Legislature(2001 - 2002)
04/19/2001 01:37 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 168-COMMERCIAL FISHING LOAN PROGRAM
CHAIRMAN PHILLIPS announced SB 168 to be up for consideration.
MR. ED CRANE, CEO, Commercial Fishing and Agriculture Banks (CFAB),
said he would answer questions, but explained his earlier comment
about the Division of Investments being subsidized competition.
Both CFAB and Division of Investments were created by the
legislature to do, at least superficially, similar
things, one with public money and the other with private
money. First of all, the Division of Investments is not
burdened with any cost of funds over the last 10 years.
CFABs annual interest expense is average $687,000. The
Division of Investments is not required to establish a
reserve for loan losses - that we have set aside $168,000
per year on average over the last 10 years. The Division
of Investments pays no taxes. CFAB has paid an average of
$152,000 in state and federal income taxes over the last
10 years. The Division of Investments is not burdened
with the cost of the board of directors; there's $25,000
or so per year. The Division of Investments does not bear
the burden of a statutorily mandated annual audit or
annual examination by the state. That costs us
approximately $30,000 per year. The Division of
Investments enjoys considerable infrastructure provided
by the Department of Administration, the Department of
Revenue, and the Department of Law, and I have no idea of
who else and have no idea how to measure that. There are
other aspects, as well, simply the cooperative structure
our statute mandates for CFAC. It's a good structure, but
the fact is that we spend a good $35,000 per year on
record keeping and communications with members on things
other than simply loans, because of that structure. If we
were simply a lender, if we simply shoveled money out the
door, we would be able to get by with probably less than
10 people in our organization rather than the 15 that we
have. I think there is a considerable subsidy the state
has provided to the Division of Investments, again, in
competition with CFAB.
But the most important element from a practical
standpoint, is really unquantifiable, but it is very
significant and that's the lack of accountability or
oversight and the ability of the Division of Investments
to change directions and policies at will with no
analyses and no concern for the bottom line. I, as
manager of CFAB, provide a report to our board of
directors each month. We have to meet with the board of
directors six times a year and are accountable to them
and I do mean accountable. We are accountable to our
members through an annual report and our members expect
to receive the patronage refunds we pay and they also
expect the dividends on the stock. I mentioned before the
cost of our annual audit by outside auditors and the
examination by the State of Alaska banking examiners. We
are required by statute to provide those to the
legislature as well as to our members. You have nothing
that's anywhere analogous from the Division of
Investments. They set their own standards in many ways…
SENATOR AUSTERMAN said he could tell that CFAB has done well over
time and asked if they are in trouble now and that's why they need
the other loans to keep going.
MR. CRANE replied that they are not in trouble, although this year
hasn't been particularly good:
I won't say that we necessarily need more loans. I would
stress and reemphasize what is mentioned in the sponsor
statement and what is illustrated in the page of numbers
you have in your packets there. CFAB actually provides
significant benefits to those people who borrow from it.
I have, and our Board of Directors has and all our
management has a very clear fiduciary responsibility to
those people who are the owners of CFAB - our borrowing
members. Those are the people we have to attempt to
protect and provide for. Fortunately, everything we do in
that regard is totally consistent with our effort and
intent to keep CFAB strong so that we can lend to
fishermen in the future. It is not really a matter of
survival or anything like that. It is, perhaps in a more
general sense, a desire to have as much good loan volume
and as diverse a loan portfolio as we can get. But as to
what has precipitated this bill, again, I'm not
necessarily trying to pick a fight with anybody, but I
would say over the last three or four years in particular
we have become increasing frustrated by the
aggressiveness of the Division of Investments, the
liberalization of certain of their policies and what we
see as irrationality in some of their practices. One of
the effects of that and we see it in some of the letters
we have seen about this bill from fishermen's
organizations, it's almost an instinctive perception on
the part of many people of, "Gee, if it's state money, it
must be a better deal."
There are many loans that we never get a chance for and
we never have the opportunity to address. We believe
there is some exploitation. I'm not questioning
anybodies' motives. This bill is also part of our
reaction to our concern…
TAPE 01-21, SIDE A
MR. CRANE continued:
"…I'll give you a reference to it on the top of page 3,
line 1, this is a reference to the quota share loans
(IFQs). The statute has said for about five years now,
the Division of Investments can make loans for quota
shares to people who are not eligible for financing from
other recognized commercial lending institutions. Our
view, and I know the Division will disagree with us, but
our view, and we have seen considerable evidence to
support our view, is that the Division has ignored that.
That has been troubling to us. In summary that's really
what's behind this bill, Senator.
MR. GREG WINEGAR, Director, Division of Investments, testified:
We have several problems with this legislation,
especially under section (a). Borrowers currently have a
choice as to which program they wish to utilize. If this
legislation passes, basically, they will have one choice
and that's to go to CFAB first. The concern we have is
that most of our borrowers under this section will not
qualify for CFAB financing. There may be a few, but most
will not. So, those applicants are going to have to
through the extra process, the extra paperwork, time and
effort necessary to go through the process twice.
The other thing we are concerned about is that although
the number of applications are relatively small, those
are going to be the stronger loans and so CFAB will
basically pick and choose which loans they wish to have
for their portfolio. Those stronger loans do help balance
out the risks of our portfolio and that does benefit the
program as a whole.
Some of the things I mentioned last week that we are
still concerned about - the use of the word "identical,"
which is used in several places here in the bill - on
page 1, line 12; page 3, line 2; page 4, lines 1 and 8.
We are concerned about the use of that term, because our
rates and our terms are not related to CFAB's or not tied
to CFAB's nor are they tied to any private sector lender.
So, we're concerned that the use of "identical" may make
it very difficult for borrowers to actually meet that
requirement.
In section 10 of our statutes, which is actually page 3,
line 29, of the bill, this is an internal refinancing
program and the sole purpose of this section is to allow
existing borrowers to take advantage of lower interest
rates when they occur to lower the rates on their loans.
As I testified last week, requiring these borrowers to go
through a whole new application process through another
lender, the time involved in that, the money involved in
that, is going to pretty much eliminate the usefulness of
this program.
I think it's important to note that since inception,
we've had 1,300 borrowers that have taken advantage of
this program and have been able to lower their rates. And
also, because rates are dropping rapidly right now, this
will have an effect on future borrowers under the
program.
I think it's very important to point out that this fund
has been a very successful program for the last 29 years.
A House Research Agency report done a few years ago said
it was one of the healthiest loan programs ever created
by the state. The fund is totally self sufficient. We get
no general fund monies; it's been that way since 1985.
There was a total of about $60,201,000 that was used to
set up the program that went from the general fund into
this fund. Sixty-nine million dollars has actually been
transferred back out of the fund with the majority of
those funds going back to the general fund. On top of
that, we've been able to leverage those funds into $341
million in loans.
Certainly, we've had some challenges. The industry has
had a lot of changes. We have had to work with a lot of
our borrowers; we've had some difficult seasons; market
conditions have changed and so, we have had to modify a
number of loans for our borrowers. But the flexibility
that we have because we are a public sector lender has
been very important in a real important public policy
issue, which is to try to keep Alaska fisheries in the
hands of Alaskans. So, we are concerned about the
legislation. We're worried it is going to limit the
effectiveness of this program and we do continue to
oppose the bill. Thank you Mr. Chairman, I appreciate the
opportunity to testify and will answer any questions you
might have.
SENATOR AUSTERMAN asked when this program was originally set up,
was it set up to help pick up those loans that were not eligible
for other funds.
MR. WINEGAR replied:
There has been a number of changes in the program over
the years, but I think that was one of the very important
purposes of the fund - was to make financing available to
a majority of Alaskans. A lot of those harvesters do not
meet your standard lending type of criteria. I think the
program was created to try and insure that those folks
have access to financing - so that we can keep those
fisheries in the hands of Alaskans.
SENATOR AUSTERMAN asked if they currently require them to be
declined from another agency first.
MR. WINEGAR answered:
It depends on the section. Our statute is divided up into
several different sections and each has different
eligibility requirements. The situation Mr. Crane was
referring to, for example, under section (c), loans for
quota shares, there is language in the statute that says
you need to not have access to financing through a
private sector lender. The Division was basically looking
at those applications and in cases where it was obvious
they did not have access to that financing, we would
consider the request without the turn down letter. In
November Mr. Crane indicated a concern about that policy
to us and so we actually had two meetings with him in
January and February. We amended our policy so that now
in every case, we require a turn down letter now for
someone to apply under section (c).
On the other hand, like section (a), loans for limited
entry permits, currently there is no restriction. There
are only two options available, our program or CFAB's and
right now borrowers have a choice as to which program
they wish to pursue. So, I guess what I'm saying is
different parts of the statute have different eligibility
requirements. Some require turn downs and some do not.
Number 600
CHAIRMAN PHILLIPS said he understood that no other industry, other
than the fishing industry, has a loan program like this within
state government and asked if that was right.
MR. WINEGAR replied that they have a couple of other small business
programs.
CHAIRMAN PHILLIPS asked if they were for a specific industry.
MR. WINEGAR replied that they cover lots of different industries.
He explained that the small business program they had was turned
over to the Alaska Industrial Development and Export Authority.
They provide financing for different types of industries like
mining and tourism, etc.
CHAIRMAN PHILLIPS said that was a multi-industry portfolio and his
was for just the one industry.
MR. WINEGAR said that was true of this particular loan program.
SENATOR LEMAN commented that the state has other incentive programs
for other industries.
SENATOR AUSTERMAN stated: "This program has been there 29 years and
I think the reason it's there obviously is that it's the number one
industry in the State of Alaska…It's the number one exporter of
product in the State of Alaska. It's not oil; it's fish. We need to
make sure that we do protect our fishermen."
SENATOR TORGERSON added that the reason the program was started was
that the fishing industry was in bad array. You couldn't borrow
anything from a commercial lender.
MR. JERRY MCCUNE, United Fishermen of Alaska, Cordova District
Fishermen United, said when CFAB was created, there was a lot of
discussion, and Cordova fishermen thought an alternative to the
state program would be good, because banks couldn't use permits as
collateral.
He said that the two are very useful loan programs. He thought the
Division of Investments was a good program because it encourages
permits to stay in residents' hands.
CFAB is a very conservative bank and has high profile
loans, but in a lot of cases in the villages and out in
the other places, young people don't have a credit
history. They have to have some experience to be able to
get this loan. This helps a lot of young folks. I can
name four or five guys in Cordova coming out of high
school that took part in the educational fishing program
that got loans from the state and are now successful
fishermen and have paid their loans back. That's the
usefulness of the Division of Investment Loan Program.
If you were to do away with the Division of Investments'
loan program and leave CFAB on its own, I don't think
we're encouraging residents to keep the permits in the
state.
He added that CFAB has a floating interest rate and the Division is
more flexible and the reason is encourage residents to get into the
fishery.
Number 1000
MR. CRANE responded that at CFAB, "None of us have any desire or
intent to see the Commercial Fishing Revolving Loan Fund done away
with or no longer be able to do what it does."
MR. CRANE agreed with Mr. McCune's remarks, but he thought the loan
administrator should not look upon the program as a loan program.
"It should not be looked at or talked about as being one of two
programs. It is not. It is a state loan program. CFAB is a private
lending institution. They are not two loan programs…."
He said that five or six years ago, there was a requirement that an
applicant be denied by two other lenders before a loan could be
made and he didn't know why it was changed. He said it wasn't
impossible for anybody to live with at the time and he pointed out
the letter of intent, which describes the program that was in place
then when CFAB would often forward applicants' paperwork and some
of their analysis to the Division of Investments. So, there was no
redundancy. He also didn't know why this bill would affect the
opportunity to change interest rates.
SENATOR TORGERSON interrupted him and asked what they do with
CFAB's profits.
MR. CRANE replied that they distribute them to their borrowers.
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