Legislature(2011 - 2012)BELTZ 105 (TSBldg)

02/03/2011 01:30 PM LABOR & COMMERCE

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01:36:27 PM Start
01:37:02 PM SB34
02:12:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
              SB  34-SMALL BUSINESS REVOLVING FUND                                                                          
1:37:02 PM                                                                                                                    
CHAIR EGAN announced the consideration of SB 34.                                                                                
1:37:17 PM                                                                                                                    
SENATOR  WIELECHOWSKI,   sponsor  of  SB  34,   said  that  small                                                               
businesses provide  a huge  amount of  employment in  Alaska. The                                                               
problem  is that  businesses continue  to have  a difficult  time                                                               
getting credit,  and this  bill would  allow small  businesses to                                                               
receive small  loans or  microloans. This  bill could  help rural                                                               
Alaska grow, he said.                                                                                                           
1:39:20 PM                                                                                                                    
MICHELLE  SYDEMAN,  Staff  to   Senator  Wielechowski,  said  the                                                               
purpose of the  fund would be to promote  economic development by                                                               
helping small  businesses in Alaska  to access  critically needed                                                               
The  Need:  in  just  two  years there  has  been  a  substantial                                                               
tightening of  credit available to  small business.  The National                                                               
Small Business  Association does a  survey twice a year  and they                                                               
have seen a  very steady decline in reporting  access to adequate                                                               
credit. Two years  ago almost 80 percent of  businesses said they                                                               
did  have access  to  the credit  they need;  now  it's under  60                                                               
percent. There were  a third fewer loans in 2009  than there were                                                               
in 2008, and fewer loans are being made now than in 2000.                                                                       
Why  is this  a problem,  she  asked and  answered that  start-up                                                               
businesses have a  particularly big effect on  job creation. Some                                                               
25 percent  of new jobs are  created as start-ups. So,  they want                                                               
to foster development of new enterprises.                                                                                       
Is Alaska  different than other states  in the US on  this credit                                                               
issue? She  said she called  various economists in the  state and                                                               
found that  the answer was  no, but the  problem may be  worse in                                                               
Alaska because  business costs are  higher, markets  are smaller,                                                               
and the number of lenders is  fewer. This is a problem that needs                                                               
to  be addressed  here. The  best  thing that  government can  do                                                               
right now is  make sure that credit is  available. Small business                                                               
credit is where we should be focusing our attention.                                                                            
MS. SYDEMAN said 46 states  have micro-lending programs under the                                                               
auspices of  the Federal Small  Business Administration,  and two                                                               
other  states participate  through  neighboring  states. So  that                                                               
leaves two  states without a  micro-lending program.  Alaska does                                                               
not have one  because there are no private lenders  willing to do                                                               
so. So government should step  in and be that intermediary lender                                                               
that is required by the federal government.                                                                                     
She  said  that  HB  412  [26th  Legislature]  passed  the  House                                                               
unanimously, but it did not pass  the Senate, which is one of the                                                               
reasons  a Senator  decided  to advance  a  bill. They  contacted                                                               
various small business owners to  ask them their opinion. The one                                                               
comment they  got back  several times was  that last  year's bill                                                               
was fantastic,  but the  maximum loan limits  are a  little lower                                                               
than they would like  to see. HB 412 had a  maximum loan limit of                                                               
$35,000  for a  sole proprietorship  and $70,000  for a  business                                                               
owned by  two or more  people. They decided that  increasing that                                                               
slightly  - to  $50,000 for  one person  and $100,000  for two  -                                                               
wouldn't run them into a loan  size that would be more attractive                                                               
to private  lenders. Coincidentally,  the federal  government did                                                               
the same thing. So, SB 34 mirrors the federal limit.                                                                            
1:44:36 PM                                                                                                                    
MS.  SYDEMAN said  the Governor  has  reintroduced microloans  as                                                               
part  of a  broader loan  package that  has similar  details. So,                                                               
what she says applies to the Governor's bill as well.                                                                           
Loan Eligibility: Applicants must  be Alaska residents. They must                                                               
provide at least  10 percent equity and  sufficient collateral to                                                               
secure the loan. Loans would have an interest rate of between 6-                                                                
8 percent  and the maximum term  would be six years.  The program                                                               
would be operated  by the Division of  Investments, Department of                                                               
Commerce, Community and Economic  Development, and it fits nicely                                                               
within other programs that the  division administers. One of them                                                               
is  the Small  Business  Economic Development  Fund. But,  though                                                               
that fund is financed with  federal money, it's only available to                                                               
communities that  have been  identified as  experiencing economic                                                               
hardship. Anchorage and Juneau businesses  would not qualify, and                                                               
further it targets long-term financing, not a short-term fairly-                                                                
quick turn-around kind of microloan.                                                                                            
The second program,  the Rural Development Fund,  is a compliment                                                               
to  an   existing  program.  It   is  available  only   to  small                                                               
communities with  less than  a population of  5,000 if  not road-                                                               
connected and 2,000 if road-connected.                                                                                          
She recapped that microloans would  be available state-wide, they                                                               
are of modest  size, they're short term and they  can actually be                                                               
used for  a fairly broad  array of purposes from  working capital                                                               
to  making improvements  to any  land one  might be  leasing, and                                                               
purchasing inventory.  This may be  a little different  than what                                                               
private lenders would do as  they are sometimes reluctant to lend                                                               
to a  start-up business  because they don't  have a  proven track                                                               
record or major assets.                                                                                                         
1:47:05 PM                                                                                                                    
The application  process would be  streamlined; a  simple process                                                               
with a $100-application fee and  a 1-percent origination fee. The                                                               
fiscal  note  calls  for  the  fund to  be  capitalized  at  $3.5                                                               
million. That could be done  with general funds. Last year's bill                                                               
explicitly called for use of  the AIDEA dividend, which has about                                                               
$35 million available,  but for the last six  years the co-chairs                                                               
of both  Finance Committees  have agreed to  use those  funds for                                                               
the capital budget.                                                                                                             
1:48:32 PM                                                                                                                    
Another  option for  $1.5 billion  in  funding is  a new  federal                                                               
program  called the  Small  Business  Jobs Act  of  2010. It's  a                                                               
formula-driven program and Alaska's share  would be more than $13                                                               
million.  She  said the  administration  has  filed a  letter  of                                                               
intent to  participate in this program.  The application deadline                                                               
is June 27, 2011.                                                                                                               
She noted that interest earnings  go back into the revolving loan                                                               
funds so they  are self-sustaining. The DCCED  has estimated that                                                               
this program could let 20 loans in  the first year and 25 in each                                                               
year thereafter. By FY17 all of  the funding would be pushed out,                                                               
but money  would start  coming back  in. So  once the  program is                                                               
capitalized. it  is self  sustaining and has  no further  cost to                                                               
the state. She  said they have seen wide-spread  support for this                                                               
kind of loan program.                                                                                                           
1:50:31 PM                                                                                                                    
The Bristol  Bay Economic Development Corporation  commented that                                                               
in their part of the  state traditional sources of capital really                                                               
are  not available;  so having  a  state program  like this  that                                                               
makes  modest  loans would  be  helpful,  particularly to  bridge                                                               
short-term  financing   problems  that  small   businesses  might                                                               
experience. It would, in fact,  enable those businesses to employ                                                               
more Alaskans, which is the goal here.                                                                                          
The Small  Business Development Center commented  that many banks                                                               
have less interest in making  small loans. Nationally the average                                                               
size of a  microloan is in the $12,000 to  $13,000 range, too low                                                               
for a  private bank to  consider. The Southwest  Alaska Municipal                                                               
Conference said the  types of businesses that  would benefit from                                                               
this would be very small mom  and pop operations - small mechanic                                                               
shops, bed and breakfast operations,  small day care centers, and                                                               
small  fishing processing  businesses -  the kind  of things  you                                                               
might see in small Alaskan communities.                                                                                         
1:52:16 PM                                                                                                                    
MS. SYDEMAN'S closing thoughts:                                                                                                 
-Very small loans, available only to residents                                                                                  
-Quick turn around                                                                                                              
-For  many  businesses  this  could  be  the  difference  between                                                               
success or failure - the ability to start up at all                                                                             
-Possibility of a federal source                                                                                                
-Self-sustaining fund                                                                                                           
MS.  SYDEMAN explained  that the  administration "is  the brains"                                                               
behind this bill.                                                                                                               
1:53:37 PM                                                                                                                    
SENATOR MENARD  asked what the "I"  stands for on slide  10 under                                                               
the Rural Development Fund.                                                                                                     
MS. SYDEMAN answered "Initiative."                                                                                              
SENATOR MENARD  said that she  understands the  difficulties with                                                               
getting a loan  right now and she would appreciate  not having to                                                               
hear  this  bill  again  before   moving  it  out.  She  strongly                                                               
supported SB 34.                                                                                                                
1:56:07 PM                                                                                                                    
CHAIR EGAN said he has a  tendency to agree with her. However, he                                                               
notified the committee that they  would hold this bill until next                                                               
SENATOR  GIESSEL asked  if Ms.  Sydeman could  clarify where  the                                                               
money will from relative to the federal money she mentioned.                                                                    
MS. SYDEMAN  answered that the  deadline for application  is June                                                               
27 of this year.                                                                                                                
SENATOR  GIESSEL  said  her  dilemma  is  the  closeness  of  the                                                               
application deadline; yet the effective  date of the bill is July                                                               
1. She  wanted to know if  there was another source  for the $3.5                                                               
million in case the federal money didn't come through.                                                                          
MS. SYDEMAN  answered that she pointed  out a hole in  her logic.                                                               
She said  she did  not know  what would  have to  be done  in the                                                               
Finance Committee  in terms of  authorizing general funds  in the                                                               
event that federal funds were not available.                                                                                    
SENATOR GIESSEL  said language on  page 2, lines  1-19, describes                                                               
where the  money can  come from, and  mentions "grant",  but then                                                               
language  on line  24(2) also  talks  about "grant".  Is that  an                                                               
MS.  SYDEMAN said  she could  not answer  that question,  and she                                                               
would have to look at it.                                                                                                       
1:59:46 PM                                                                                                                    
SENATOR MENARD  confirmed that she  would clarify with  the banks                                                               
don't feel this is a competition with them.                                                                                     
MS. SYDEMAN  answered that  she would  not be  able to  make that                                                               
clarification today. Yesterday she  talked with bank industry and                                                               
there is  now some  concern about  the loan  limits in  this bill                                                               
even thought  the limits  were acceptable  in the  previous bill.                                                               
She hoped there  will be testimony from  someone representing the                                                               
banking industry.                                                                                                               
Another issue  that came up  yesterday was regarding some  of the                                                               
DCCED  loan programs  that require  an  applicant first  go to  a                                                               
private lender  and be turned  down for  a loan before  coming to                                                               
the state. Her understanding before  yesterday afternoon was that                                                               
lenders felt in  some ways that creates  "non-revenue traffic" to                                                               
their banks and that people are  just there to be turned down and                                                               
have no  intention of applying for  an interest rate that  may be                                                               
at the higher  lending level that a private lender  would need to                                                               
ask for.  Some bankers  said if such  a provision  were included,                                                               
that would make  them oppose the bill. She  thought the committee                                                               
would want  to look  at the  maximum loan limit  and a  turn down                                                               
2:02:23 PM                                                                                                                    
SENATOR MENARD said the reason it  is important to advocate for a                                                               
loan limit of  $50,000 is because there are  many individuals who                                                               
have  some great  ideas but  do not  have the  start up  money to                                                               
begin. This revolving  loan for small businesses  is a reasonable                                                               
bill to put forward. Small business is the heart of America.                                                                    
SENATOR  WIELECHOWSKI noted  that Senator  Menard was  a co-prime                                                               
sponsor and Senator Davis was added as a co-sponsor of SB 34.                                                                   
2:04:08 PM                                                                                                                    
SENATOR GIESSEL repeated her question  about the inclusion of the                                                               
word "grant" in  the money received in  the bill and if  it is an                                                               
WANETTA  AYERS,  Director,   Division  of  Economic  Development,                                                               
Department  of  Commerce,   Community  and  Economic  Development                                                               
(DCCED), said she  believes that it is a  drafting oversight. She                                                               
added that they have submitted,  through the Governor's Office, a                                                               
package of  three revolving loan  funds (HB  121 and SB  67) that                                                               
have  a   microloan  provision.   The  Governor  has   been  very                                                               
supportive  of this  for several  sessions,  and for  all of  the                                                               
reasons  Ms.   Sydeman  outlined,   it  follows  the   logic  and                                                               
information  they received  from both  borrowers and  the lending                                                               
community about the need and support for the program.                                                                           
She  said   that  a   number  of   bankers  participate   in  the                                                               
Commissioner's Economic Advisory Council that  said the idea of a                                                               
turn down  provision was probably  not necessary for  a microloan                                                               
bill. However, it is a  standard practice within the department's                                                               
other loan funds and she didn't see that as a tremendous hurdle.                                                                
MS. AYERS also  mentioned that Ms. Sydeman's slides  refer to the                                                               
Division of  Investments, which has  been merged with  the Office                                                               
of   Economic  Development   into   the   Division  of   Economic                                                               
Development, and  that would be  the operating entity  that would                                                               
be responsible for implementing this loan fund.                                                                                 
2:07:18 PM                                                                                                                    
MIKE BORGFORD,  Executive Director,  Made in  Mat-Su Association,                                                               
Wasilla,  said  SB 34  has  complete  support.  It is  really  an                                                               
important tool  especially for  those in the  core from  Homer to                                                               
Fairbanks, because  there are  other programs  that none  of them                                                               
are eligible for.  The biggest thing they see with  SB 34 is that                                                               
it will add  viability for existing businesses, which  are all in                                                               
manufacturing. With  the credit crunch  and even before  then, it                                                               
was  very difficult  for small  businesses to  go into  the local                                                               
lending establishments and get small loans.                                                                                     
One  important question  was  brought up  that  the bill  doesn't                                                               
require the business to be located  in Alaska. It came up because                                                               
one of  their members who  is a  long-term resident of  the MatSu                                                               
also owns  a company in Oregon.  He thought he could  apply for a                                                               
loan through  this program  and actually spend  the money  on his                                                               
business in  Oregon. They  found that unique,  but he  hoped that                                                               
loophole would be closed before this bill is enacted into law.                                                                  
SENATOR  MENARD said  it would  be a  good idea  to address  this                                                               
2:10:17 PM                                                                                                                    
JIM   DODSON,    President,   Fairbanks    Economic   Development                                                               
Corporation,  said  that he  agrees  with  limiting the  bill  to                                                               
businesses  in Alaska.  Nationally, he  stated over  the last  15                                                               
years small businesses have generated  over 64 percent of all new                                                               
jobs in  the US.  It's important to  remember that  economies are                                                               
measured by the success of  individuals and availability of jobs,                                                               
personal  quality of  life and  individual  opportunity, not  the                                                               
success of government. Since 1990,  the average per capita income                                                               
of  Alaskans has  been in  decline relative  to the  national per                                                               
capita, a  trend that must  be reversed, and SB  34 is a  move in                                                               
the right direction.                                                                                                            
2:12:12 PM                                                                                                                    
CHAIR EGAN  announced that the  committee would hold SB  34 until                                                               
next week.  There being  no further business  to come  before the                                                               
committee, he adjourned the meeting at 2:12 p.m.                                                                                

Document Name Date/Time Subjects
SB 34 Sponsor Statement.PDF SL&C 2/3/2011 1:30:00 PM
SB 34
SB034-CCED-DED-01-28-11(B).pdf SL&C 2/3/2011 1:30:00 PM
SB 34
Small Biz Revolving Loan Fund PP2.pdf SL&C 2/3/2011 1:30:00 PM
SB 34
microloan support SB34 SWAMC.pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB 34 Support lttr Lower Kuskokwim Econ Dvlpmnt Council.pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB 34 Support lttr PWS Econ. Dvlpmnt Dist..pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB 34 News Articles.pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB034-CCED-DED-01-28-11(A).pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB034-CCED-DED-01-28-11(A) REVISED.pdf SL&C 2/3/2011 1:30:00 PM
SB 34
SB034-CCED-DED-01-28-11(B) REVISED.pdf SL&C 2/3/2011 1:30:00 PM
SB 34