  of other  states  programs  might  be                                                                    
different they all allow portability.                                                                                           
                                                                                                                                
4:57:54 PM                                                                                                                    
                                                                                                                                
Co-Chair Stedman cited the April  7th letter from ASLC (Copy                                                                    
on File)  to the  committee. He  asked for  clarification of                                                                    
the information  submitted to the committee  specifically to                                                                    
the requested  sum of $100 million  for approximately 12,000                                                                    
loans and what  amount will be issued within  the next year.                                                                    
Ms. Barrans  replied that it would  be over a period  of one                                                                    
to two years depending on  loan volume. She guessed that the                                                                    
volume  will  drop  slightly due  to  the  tightened  credit                                                                    
standards  being implemented.  She  expected  the amount  to                                                                    
total  close to  $85  million next  year. Co-Chair  Steadman                                                                    
requested the discussion focus on  the issues as they relate                                                                    
to a one year period.                                                                                                           
                                                                                                                                
Co-Chair  Stedman  asked  Mr.  Burnett  to  explain  if  the                                                                    
economic crisis credit seize up  as it relates to the Alaska                                                                    
housing  issue earlier  this year  causes  exposure for  the                                                                    
state  and if  it  still  has an  effect  on current  credit                                                                    
conditions.  Mr.  Burnett  responded  that  except  for  the                                                                    
period  of last  September  through December  there has  not                                                                    
been  a  serious  liquidity  issue that  cannot  be  met  by                                                                    
existing  credit providers  such as  Alaska Housing  Finance                                                                    
Corporation. He stated  that DOR is not  considered a credit                                                                    
provider.                                                                                                                       
                                                                                                                                
Co-Chair Stedman  queried the  corporation for  other ideas,                                                                    
solutions,  and options  rather  than  soliciting for  state                                                                    
funds.                                                                                                                          
                                                                                                                                
4:59:59 PM                                                                                                                    
                                                                                                                                
Ms. Barrans  answered that the corporation  along with their                                                                    
financial  advisor   had  studied  solutions   other  states                                                                    
employed  to solve  this problem.  She said  that each  case                                                                    
required  some  financial  support  from  their  state.  She                                                                    
reiterated that the dilemma is  that the capital markets the                                                                    
student   loan   entities   would  be   accessing,   without                                                                    
dependence  on their  state are  no longer  available at  an                                                                    
affordable  cost. The  other option  discussed  was for  the                                                                    
state  to finance  the program  with a  direct appropriation                                                                    
from the general  fund for a period of time.  The option was                                                                    
rejected because  the ASLC program was  initially created to                                                                    
avoid dependence on  the use of state general  funds and the                                                                    
variability of  those funds from  one year to the  next. Ms.                                                                    
Barrans   stressed   that    this   market   disruption   is                                                                    
unprecedented. Co-Chair Stedman surmised  that there are not                                                                    
a lot of alternative solutions available.                                                                                       
                                                                                                                                
Senator  Huggins asked  for the  interest rates  on in-state                                                                    
and  out-of-state  loans.  Ms.  Barrans  answered  that  the                                                                    
interest rates are 6.8 percent  for in-state and 7.3 percent                                                                    
for  out-of-state  alternative  loans. She  added  that  the                                                                    
loans  offered  through  the federally  guaranteed  Stafford                                                                    
loan  program present  the lowest  risks to  the corporation                                                                    
and can be offered at interest rates of 6 percent or below.                                                                     
                                                                                                                                
Senator Huggins  asked what  the interest  rates will  be in                                                                    
2010-2011. Ms. Barrans expected rates  to remain in the same                                                                    
range. She said there was a statutory cap of 8.25 percent.                                                                      
                                                                                                                                
5:04:08 PM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  requested the amount that  the corporation                                                                    
was able  to sell the bonds  for and at what  interest rates                                                                    
over the previous five years.  Ms. Barrans replied she would                                                                    
provide the information.                                                                                                        
                                                                                                                                
Co-Chair  Stedman asked  if this  bill was  the only  option                                                                    
available to fund higher education in Alaska.                                                                                   
                                                                                                                                
LEE  DONNER,  MANAGING  DIRECTOR, FIRST  SOUTHWEST  COMPANY,                                                                    
CONSULTANT,   STUDENT   LOAN  CORPORATION,   DEPARTMENT   OF                                                                    
EDUCATION  AND   EARLY  DEVELOPMENT   (via  teleconference),                                                                    
explained  that  the provisions  of  the  legislation is  to                                                                    
provide  interim  financing  and a  stand-by  bond  purchase                                                                    
agreement  or  letter of  credit.  He  stated that  if  this                                                                    
strategy  works the  corporation  should be  able to  access                                                                    
capital  markets  and raise  capital  in  the open  markets,                                                                    
within the  next six  months to  finance the  FFELP (Federal                                                                    
Family Education  Loan Program)  and fixed  rate alternative                                                                    
loans. The combined  financing of both types  of loans would                                                                    
allow  the corporation  to repay  the interim  financing. He                                                                    
agreed with  Ms. Barrans  that other  states options  to the                                                                    
loan  crisis   all  involved  direct   intervention,  albeit                                                                    
different  approaches.  Other plans  vary  in  costs to  the                                                                    
state ranging from direct appropriation,  to risk of general                                                                    
obligation  coverage  on  the  debt,  to  plans  similar  to                                                                    
Alaska's  with the  little associated  risk. He  exemplified                                                                    
the state of  Texas direct involvement to  grant the state's                                                                    
general obligation  to the bondholders.  The debt  becomes a                                                                    
general  obligation  of the  state  of  Texas. In  contrast,                                                                    
Alaska's  plan  has  no  cost  to the  state,  if  the  bond                                                                    
purchase agreement  or letter of credit  is adequately rated                                                                    
as  anticipated,   and  has  the  potential   of  generating                                                                    
revenue. He  noted that in the  event that the state  has to                                                                    
purchase  the bonds  there is  an  applicable interest  rate                                                                    
that the bonds  bear to the state during the  length of time                                                                    
the state owns the bonds.                                                                                                       
                                                                                                                                
5:08:51 PM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman referred  to the  historic balance  of the                                                                    
GeFONSI account indicated  on the graph provided  in the DOR                                                                    
handout (copy  on file) and  asked what the  minimum balance                                                                    
was  since  1996.  Mr.  Burnett  replied  that  the  minimum                                                                    
balance was  $600 million. Co-Chair  Stedman asked  when the                                                                    
$100 million  tied up as  liquidity would  be a risk  to the                                                                    
state  especially   if  there  are  repeated   requests  for                                                                    
additional appropriations.  Mr. Burnett  stated that  he was                                                                    
comfortable  with an  amount well  below  $600 million.  Co-                                                                    
Chair Stedman  recapped that  the department  is comfortable                                                                    
with the  $100 million  request but  repeated appropriations                                                                    
are  not  advisable. Mr.  Burnett  agreed  that this  amount                                                                    
would cause concern after two years.                                                                                            
                                                                                                                                
Ms. Barrans  reminded the committee  that $100 million  is a                                                                    
maximum cap, not  per annum request. She  explained that the                                                                    
$100 million  could be expended  over a period of  more than                                                                    
one year. She added that  the corporation does not expect to                                                                    
request additional funds.                                                                                                       
                                                                                                                                
5:11:52 PM                                                                                                                    
                                                                                                                                
Co-Chair Hoffman  asked if the  economy continues  to falter                                                                    
would the  department return to the  legislature and request                                                                    
additional loan guarantees. Mr.  Burnett replied that if the                                                                    
markets continue to fail over  a two year period the student                                                                    
loan  corporation   will  need  to  consider   more  extreme                                                                    
measures such  as termination of the  program. He emphasized                                                                    
that  the  state could  not  continue  to loan  under  those                                                                    
circumstances.                                                                                                                  
                                                                                                                                
CSHB 172(FIN)  was HEARD and  HELD in Committee  for further                                                                    
consideration.                                                                                                                  
                                                                                                                                
5:14:00 PM          AT EASE                                                                                                   
5:17:14 PM          RECONVENED                                                                                                
                                                                                                                                

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