Legislature(2009 - 2010)HOUSE FINANCE 519

03/30/2010 01:30 PM FINANCE

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Heard & Held
Heard & Held
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                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 30, 2010                                                                                            
                         1:36 p.m.                                                                                              
1:36:24 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stoltze called the  House Finance Committee meeting                                                                    
to order at 1:36 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Mike Hawker, Co-Chair                                                                                            
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Vice-Chair                                                                                      
Representative Allan Austerman                                                                                                  
Representative Mike Doogan                                                                                                      
Representative Anna Fairclough                                                                                                  
Representative Neal Foster                                                                                                      
Representative Les Gara                                                                                                         
Representative Mike Kelly                                                                                                       
Representative Woodie Salmon                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative Reggie Joule                                                                                                     
ALSO PRESENT                                                                                                                  
Ted   Leonard,   Executive   Director,   Alaska   Industrial                                                                    
Development  and Export  Authority, Department  of Commerce,                                                                    
Community and Economic  Development; Greg Winegar, Director,                                                                    
Alaska  Division  of  Investments, Department  of  Commerce,                                                                    
Community  and Economic  Development;  Mark Davis,  Economic                                                                    
Development  Officer,  Alaska   Industrial  Development  and                                                                    
Export  Authority,  Department  of Commerce,  Community  and                                                                    
Economic  Development;  Craig  Dahl,  President/CEO,  Alaska                                                                    
Pacific  Bank and  Vice  Chair, Federal  Home  Loan Bank  of                                                                    
Seattle Board.                                                                                                                  
PRESENT VIA TELECONFERENCE                                                                                                    
Mike   Burgforg,   Executive   Director,  Made   in   Mat-Su                                                                    
Association, Mat-Su.                                                                                                            
HB 410    AIDEA LOANS                                                                                                           
          HB 410 was HEARD and HELD in Committee for                                                                            
          further consideration.                                                                                                
HB 412    MICROLOAN REVOLVING FUND                                                                                              
          HB 412 was HEARD and HELD in Committee for                                                                            
          further consideration.                                                                                                
HOUSE BILL NO. 410                                                                                                            
     "An   Act   relating   to   loan   participations   and                                                                    
     development finance  projects of the  Alaska Industrial                                                                    
     Development  and  Export  Authority;  and  relating  to                                                                    
    loans from the rural development initiative fund."                                                                          
1:36:58 PM                                                                                                                    
TED   LEONARD,   EXECUTIVE   DIRECTOR,   ALASKA   INDUSTRIAL                                                                    
DEVELOPMENT  AND  EXPORT  AUTHORITY (AIDEA),  DEPARTMENT  OF                                                                    
COMMERCE,  COMMUNITY  AND  ECONOMIC  DEVELOPMENT,  explained                                                                    
that three  of the bill's  sections deal with AIDEA  and one                                                                    
part  deals  with an  AIDEA  fund  run  by the  Division  of                                                                    
Investments. He  detailed that the  changes requested  by HB
410  would deal  with  the first  part  of implementing  the                                                                    
strategic plan,  the effectiveness of AIDEA  programs, and a                                                                    
new development tool related to the loan program.                                                                               
     Section  1. AS  44.88.159(e) is  amended to  change the                                                                    
     method by  which AIDEA determines the  minimum interest                                                                    
     rate to  be charged  on loan participations  that AIDEA                                                                    
     finances with  AIDEA assets rather than  bond proceeds.                                                                    
     Current method  requires AIDEA  to establish  a minimum                                                                    
     by estimating the  true interest cost in  AIDEA were to                                                                    
     use bond proceeds. The proposed  method would allow the                                                                    
     minimum to be based on  the greater of either the rates                                                                    
     achieved by  a type  of category of  financial security                                                                    
     in a  published nationally  recognized market  index or                                                                    
     the 5-year rate of return on AIDEA's investments.                                                                          
Mr. Leonard  detailed that Section  1 would address  how the                                                                    
minimum interest  rate is  set when  AIDEA funds  loans with                                                                    
internal funds. Currently,  AIDEA sets the rate  by going to                                                                    
the bond  market and  asking an  expert like  Goldman Sachs.                                                                    
When the  municipal bond market had  problems, AIDEA's rates                                                                    
went  from the  6 percent  range up  to the  high 9  percent                                                                    
range; the rates have come  down but are still shifting. The                                                                    
agency was considering  going to an index  so that customers                                                                    
and partners could have a more steady interest rate.                                                                            
     Section  2. AS  44.88.159 is  amended by  adding a  new                                                                    
     subsection   that   allows   AIDEA  to   establish   in                                                                    
     regulation  a new  program  to  provide incentive  rate                                                                    
     rebates  to  certain  loan participations  that  create                                                                    
     jobs,  promote   rural  development  or   foster  other                                                                    
     economic development criteria.                                                                                             
        · Rate rebates are limited to no more than 1% of                                                                        
          the interest rate charged to AIDEA's portion of                                                                       
          the loan participation.                                                                                               
        · The balance of loans subject to rebates would be                                                                      
          limited to no more than 5 % of the outstanding                                                                        
          balance of all loan participations.                                                                                   
        · The authority may not commit to pay an incentive                                                                      
          rebate for more than 5 years.                                                                                         
        · Allows AIDEA to establish a separate account for                                                                      
          this program.                                                                                                         
Mr. Leonard reported that Section 2  would set up a new tool                                                                    
under  the commercial  finance program  that would  allow an                                                                    
incentive rebate  program to  give incentives  to businesses                                                                    
meeting certain  criteria. For example,  if a  criterion was                                                                    
to develop 25 new jobs  with the investment, AIDEA would not                                                                    
give the rebate unless the jobs were in fact created.                                                                           
Co-Chair Hawker  pointed out that the  provision would bring                                                                    
extreme latitude  to the agency because  the criteria listed                                                                    
are authorized  to be established in  regulations adopted by                                                                    
AIDEA.  Mr.   Leonard  agreed.  He  added   that  AIDEA  had                                                                    
considered putting  the criteria  in statute, but  they felt                                                                    
they needed the flexibility to  tailor to the areas in which                                                                    
they were trying to incentivize investment.                                                                                     
Representative Kelly asked whether  the AIDEA board approved                                                                    
regulations. Mr.  Leonard responded  in the  affirmative. He                                                                    
added that the agency was  in the process of modernizing the                                                                    
organizational  structure   so  that   loans  would   go  to                                                                    
investment committees made of  private sector and management                                                                    
before going to the board.                                                                                                      
1:42:57 PM                                                                                                                    
Mr. Leonard continued with Section 3:                                                                                           
     AS 44.88.172(a)  is amended to  clarify that  AIDEA can                                                                    
     own  or operate  a percentage  of a  project -  not the                                                                    
     entire project.                                                                                                            
Mr. Leonard  detailed that currently there  are two sections                                                                    
in  statute; an  intent section  stipulating that  AIDEA can                                                                    
own an  interest in a  project, and another  section stating                                                                    
that  AIDEA  has  to  own the  project.  The  request  would                                                                    
clarify that  AIDEA has the  ability to  own a portion  of a                                                                    
project.  He   noted  that  the   price  tags   on  economic                                                                    
infrastructures are  increasing. For example, a  plant could                                                                    
be  in the  $1 billion  to  $2 billion  range, past  AIDEA's                                                                    
capacity;  AIDEA could  help the  project  be successful  by                                                                    
owning  a  portion  of  it.   In  addition,  evaluating  the                                                                    
practices  of other  development  finance organizations  has                                                                    
revealed that partnering with the  private sector shares the                                                                    
Co-Chair  Hawker  clarified  that  the  intent  was  not  to                                                                    
prohibit the  practice of  full ownership  but to  widen the                                                                    
latitude  to  allow AIDEA  to  be  a component  investor  in                                                                    
projects. He  thought the existing  language was  not clear,                                                                    
but seemed to preclude ownership  of the entire project. Mr.                                                                    
Leonard acknowledged the need for more clarity.                                                                                 
     Section  4.   AS  44.88.610(a)  is  amended   to  allow                                                                    
     borrowers to have  multiple Rural Development Revolving                                                                    
     Loan Fund  loans and increases the  cumulative amount a                                                                    
     person  may  borrow  from   $100,000  to  $150,000  and                                                                    
     increases  the cumulative  amount two  or more  persons                                                                    
     may borrow from $200,000 to $300,000.                                                                                      
Mr.  Leonard explained  that the  section  addresses a  fund                                                                    
that  AIDEA  financed  in  the  past  and  the  Division  of                                                                    
Investments currently operates.  The fund is one  of the few                                                                    
that  AIDEA  has  under  its   umbrella  that  is  a  direct                                                                    
participation loan  program. The authority had  searched for                                                                    
ways  to utilize  the money  to  get more  loans into  rural                                                                    
areas.  The  division  suggested changing  the  limits  from                                                                    
$100,000 to $150,000  for one business and  from $200,000 to                                                                    
$300,000  for more  than two  businesses, and  then changing                                                                    
the rate  from 6  percent to  4 percent  (more in  line with                                                                    
other  programs  run  by the  Division  of  Investment).  He                                                                    
stressed that  the change would allow  a successful business                                                                    
to have more than one loan as it grows.                                                                                         
1:47:34 PM                                                                                                                    
Co-Chair  Hawker  clarified  that   the  provision  was  not                                                                    
changing the rate from 6  percent to 4 percent, but changing                                                                    
the minimum rate. Mr. Leonard agreed.                                                                                           
Vice-Chair  Thomas referred  to  page 3,  line 23  adressing                                                                    
business located where  the population is 5,000  or less and                                                                    
not  connected by  road  or rail.  He  asked whether  Haines                                                                    
would  qualify  since  the   connecting  road  went  through                                                                    
another country.                                                                                                                
GREG  WINEGAR,  DIRECTOR,  ALASKA DIVISION  OF  INVESTMENTS,                                                                    
DEPARTMENT OF COMMERCE,  COMMUNITY AND ECONOMIC DEVELOPMENT,                                                                    
answered that  that the  key is being  connected by  road or                                                                    
rail; it does not matter  that the road goes through another                                                                    
Vice-Chair Thomas  thought the  language should  be changed.                                                                    
Mr.  Winegar offered  to  work to  change  the language  and                                                                    
acknowledged discussion about the  where the lines should be                                                                    
drawn.  He   thought  the  upcoming  census   could  make  a                                                                    
difference in which communities would qualify.                                                                                  
Vice-Chair  Thomas recalled  other legislation  that defined                                                                    
"resident" and wanted clarification.                                                                                            
Representative  Austerman  queried  the position  of  Haines                                                                    
regarding the definition.                                                                                                       
Vice-Chair Thomas  replied that  in the past  the fact  of a                                                                    
foreign  country had  excluded Haines  because a  connecting                                                                    
road was defined as one with 24-hour access.                                                                                    
1:51:28 PM                                                                                                                    
Mr.  Winegar responded  that Haines  did  qualify under  the                                                                    
existing statute.                                                                                                               
Representative Fairclough  referenced the  the indeterminate                                                                    
fiscal  note  with  zeroes  and  asked  whether  costs  were                                                                    
anticipated  for  the  incentive rate  rebate.  Mr.  Leonard                                                                    
responded  that overall  he did  not  expect cost  increases                                                                    
because of  the agency's capacity to  increase its portfolio                                                                    
balance on  new loans. He  pointed out that new  loans (even                                                                    
with the 100 basis points  reduction) would be more than the                                                                    
opportunity cost of investing internal funds.                                                                                   
Representative  Fairclough queried  the current  capacity of                                                                    
the  Gas-To-Liquids (GTL)  plant. Mr.  Leonard replied  that                                                                    
current statute allows $400 million  over a rolling 12-month                                                                    
period.  He noted  that the  House had  passed HB  90, which                                                                    
would take out refunding bonds and result in more capacity.                                                                     
1:54:07 PM                                                                                                                    
Representative  Fairclough  referred  to  a  bill  exempting                                                                    
AIDEA  from  procurement  code   and  asked  how  investment                                                                    
strategies would be  affected. Mr. Leonard did  not know and                                                                    
offered to get the information.                                                                                                 
Representative  Doogan questioned  how loan  costs would  be                                                                    
affected by Section 1. Mr.  Leonard responded that AIDEA was                                                                    
considering   several   different    indexes   set   through                                                                    
regulation, such  as the Federal  Home Loan Bank  index with                                                                    
5,  10,  15, and  30-year  indexes  for  cost to  funds.  In                                                                    
addition,  AIDEA  has  a minimum  floor  for  the  five-year                                                                    
annualized rate of return to  protect the loan portfolio and                                                                    
the  state  dividend.  The authority  uses  the  index  plus                                                                    
operation  cost on  a normal  daily rate;  if the  rate went                                                                    
below  that,  they  would  look at  the  minimum  floor.  He                                                                    
emphasized that  the legislation  would set the  minimum and                                                                    
allow AIDEA  (based on  other factors  that could  come into                                                                    
play, such  as loan risk) to  have a higher rate.  The index                                                                    
would be  the minimum rate  and would be set  by regulation.                                                                    
He added that  the index could be changed if  a better index                                                                    
came along.                                                                                                                     
Representative Doogan queried fund  costs under the proposed                                                                    
MARK DAVIS, ECONOMIC  DEVELOPMENT OFFICER, ALASKA INDUSTRIAL                                                                    
DEVELOPMENT  AND EXPORT  AUTHORITY, DEPARTMENT  OF COMMERCE,                                                                    
COMMUNITY  AND ECONOMIC  DEVELOPMENT,  responded that  using                                                                    
the 20-year  rate of the  Federal Home Loan Bank  of Seattle                                                                    
against what  AIDEA charges currently  would amount  to 1.04                                                                    
percent.  Over 20  years, AIDEA  is  essentially charging  a                                                                    
point that  it does not need  to charge in order  to recover                                                                    
the  rate of  funds.  He added  that  the statute  currently                                                                    
requires AIDEA to  use a cost of funds  tied historically to                                                                    
bonds,  which are  no  longer stable.  The  agency wants  to                                                                    
shift  to  more a  more  stable  and transparent  index.  He                                                                    
suggested  checking  the  Federal  Home  Loan  Bank  on  the                                                                    
Internet to figure out the  loan rate; currently Goldman and                                                                    
Sachs calculates  the rate.  He thought  the rates  would be                                                                    
lowered over time and be  protected against anomalies in the                                                                    
market.  The  treasury bill  is  currently  at 4.75  for  30                                                                    
years; 18 months  ago it was at minus  one, illustrating the                                                                    
instability of the bond market.                                                                                                 
1:59:39 PM                                                                                                                    
Representative Doogan  turned to Section 2  in the sectional                                                                    
analysis, related  to establishing a new  program that could                                                                    
create jobs,  promote rural  development, and  "foster other                                                                    
economic  development  criteria."  He asked  what  fostering                                                                    
criteria meant.   Mr. Davis  responded that the item  is the                                                                    
result of AIDEA's effort over the  past two years to work on                                                                    
a strategic economic  plan. The plan has  been released. The                                                                    
agency  studied  the  criteria used  by  similar  industrial                                                                    
development banks in  44 other states. The  statute uses job                                                                    
creation because the preamble  stipulates the elimination of                                                                    
unemployment. He  noted that most  development organizations                                                                    
put an  emphasis on distressed areas,  and that unemployment                                                                    
in  rural Alaska  tends  to be  high.  Other criteria  could                                                                    
relate to  distressed economic zones within  cities (such as                                                                    
Anchorage), which would track  the current federal practices                                                                    
under  the Build  America Bonds  (BABs) and  other types  of                                                                    
instruments.  Alaska  could  also  look  at  new  technology                                                                    
developments  that  could  spur further  job  creation.  The                                                                    
criteria could  be adopted through  regulation by  the AIDEA                                                                    
Representative Doogan pointed to Sections  4 and 5, which he                                                                    
understood as a substantial  loosening of loan requirements,                                                                    
both in terms  of getting people more  money, lower interest                                                                    
rates, and the  ability to get more than one  loan. He asked                                                                    
why the agency wanted the  changes. Mr. Winegar replied that                                                                    
based on  public input and internal  discussions about lower                                                                    
rates, AIDEA hoped to provide  a better rate for businesses,                                                                    
which  are creating  jobs. The  agency would  be allowed  to                                                                    
create regulations  to lower the  rate; currently  the floor                                                                    
by statute is  6 percent. Other successful  programs such as                                                                    
Small Business  Development allow  rates down to  4 percent.                                                                    
He  added that  the same  holds  true for  the loan  amount.                                                                    
Rates have gone up significantly  in the past several years,                                                                    
so the thinking  was to provide a  higher minimum. Regarding                                                                    
making more  than one loan,  a business that  was successful                                                                    
after getting  a small loan  ($10,000 to $20,000)  would not                                                                    
currently  be able  to borrow  more. The  agency thought  it                                                                    
made more  sense to  have the  limit based  on an  amount as                                                                    
opposed to the number of loans.                                                                                                 
2:04:13 PM                                                                                                                    
Representative  Doogan questioned  how  the  agency will  be                                                                    
able to monitor the effect of  the changes and what it could                                                                    
do if the  changes were not financially  viable. Mr. Winegar                                                                    
replied  that  AIDEA  carefully monitors  all  programs.  He                                                                    
emphasized  that  the changes  would  not  be required,  but                                                                    
would  provide flexibility.  He detailed  that the  lifetime                                                                    
delinquency rate  on the program  since origination  was 4.3                                                                    
percent.  He assured  the committee  that  the agency  could                                                                    
make adjustments  as needed  through the  regulation process                                                                    
as well as through the lending decision process.                                                                                
Representative  Kelly wondered  why he  had not  heard about                                                                    
changes related to credit worthiness  or about adjusting for                                                                    
risk.  Mr.   Winegar  answered  that   there  would   be  no                                                                    
difference in evaluation in terms of risk.                                                                                      
Co-Chair   Hawker  queried   the  4.3   percent  delinquency                                                                    
statistic. He  asked how  many Rural  Development Initiative                                                                    
Fund loans were  outstanding at any given  time. Mr. Winegar                                                                    
replied that  AIDEA currently  had 41  loans out  totally $4                                                                    
million and  $1.7 million  available to  lend. Historically,                                                                    
62 loans  totaling $7.2 million  have been made  through the                                                                    
program since the program started in 2000.                                                                                      
2:07:37 PM                                                                                                                    
Representative  Foster  directed   attention  to  Section  3                                                                    
regarding  old   language  about  AIDEA  owning   an  entire                                                                    
project.  He queried  the minimum  amount of  a project  and                                                                    
possible ramifications. Mr. Leonard  answered that the issue                                                                    
had been  discussed, but  a minimum  was not  considered. He                                                                    
believed using  due diligence and project  feasibility would                                                                    
result in  the percentage  of ownership that  would maximize                                                                    
the potential of the project.                                                                                                   
Mr. Davis  commented that the  section was  a clarification.                                                                    
One  statute  preamble  (AS  44.88.010(a))  currently  reads                                                                    
"incur debt to  own and operate facilities,"  which has been                                                                    
interpreted  to mean  that  the entire  facility  has to  be                                                                    
owned and operated.  On the other hand,  AS 44.88.085 states                                                                    
that "to  acquire an interest  in a project as  necessary or                                                                    
appropriate," which seemed to  indicate that AIDEA could own                                                                    
an interest in  a project and have partners.  House Bill 410                                                                    
would clarify  the language to  say that owning  an interest                                                                    
was the appropriate way to read the statute.                                                                                    
Representative  Fairclough  asked  whether  AIDEA  would  be                                                                    
allowed to  participate in an in-state  gasline project. Mr.                                                                    
Davis replied  that the agency  could invest in  any project                                                                    
with rate of  return consistent with statute.  He noted that                                                                    
the agency had looked at gas  projects in the past and would                                                                    
do so again in the future.                                                                                                      
CRAIG  DAHL, PRESIDENT/CEO,  ALASKA  PACIFIC  BANK and  VICE                                                                    
CHAIR, FEDERAL  HOME LOAN BANK  OF SEATTLE  BOARD, testified                                                                    
in support of the legislation  on behalf of the institutions                                                                    
as well  as the Alaska  Bankers Association. He  stated that                                                                    
AIDEA  had proven  over  the years  to be  a  pillar of  the                                                                    
state's   economic   development   activity.   The   various                                                                    
participation loan programs have  been successful because of                                                                    
a competitive  rate structure  that helped  induce a  lot of                                                                    
business loans  and project lending, creating  many jobs and                                                                    
helping the economy develop.                                                                                                    
Mr. Dahl  described the  Alaska Pacific Bank  as one  of the                                                                    
smallest institutions  in the  state; however,  it currently                                                                    
had over  $30 million in  loans and  has managed to  work in                                                                    
concert  with   the  various  programs  through   AIDEA.  He                                                                    
believed the  same was  true for all  the state's  banks. He                                                                    
felt that AIDEA should be  competitive and responsive to the                                                                    
market. He  stressed that Alaska  has managed to  avoid most                                                                    
of  the serious  impacts from  the recession  and underlined                                                                    
the importance  of the state's economy  remaining stable and                                                                    
moving forward. He  felt that AIDEA was a  critical piece in                                                                    
the success of the state's economy.                                                                                             
2:12:40 PM                                                                                                                    
HB  410  was  HEARD  and   HELD  in  Committee  for  further                                                                    
HOUSE BILL NO. 412                                                                                                            
     "An Act establishing the Alaska microloan revolving                                                                        
     fund; making loans for commercial purposes from the                                                                        
     fund; and relating to the fund and loans; and                                                                              
     providing for an effective date."                                                                                          
2:13:21 PM                                                                                                                    
GREG  WINEGAR,  DIRECTOR,  ALASKA DIVISION  OF  INVESTMENTS,                                                                    
DEPARTMENT OF COMMERCE,  COMMUNITY AND ECONOMIC DEVELOPMENT,                                                                    
informed the committee  that HB 412 would create  a new loan                                                                    
program  aimed at  helping small  Alaskan businesses  access                                                                    
critically  needed capital  to start  new businesses  and to                                                                    
grow existing  ones. He  noted that  the program  is modeled                                                                    
after a similar program  operated through the Small Business                                                                    
Administration (SBA)  that is available  in 46  other states                                                                    
but not  in Alaska  because of SBA  lender criteria  that no                                                                    
institution has met.                                                                                                            
Mr.  Winegar detailed  that the  maximum loan  given through                                                                    
the program would  be $35,000 for an  individual and $70,000                                                                    
for  two or  more individuals.  There would  be a  residency                                                                    
requirement. The loan  proceeds could be used  for a variety                                                                    
of  purposes,  including  working  capital,  equipment,  and                                                                    
construction.  The  maximum  loan  term would  be  6  years,                                                                    
patterned  after   the  SBA  program.  The   loans  must  be                                                                    
collateralized and the  interest rate would be  prime plus 1                                                                    
percentage point with a floor of  6 percent and a ceiling of                                                                    
8  percent.   In terms  of capitalization,  the fiscal  note                                                                    
includes   $3.5  million   that  would   come  from   AIDEA,                                                                    
contingent  on  passage of  HB  411.  Operating expenses  at                                                                    
$77,700 would be  included to hire a loan  officer. He noted                                                                    
that the department  worked hard to keep the  fiscal note as                                                                    
low as possible.                                                                                                                
Mr. Winegar  continued that the  fund would  be set up  as a                                                                    
revolving  fund; all  repayments  would come  back into  the                                                                    
fund  and  new  loan  requests  would come  out  of  it.  In                                                                    
addition,  the  operating  expenses would  be  covered  from                                                                    
earnings  of  the  fund,  similar   to  other  programs.  He                                                                    
reported that  the department was projecting  about 75 loans                                                                    
in the  first year,  100 in  the second,  and then  the fund                                                                    
could  maintain about  25 loans  per year  from the  initial                                                                    
2:16:39 PM                                                                                                                    
Co-Chair  Hawker queried  the prime  rate plus  one proposed                                                                    
for  the  program. Mr.  Winegar  responded  that most  other                                                                    
programs in  the department were  based on prime rate  so it                                                                    
was  used to  be consistent.  The  rate could  be geared  to                                                                    
another index.                                                                                                                  
Representative Kelly asked  why there was a cap  if the rate                                                                    
was prime  plus. Mr. Winegar  answered that the cap  was put                                                                    
in  to offer  protection in  case  of a  high interest  rate                                                                    
Representative  Kelly  registered  concerns as  the  program                                                                    
would be  converted from  one with  a spread  to one  with a                                                                    
"give-away" element.                                                                                                            
Co-Chair Hawker  asked whether the  notes would  be six-year                                                                    
fixed-rate notes.  Mr. Winegar answered in  the affirmative.                                                                    
He noted  that other  program regulation  required quarterly                                                                    
review and  adjustment; at the  time the loan is  given, the                                                                    
rate is fixed for the term of the loan.                                                                                         
Co-Chair Hawker  asked whether a  variable rate  program had                                                                    
been considered,  which would benefit  the consumer  in low-                                                                    
rate  periods but  protect in  high-rate  ones. Mr.  Winegar                                                                    
responded that  the agency had  considered the  option; they                                                                    
thought  the  fixed rate  would  be  make  it easier  for  a                                                                    
borrower to plan.  He acknowledged the fund could  be set up                                                                    
as a floating rate.                                                                                                             
2:19:39 PM                                                                                                                    
Representative  Foster  thought  the program  was  good  for                                                                    
rural  Alaska. He  queried plans  to  communicate about  the                                                                    
program  in  rural  areas.  Mr.  Winegar  replied  that  the                                                                    
program would be handled like  other programs, with outreach                                                                    
work, advertisement, and  attendance at various conferences.                                                                    
He  noted a  contract with  the Alaska  Business Development                                                                    
Center to  assist in outreach  efforts. He  also anticipated                                                                    
using  the   Small  Business   Development  Center   at  the                                                                    
University of Alaska.                                                                                                           
Representative   Foster  queried   examples  of   collateral                                                                    
sufficient to secure the loan.  He wondered the lowest level                                                                    
of   collateral  acceptable.   Mr.  Winegar   answered  that                                                                    
standards would be set through  regulation; the language was                                                                    
broad to allow as much  flexibility as possible to work with                                                                    
businesses. Deeds  of trust on property  and inventory would                                                                    
apply.  The  term of  the  loan  would  be geared  based  on                                                                    
collateral. The provision  would provide maximum flexibility                                                                    
to secure  the loan in  the best way possible;  however, the                                                                    
language does not require a certain type of collateral.                                                                         
Representative   Austerman   commented  that   research   on                                                                    
economic  development  has  confirmed  the  need  for  small                                                                    
businesses  to  have  access  to  funds  through  reasonable                                                                    
loans. He  questioned the fiscal  note, related to  the flow                                                                    
of  funds. He  noted  that currently  the  state receives  a                                                                    
dividend  from AIDEA  that goes  into the  general fund  and                                                                    
that  funding for  the proposed  program would  come out  of                                                                    
AIDEA  dividend  receipts.  He   thought  the  $3.5  million                                                                    
requested should  be general funds.  He also  questioned the                                                                    
$77,700  for the  position, which  was coming  out of  AIDEA                                                                    
dividends. He assumed the position  would be in the Division                                                                    
of Investments through  reimbursable service agreement (RSA)                                                                    
funds from  AIDEA. He wanted  to fund the position  with the                                                                    
general funds through the normal process.                                                                                       
2:23:22 PM                                                                                                                    
Representative  Fairclough queried  the definition  (page 3,                                                                    
lines  15 and  16) of  an  Alaska resident.  She pointed  to                                                                    
eligibility language  (starting on line  4 and on  line 10):                                                                    
"to meet the residency requirements  of (a) of this section,                                                                    
the applicant  (1) must physically  reside in the  state and                                                                    
maintain  a   domicile  in  the  state   during  the  twelve                                                                    
consecutive months  before the  date of the  application for                                                                    
the program, but  may not declare or  establish residency in                                                                    
another state  or receive  residency or  a benefit  based on                                                                    
residency   from  another   state."   She   asked  how   the                                                                    
stipulation  applied. Mr.  Winegar replied  that the  intent                                                                    
was that residency was maintained over the 12-month period.                                                                     
Representative  Fairclough questioned  the possibilities  of                                                                    
what the  language could mean.  Co-Chair Hawker  agreed that                                                                    
the question was important to consider.                                                                                         
Representative  Doogan  thought  that microloans  were  much                                                                    
smaller.  He  queried why  the  agency  considered the  loan                                                                    
amounts available as microloans. He  also asked what kind of                                                                    
loans  would be  expected.  Mr. Winegar  responded that  the                                                                    
loan  amounts and  the term  "microloan" came  from the  SBA                                                                    
program, as did  the $3.5 million limit. The  types of loans                                                                    
expected were for  working capital for a  small business, to                                                                    
be used for leasehold improvements or equipment.                                                                                
Representative Doogan  wondered whether  the loans  might be                                                                    
too small as  expenses were so much higher  in rural Alaska.                                                                    
Mr. Winegar answered that there  were two other programs for                                                                    
small  businesses  in  rural  Alaska,  including  the  Rural                                                                    
Development Revolving  Loan Fund,  which would  offer larger                                                                    
loans for  smaller communities. The  program proposed  in HB
412 would fill  a need not filled by the  other programs. He                                                                    
emphasized that  all areas  of the  state would  qualify for                                                                    
the microloan  program, whereas other  the programs  are for                                                                    
smaller  areas.  The proposal  would  fill  a gap  that  SBA                                                                    
covers in most other states.                                                                                                    
2:28:51 PM                                                                                                                    
Representative   Kelly   asked   whether  the   agency   had                                                                    
considered  funding the  program  "upstream"  of AIDEA.  Mr.                                                                    
Winegar answered  that the position would  initially be paid                                                                    
for  out  of  the  dividend  and  then  would  come  out  of                                                                    
revolving  fund, along  with other  expenses. Other  funding                                                                    
options  had been  considered at  the Office  of Budget  and                                                                    
Management (OMB)  level; the proposed option  was considered                                                                    
the best one.                                                                                                                   
Co-Chair Hawker  thought an  eligibility requirement  in the                                                                    
section on  loan limits should  be moved to  the eligibility                                                                    
section. He  pointed to page 3,  line 28 about not  making a                                                                    
loan to person with a  past due child support obligation. He                                                                    
called  it   the  only  "moral  turpitude"   clause  in  the                                                                    
provision and asked  why other groups such  as convicted sex                                                                    
offenders  or felons  were not  listed. He  asked why  child                                                                    
support was targeted. Mr. Winegar  replied that the language                                                                    
was modeled on other legislation  and that the same language                                                                    
was  in all  AIDEA  programs. He  acknowledged the  possible                                                                    
need to change the placement of the language.                                                                                   
Co-Chair Hawker questioned  whether other restrictions might                                                                    
be appropriate.                                                                                                                 
Co-Chair Hawker  directed attention to the  findings section                                                                    
on page  1, line 9,  the declaration "essential for  the on-                                                                    
going economic  health and well-being  of the state  and its                                                                    
citizens  and   families."  He  asked  whether   there  were                                                                    
families that  were not citizens.  Mr. Winegar did  not know                                                                    
where the language originated.                                                                                                  
Co-Chair Hawker  moved to line  12 in the  findings section,                                                                    
"economic growth  and self-employment  in small  business is                                                                    
hampered."  He did  not recall  seeing  the word  "hampered"                                                                    
elsewhere in statute.                                                                                                           
Representative Gara wondered whether  the business had to be                                                                    
located in the  state of Alaska. Mr.  Winegar responded that                                                                    
line 17  on page 2  stipulated that  loans would be  made to                                                                    
eligible  applicants   to  be  used  for   working  capital,                                                                    
equipment, and so on "by a business located in the state."                                                                      
2:33:57 PM                                                                                                                    
Co-Chair Hawker requested  clarification of earlier comments                                                                    
about "stiffer compliance requirements"  that were not being                                                                    
utilized.  He  asked  how   the  legislation  could  justify                                                                    
deviating from  the underwriting  standards of the  SBA. Mr.                                                                    
Winegar  responded  that there  had  to  be an  intermediary                                                                    
lender in  order to  have a  SBA microloan  program. Lenders                                                                    
have to meet  certain criteria; no one in the  state has met                                                                    
the criteria.                                                                                                                   
Co-Chair Hawker asked whether the  provision applied only to                                                                    
the  microloan   program.  Mr.   Winegar  answered   in  the                                                                    
affirmative. He reported  that the agency had  talked to SBA                                                                    
about the possibility  of the state qualifying  as a lender,                                                                    
but states were not eligible.                                                                                                   
Co-Chair Hawker informed the committee  that staff had noted                                                                    
that the test  for child support does not show  up on credit                                                                    
reports,  so the  language indicates  a way  to address  the                                                                    
Representative  Foster  queried  whether  information  about                                                                    
collections  should  be  in the  fiscal  note.  Mr.  Winegar                                                                    
replied that  collections are done in-house  and figured in.                                                                    
He added that the loan  officer is also a collection officer                                                                    
and can do collections.                                                                                                         
Representative Fairclough  referred to page 2  of the fiscal                                                                    
note  and  requested  an  update  on  the  status  of  other                                                                    
legislation that would affect  the fund. Mr. Winegar replied                                                                    
that there  were two  bills: HB 411  in the  House Resources                                                                    
Committee and SB 301 in the Senate Finance Committee.                                                                           
2:38:54 PM               AT EASE                                                                                              
2:41:02 PM               RECONVENED                                                                                           
MIKE   BURGFORG,   EXECUTIVE   DIRECTOR,  MADE   IN   MAT-SU                                                                    
ASSOCIATION,  MAT-SU  (via   teleconference),  testified  in                                                                    
support   of  the   legislation.   He   reported  that   his                                                                    
organization  represented value-added  manufacturers in  the                                                                    
Mat-Su. He  stated that the  organization's 245  members and                                                                    
affiliates strongly  support HB  412 because  small business                                                                    
will  qualify for  the  first time.  Other  programs do  not                                                                    
support businesses in  the area. He spoke  to concerns about                                                                    
the  money volume.  A survey  showed that  members would  be                                                                    
looking  for  smaller than  $35,000  to  $70,000 loans.  The                                                                    
greatest concern among members  was capital for the purchase                                                                    
of  raw materials  in order  to be  more competitive  in the                                                                    
market.  He stressed  the importance  of the  legislation to                                                                    
small businesses in the state.                                                                                                  
Co-Chair  Hawker   asked  whether  the   business  community                                                                    
represented   had  difficulty   accessing  small   lines  of                                                                    
commercial    credit     through    traditional    financing                                                                    
institutions. Mr. Burgforg replied  that most of the members                                                                    
queried  had  difficultly  because  of  the  size  of  their                                                                    
businesses. They  could take personal  loans, which  did not                                                                    
build  their businesses.  The microloan  program would  help                                                                    
build  business  and  establish  credit,  making  them  more                                                                    
viable and better business partners in the community.                                                                           
Co-Chair Hawker  queried underwriting criteria.  Mr. Winegar                                                                    
responded  that  the  agency  would  establish  underwriting                                                                    
criteria  through the  regulatory process.  The goal  was to                                                                    
leave flexibility so that each  business could be considered                                                                    
2:46:45 PM                                                                                                                    
Co-Chair Hawker  summarized that  the intent of  the program                                                                    
is to  be able to  accommodate concerns of  small businesses                                                                    
such   as  those   represented   by  the   Made  in   Mat-Su                                                                    
Association. Mr. Winegar agreed.                                                                                                
Vice-Chair  Thomas pointed  to letters  of support  from the                                                                    
Bristol  Bay  Economic  Development  Corporation,  Anchorage                                                                    
Development  Corporation, and  others, including  commercial                                                                    
HB  412  was  HEARD  and   HELD  in  Committee  for  further                                                                    
The meeting was adjourned at 2:49 PM.                                                                                           

Document Name Date/Time Subjects
Letter from Governor HB410.pdf HFIN 3/30/2010 1:30:00 PM
HB 410
Sectional Analysis HB410.pdf HFIN 3/30/2010 1:30:00 PM
HB 410
HB 412 Sectional Analysis.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
HB 412 Transmittal Letter.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
Micro loans.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
Microloan Support Letters.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
HB 412 Support Letter.pdf HFIN 3/30/2010 1:30:00 PM
HB 412
admin@aidea org_20100401_145122.pdf HFIN 3/30/2010 1:30:00 PM
HB 410