Legislature(2015 - 2016)BUTROVICH 205
02/10/2015 09:00 AM STATE AFFAIRS
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SJR 2-CONST. AM: G.O. BONDS FOR STUDENT LOANS 9:50:49 AM CHAIR STOLTZE announced that SJR 2 is the committee's next order of business. 9:51:29 AM SENATOR ANNA MACKINNON, Alaska State Legislature, Juneau, Alaska, SJR 2 sponsor, explained that SJR 2 proposes to amend Alaska's Constitution, a process that is an extremely serious issue. She referred to page 30, Article 9, Section 8 in the Constitution regarding state debt as follows: No state debt shall be contracted unless authorized by law for capital improvements or unless authorized by law for housing loans for veterans and ratified by a majority of the qualified voters of the state who vote on the question; Mr. Chairman, what that means is that we can't right now use the full faith and credit for student loans, so our corporation goes out into a bond market and uses a revenue stream to provide opportunities for Alaskans to borrow. Currently the state interest rates for student loans is 6.7 percent and the federal rate is 4.66 percent; should this be passed into law, the question would go before voters in the 2016 election and the first time we can try to reduce student loan debt, or at least the interest rate we charge, would be in 2018 where we would offer a bond and the first time a student could benefit from this is 2019. CHAIR STOLTZE pointed out that voting does not have to occur during the general election. SENATOR MACKINNON answered correct and noted that voting could occur in a special election. She declared that SJR 2, should it be passed by the people of Alaska, would provide an opportunity to reduce student loan debt through refinancing or lowered interest rates. 9:53:38 AM KRISTEN PRATT, Staff, Senator MacKinnon, Alaska State Legislature, Juneau, Alaska, confirmed that Senator MacKinnon had addressed the resolution's main points. CHAIR STOLTZE asked to verify that there were similar mechanisms for veterans' bonds in 1982 and 2002. He inquired if there are any other bond authorization mechanisms. SENATOR MACKINNON replied that bonding mechanisms have been for capital improvements that were originally in the Constitution. She noted that Chair Stoltze pointed out that the Constitution was amended in 1982 to include veteran housing. She reiterated that SJR 2 specifically allows an opening for something that is not capital. She noted that there has been conversation about trying to broaden the resolution to give the Legislature the full power and authority to use the state's Triple-A credit rating. She summarized that SJR 2 addresses Alaska's students who are adversely effected by the revenue bond stream and that the people of Alaska support the change. CHAIR STOLTZE noted that SJR 2 is a constitutional amendment and that he intends to have the Department of Revenue address questions. He asked if there was a time limit or if there was a substantive change on the veteran's housing bonds authorization that required the Legislature to do a new constitutional amendment. 9:54:27 AM JERRY BURNETT, Deputy Commissioner, Treasury Division, Alaska Department of Revenue, Juneau, Alaska, explained that the constitutional amendment in 1982 allowed for veterans' mortgage bonds and additional veterans' mortgage bonds was authorized in 2002. He stated that he assumed the change in 2002 was strictly an authorization and not a constitutional change. CHAIR STOLTZE asked to verify that 2002 was not another constitutional amendment. MR. BURNETT answered correct. He remarked that using general obligation bonds for student loans would have no adverse effect on the state's credit rating. He noted that student bonds would not be included in the state's calculation of state supported debt due to the secured revenue from the student loan program. He revealed that he sits on the board of the Student Loan Corporation and the Department of Revenue is familiar with the bonding issue. He pointed out that due to adverse market conditions, legislation was passed in 2009 to allow student loans to be financed directly out of the general fund. CHAIR STOLTZE asked if the difficulty was linked to federal laws. MR. BURNETT answered no. He explained that the change was in response to the financial crisis where direct student loan lending was locked-up. 9:58:02 AM CHAIR STOLTZE recalled that Postsecondary Education prompted the Legislature to pass some statutory changes on requirements. MR. BURNETT replied correct. He specified that the changes improved the program with additional credit standards. He added that legislation was passed to allow the state to have a letter of credit to support the Student Loan Program's borrowing and finance student loans directly from the general fund. CHAIR STOLTZE noted that enhanced levels of securitization by the borrower was added. SENATOR MACKINNON noted that the rating for student credit was changed where students were required to either use parents' credit ratings or have parents co-sign for loans. SENATOR WIELECHOWSKI noted that there are very interesting provisions in the Constitution's original section about the state being able to contract debt for the purpose of "Repelling invasion, suppressing insurrection, and defending the state in war." He asked what the current student loan rates were and how much the interest rates could possibly be lowered. MR. BURNETT answered that Diane Barrans could address questions regarding interest rates. He stated that borrowing from the Triple-A rated general obligation debt will result in low interest rate loans when the current money market is sub-three percent. 10:00:26 AM SENATOR HUGGINS asked what the default rates were for veterans' mortgages and student loans. MR. BURNETT answered that he was not certain. He explained that the programs are structured in a way that there's additional security beyond the borrowing to allow a default rate that does not directly hit the lending. SENATOR HUGGINS noted that student loans have some forgiveness provisions and pointed out that mortgages cannot be forgiven. He asked what the student loan default rate was. 10:02:06 AM DIANE BARRANS, Executive Officer/Executive Director, Alaska Student Loan Corporation (ASLC)/Alaska Commission on Postsecondary Education (ACPE), Juneau, Alaska, explained that the current default rate for student loans is 6.6 percent on the overall portfolio. She conceded that the default rate would appear high when compared against commercial loans. She explained that funding for student loan debt is over- collaterized to ensure that the debt to loan ratio is never one- to-one. She specified that the loan program always has excess in order to offset any impacts to the program's ability to pay debt service or outstanding loans. She added that there have been no loan forgiveness provisions for some years. She noted that forgiveness for the Teacher Education Loan is being phased out due to an inability to fund the program with debt. CHAIR STOLTZE asked to verify that there is a medical provider's loan forgiveness program. MS. BARRANS answered correct. She explained that there is a Washington, Wyoming, Alaska, Montana, and Idaho (WWAMI) Graduate Medical Program where the state directly funds Alaska students' participation with general funds. She specified that students in the WWAMI Program have an obligation to work in the state in order to receive loan forgiveness. Students that fail to comply with loan requirements have to repay the support the state has provided. 10:04:17 AM CHAIR STOLTZE asked to verify that there is a medical provider forgiveness program that is paid for with general funds rather than the student loan program. MS. BARRANS noted that Chair Stoltze was referencing the Providing Support-for-Service to Health Care Practitioners (SHARP) Program which the Legislature has funded. She explained that the SHARP Program pays for a percentage of a student loan if an individual works in eight different medical specialties and works in certain underserved areas. SENATOR WIELECHOWSKI asked what the current student loan interest rate is and what the percentage will be if SJR 2 passes. MS. BARRANS answered that the current student loan interest rate is 6.7 percent. She explained that the ASLC Board annually approves borrower benefits and noted that individuals attending school in Alaska receive a 0.50 percent discount, resulting in an interest rate of 6.2 percent. She noted that financial advisors have indicated that passing SJR 2 could result in interest rates being lowered by 1.0 to 1.3 percent. SENATOR HUGGINS noted that the University of Alaska is looking at homegrown-teachers that target Alaska's bush-communities and asked if a loan forgiveness will be instituted to support the program. MS. BARRANS answered that supporting homegrown-teachers with a loan forgiveness program similar to SHARP is a possibility rather than the Teacher Education Loan that is currently being phased out. She explained that the SHARP program has successfully targeted underserved areas where the Teacher Education Loan resulted in a small percentage actually in the field teaching where the program ideally targeted them. 10:07:41 AM SENATOR COGHILL asked how the bonding process would work if SJR 2 passed. SENATOR MACKINNON answered that the revenue source for the bonding service will change where a lower interest is attained through the full faith and credit of the State of Alaska. MS. BARRANS explained that general obligation bonds addresses the amount of debt beyond an authorized cap. She specified that the ASLC Program goes into the market in February or March in order to coincide with the academic year. She said one of the advantages of having general obligation authority is the process will be more expedited because there will not be the kind of labor intensive work involve with rating agencies that examine student loan cash flow portfolios. 10:09:57 AM SENATOR COGHILL asked to verify that general obligation bonding will smooth out some of the cyclical issues by having a ready- bondable system. MS. BARRANS answered yes. SENATOR COGHILL asked if the definition for postsecondary education being inserted into the Constitution needs to be flexible. MS. BARRANS answered that the use of the funding is controlled by the Legislature through the student loan statutes that very explicitly set out what the loans can be used for. She noted that student loans include vocational training that meets certain criteria. 10:12:01 AM SENATOR WIELECHOWSKI asked what the formula is to come up with the current 6.7 percent interest rate. MS. BARRANS answered that the fairly complicated formula looks at the cost of issuance, the cost of debt which ASLC pays, and the cost of servicing. SENATOR WIELECHOWSKI noted that the federal interest rates are much lower, 4.6 percent for 2014-2015. He pointed out that the state's interest rate for students is over two points higher than the federal interest rate, a significant difference for the tens of thousands of dollars that students take on. He asked if Ms. Barrans had a component breakdown the student interest rate. MS. BARRANS answered that Congress sets the rate. She explained that because the federal government is not financing the loans through the financial markets, the federal government can essentially choose to subsidize the loans to whatever extent they choose to and that is a matter of federal policy. She said an analogy would be if the State of Alaska funded the ASLC Program with cash and the State of Alaska could set the rate at whatever rate they chose to. SENATOR MACKINNON pointed out that most students are referred to the federal program to access lower interest rates first, the state's program second, and the private sector third. She noted that the private sector's interest rates depend on what educational career the student is pursuing. MS. BARRANS agreed with Senator MacKinnon. She pointed out that the Federal Stafford Loan is also available for students, but the interest rate is 0.50 percent higher than the state's rate at 7.21 percent. She added that the ASLC Program also makes students and parents aware of the Family Education Loan as well as the Supplemental Education Loan. She revealed that when the instate discount is factored in, the state's loan options are 1.0 percent below the federal rate. 10:15:58 AM SENATOR HUGGINS asked Ms. Barrans to explain President Obama's proposal to offer education at community colleges. MS. BARRANS answered that the proposal is in the President's budget. She detailed that the proposal comes with "strings" attached so the entire concept is not free, but the proposal would reduce cost. SENATOR HUGGINS asked for an explanation of how the "strings" attached to the program will affect Alaska's students. MS. BARRANS answered that she has not done the analysis nor has she spoken with the University of Alaska. SENATOR HUGGINS stated that he is not supportive of the President's concept with the attached "strings." He asked if Alaska has a community college campus that will meet the concept's definition. MS. BARRANS answered yes. She said Prince William Sound Community College and most other campuses that primarily offer associates or lower credentials would qualify. She noted that there are income contingent provisions that are in the President's proposal where students would not qualify if their family incomes reach certain levels. 10:18:23 AM SENATOR MACKINNON noted that she has a son with a student loan debt in Alaska. She said she did not think that she will be positively impacted because her son intends to pay off his student loan debt by 2019. CHAIR STOLTZE inquired if a student's degree is taken into account when assessing a student loan. SENATOR MACKINNON replied that there is an education component of the student loan program where monthly payments are calculated based upon a student's career choice. CHAIR STOLTZE noted that the data provided from the calculation was strictly informational. SENATOR MACKINNON replied yes. SENATOR WIELECHOWSKI asked what the cost breakdown was for the 6.7 percent rate. He asked what the three components are that make up the percentage. MS. BARRANS explained that the board annually sets the interest rate that is derived from the three components. SENATOR WIELECHOWSKI asked if ASLC is a breakeven operation or if money is returned to the general fund. MS. BARRANS answered that there have been dividends that ASLC has paid to the state. She noted that ASCL has not paid a dividend to the state since 2009. She explained that ASLC's goal is to do just enough better than breaking even to keep the organization in the black. 10:21:26 AM SENATOR WIELECHOWSKI asked if Ms. Barrans had any sense of how the state's interest rate compares with other states. MS. BARRANS answered that the state's interest rates are quite comparable to other states, but noted that Texas is the exception with a program that is funded through general obligation bonds. She pointed out that Texas actually has loans that range from a 0.0 percent to 5.5 percent. SENATOR WIELECHOWSKI asked if the Texas model is something Alaska could replicate. MS. BARRANS answered that replicating a program similar to Texas would seem unlikely due to the state's current financial climate. She explained that Texas has built their large fund source over a 40 year period. She noted that Texas is seriously looking at ending their 0.0 interest rate. SENATOR COGHILL asked what the cost of debt is for ASLC. MS. BARRANS answered that ACPS actually services the loans for the ASLC and there are costs associated with servicing. She revealed that other than servicing, the other costs include the interest paid on the debt and the onetime cost of issuance for the bond council rating agency fees. CHAIR STOLTZE announced that the committee will hear public testimony. 10:24:29 AM LANCE STEVENS, President, Juneau Chamber of Commerce, Juneau, Alaska, Supports SJR 2. He said the Juneau Chamber of Commerce feels that any opportunity to increase the participation in continuing education increases the ability to hire and recruit a qualified workforce. He asserted that driving down student debt servicing costs increases the opportunity for repayment, lowers default rates, and sets individuals up for long term success. SENATOR HUGGINS noted that some states with large industrial bases have companies that buyout student loans. He asked if Alaska has programs that buyout student loans. MR. STEVENS noted that the Juneau Chamber of Commerce offers class reimbursement within its organization for classes that are business oriented. He specified that students pay upfront and reimbursement is based on achieving a certain qualifications. He said what Senator Huggins referred to is more industry specific. 10:28:04 AM MIKE COONS, representing himself, Palmer, Alaska, stated that student loans negatively impact taxpayers and harms students' and parents' credit ratings. He opined that there needs to be more encouragement for Alaska's parents to save more money rather than borrowing. He inquired if the Alaska student loans can be used at colleges outside of the state. He added that students who attend colleges outside of Alaska tend not to return. He noted that the 6.6 percent default rate was substantial and asked what the specific default rate was for veterans. 10:32:57 AM CHAIR STOLTZE noted that he shares a lot of the same personal values with Mr. Coons about personal responsibility and being debt free. He noted that Ms. Barrans had testified in the past that Alaskans who did not return to the state actually had a higher repayment rate than students who remained in Alaska. MS. BARRANS acknowledged that Chair Stoltze was correct. CHAIR STOLTZE added that the state needs to strive to correct the default percentage for instate students. 10:34:23 AM DAVID NEES, representing himself, Anchorage, Alaska, noted that he is concerned about amending the Constitution to bond for something that is not real property. He stated that he is worried that additional programs might be considered to receive lower interest rates from the state. He asked what the current default rate was. He pointed out that the current loan program pays for 90 percent or 100 percent of the ACPE's budget. He inquired if a lowered loan rate program will ultimately be paid for from the state's general fund. 10:36:48 AM MS. BARRANS reiterated that the current student default rate is 6.6 percent on the outstanding portfolio. She pointed out that the default rate will continue to decline because a higher credit requirement has been in place for the last several years. She said the structure from the proposed bill should have no effect in the way ACPE's activities are funded. She stated that ACPE does not expect to shift any of its supported cost to the general fund and costs will continue to be paid from ASLC's receipts. 10:38:00 AM CHAIR STOLTZE stated that he suspects the bill will receive more scrutiny in the Senate Finance Committee. SENATOR HUGGINS asked if ACPE has wage garnishment authority. MS. BARRANS answered yes. She said the Legislature has given ACPE the authority by statute to issue administrative wage garnishments. She stated that wage garnishment is another tool that ACPE uses on a regular basis. She added that ACPE also garnishes Permanent Fund Dividends (PFD). She revealed that ACPE is third in line for PFD garnishment after child support and court ordered restitution. CHAIR STOLTZE announced that seeing no additional requests, public testimony is closed. SENATOR WIELECHOWSKI asked after garnishment procedures, what default percentage is actually not recovered. MS. BARRANS replied that she can provide write-off information. She noted that some write-offs occurs due to death or total disability. CHAIR STOLTZE asked if the ASLC oversees its default collections. MS. BARRANS answered that ACPE does instate collections and a third party collection agency is used to pursue some instate and out of state collections. CHAIR STOLTZE asked what percentage ACPE collects from its defaulters. MS. BARRANS answered that 15 percent is considered a good rate for badly-aged debt. 10:41:59 AM SENATOR COGHILL moved to report SJR 2, [29-LS0010\W], from committee with individual recommendations and attached fiscal note(s). 10:42:19 AM CHAIR STOLTZE announced that seeing no objection, SJR 2 moved out of committee.