Legislature(1995 - 1996)
03/11/1996 03:10 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE March 11, 1996 3:10 p.m. MEMBERS PRESENT Representative Pete Kott, Chairman Representative Norman Rokeberg, Vice Chairman Representative Beverly Masek Representative Jerry Sanders Representative Brian Porter Representative Kim Elton Representative Gene Kubina MEMBERS ABSENT All members were present. COMMITTEE CALENDAR * HOUSE BILL NO. 490 "An Act relating to grants and other financial assistance authorized or made by the Alaska Science and Technology Foundation for the BIDCO assistance program." - PASSED OUT OF COMMITTEE * HOUSE BILL NO. 502 "An Act relating to the auctioning of real estate." - PASSED OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HB 490 SHORT TITLE: FINANCIAL ASSISTANCE TO BIDCO SPONSOR(S): REPRESENTATIVE(S) B.DAVIS, Robinson, Willis, Brown, Elton JRN-DATE JRN-PG ACTION 02/09/96 2693 (H) READ THE FIRST TIME - REFERRAL(S) 02/09/96 2693 (H) L&C, STATE AFFAIRS, FINANCE 02/21/96 2847 (H) COSPONSOR(S): WILLIS, BROWN 02/22/96 2862 (H) COSPONSOR(S): ELTON 03/11/96 (H) L&C AT 3:00 PM CAPITOL 17 BILL: HB 502 SHORT TITLE: CONDUCTING AUCTIONS OF REAL PROPERTY SPONSOR(S): REPRESENTATIVE(S) G.DAVIS, Navarre JRN-DATE JRN-PG ACTION 02/12/96 2726 (H) READ THE FIRST TIME - REFERRAL(S) 02/12/96 2726 (H) LABOR & COMMERCE, FINANCE 03/11/96 (H) L&C AT 3:00 PM CAPITOL 17 WITNESS REGISTER JONATHAN SPERBER, Legislative Aide to Representative Bettye Davis Alaska State Legislature State Capitol Building, Room 430 Juneau, Alaska 99801 Telephone: (907) 465-3875 POSITION STATEMENT: Provided sponsor statement for HB 490. JAMES KENWORTHY, Executive Director Alaska Science and Technology Foundation 4500 Diplomacy, Suite 515 Anchorage, Alaska 99508 Telephone: (907) 272-4333 POSITION STATEMENT: Testified on HB 490. REPRESENTATIVE GARY DAVIS Alaska State Legislature Capitol Building, Room 420 Juneau, Alaska 99801 Telephone: (907) 465-3835 POSITION STATEMENT: Sponsor of HB 502. NORM "BUD" BLAKELY, Auctioneer P.O. Box 537 Soldotna, Alaska 99669 Telephone: (907) 262-3536 POSITION STATEMENT: Testified in support of HB 502. KEN LANCASTER, Broker Beluga Realty Box 104 Soldotna, Alaska 99669 Telephone: (907) 260-3575 POSITION STATEMENT: Testified in support of HB 502. ACTION NARRATIVE TAPE 96-20, SIDE A Number 001 The House Labor and Commerce Standing Committee was called to order by Chairman Pete Kott at 3:10 p.m. Members present at the call to order were Representatives Kott, Masek, Sanders, Porter and Elton. Members absent were Representatives Rokeberg and Kubina. HB 490 - FINANCIAL ASSISTANCE TO BIDCO CHAIRMAN KOTT noted that the first item of business was HB 490 and called upon Jonathan Sperber to introduce the bill. Number 030 JONATHAN SPERBER, Legislative Aide to Representative Bettye Davis, sponsor of HB 490, presented the sponsor statement: "Under current law, the ability of the Alaska Science and Technology Foundation to authorize new financial assistance without legislative approval will sunset on June 30th of this year. House Bill 490 would extend the sunset date to June 30, 2000. "The 18th Legislature appropriated $3 million to establish a BIDCO fund, BIDCO standing for Business and Industrial Development Corporation Act, but Governor Hickel vetoed $2 million and no additional appropriations have been made. The BIDCO fund has thus been severely underfunded since it was established in 1992. "A successful BIDCO generally requires about $3-5 million in capitalization. Both the state and private sectors have determined that the $1 million in the BIDCO fund is not enough to allow an otherwise acceptable request for proposal to be funded. House Bill 490 would authorize the Alaska Science and Technology Foundation to make grants to BIDCOs, thus overcoming this funding obstacle. "BIDCOs provide emerging, small- and medium-size businesses with financing, management support and technical assistance. BIDCOs provide flexible financing for businesses with economically sound financing needs, but which are considered too risky by conventional lenders. BIDCOs compensate for taking greater risks by providing a much greater degree of hands-on support and management assistance, thus reducing the risk and facilitating the growth of their portfolio companies. Incentives are also included to assist businesses that are minority-owned or located in distressed areas." Number 201 JAMES KENWORTHY, Executive Director, Alaska Science and Technology Foundation (ASTF), testified via teleconference from Anchorage. He cited three reasons why the legislation was a good idea. "First of all," he said, "there are (indisc. -- coughing) up here that are in the risk capital business. I would think of BIDCOs as doing less risky deals than venture capital. They're not all equity deals. It's a much broader range of businesses in Alaska, as there have been in Michigan, that would qualify for the debt/equity financing that BIDCOs can provide. Secondly, we're able to leverage our funds. Our spreadsheet analyses show that we think about $6 million is the critical mass for the size of BIDCO capitalization needed to launch these types of financial institutions. The legislature, by earmarking $1 million of our budget, pretty much hamstrung us from being able to have a successful proposal come through our RFP process. We would like to recommend that if the legislature would extend the $1 million sunset, the ASTF board has voted to put $2 million of our earnings into it, basically putting $3 million of public funds to be matched one-to-one by the private sector. We think that's the proper critical mass to launch a BIDCO. And we think it's most important for the infrastructure of the state that that kind of institution be established outside the public sector, in the private sector, with operators that could provide hands-on management experience in the (indisc.) these start-up or turn-around business situations and be risking their own capital in picking out those deals. Number 388 MR. KENWORTHY continued: "And lastly, the way we've constructed the formulas, essentially, for the loaned state funds to be paid back, is it's a performance-based formula, where essentially the more jobs, in effect, payroll, that is created and the more sales of the business, the less they have to pay back the fund. That's how this subsidy is, basically, it puts the private sector into this riskier market (indisc.). If they do good deals that create jobs and sales, then (indisc.) economic development and their loan to ASTF is hereby reduced. If they don't do good deals, wherever located, then they will still have the full obligation of the state's funds in launching the BIDCO." Number 457 CHAIRMAN KOTT asked about Mr. Kenworthy's indication that ASTF would take $2 million from its earnings to endow the fund, which currently had $1 million in it. MR. KENWORTHY replied, "Right. The legislature in the current bill gave us $1 million of our earnings and said, `put it toward BIDCOs.' So we would take $2 million of unobligated funds from ASTF and put that in the same pot, essentially, creating a $3 million-dollar public fund that we would put an RFP out and say should be matched one-to-one by the private sector, creating a $6 million capitalized institution." Number 511 CHAIRMAN KOTT asked whether a grant made by using the endowment would be an actual grant or a loan. MR. KENWORTHY explained it was in the form of a loan, with the statute allowing ASTF to set the terms of that loan. In effect, ASTF lent funds, at a rate approximating prime, to the successful proposer, who would then loan that money to businesses. Every year, ASTF would audit sales and payrolls of the businesses to determine increases of jobs and sales. By the degree to which they could show growth in those firms, BIDCOs would reduce their obligation to repay funds to ASTF. Payback to the state would be in increased economic development. Number 597 CHAIRMAN KOTT referred to Mr. Kenworthy's comment that in order for a BIDCO program to be successful, there needed to be a certain amount of capitalization, with $6 million being the suggested amount. Chairman Kott asked if that amount was compatible with other states. MR. KENWORTHY replied, "In the Michigan program, they launched 12 BIDCOs. The smallest one was capitalized at only one-and-a-half, and that's the only BIDCO that had to merge with a larger BIDCO. The average was $8-10 million and almost all those BIDCOs have now had a second round of financing. So, the banks have come in and further private investment has come in. So, for the $20-30 million the state put up to launch 12 BIDCOs, that was matched, first of all, by the private sector, two-to-one. And there's been a second round of financing and that created, basically, $200 million of capital. We think, based upon that experience and adjusting for the realities up here, we'll be asking for a one-to-one match. We think that this $6 million is the minimum size that creates a critical mass, because ... for your start-up costs, for the hands- on management, you basically have to look at what interest they could earn on that money to fully staff a BIDCO and provide those kinds of management services." Number 684 CHAIRMAN KOTT mentioned that the BIDCO assistance program had been created in 1992, before he was in the legislature. The appropriation made to the program in 1992 was $3 million, of which the previous administration vetoed $2 million. Representative Kott asked whether Mr. Kenworthy recalled the reason for the veto. MR. KENWORTHY replied, "I'm sorry, I can't, even though I testified as the person running the Michigan technology program at the time. But I don't think it was related to the Hickel Administration's position on BIDCOs. I think it was related to the budget issue at the time." Number 720 CHAIRMAN KOTT asked: "Do you envision just making a one-time $2 million influx of money through your earnings, or would this be a continuous process?" MR. KENWORTHY responded, "A one time, for two reasons. First of all, we think it's important to capitalize that institution in the private sector and not have them dependent on ongoing state support. And secondly, because of the higher rates of return we're earning this year, because of the permanent fund taking capital gains, we have the ability to do that this year. We would not necessarily have the ability to do it next year." Number 763 REPRESENTATIVE BRIAN PORTER asked why the bill referred, in most sections, to grants instead of loans. MR. KENWORTHY replied, "Because our statutory authority allows us to make grants, essentially. So, the statute says we can grant to the BIDCO assistance fund, but we structure those grants in the form of a loan that must be repaid." REPRESENTATIVE PORTER said he understood the sliding scale on interest for ability to meet goals of the program. "But just so that the record is clear," he stated, "what we're really saying here is you're restructuring a loan, as opposed to a grant that there is no requirement for repayment." MR. KENWORTHY replied, "Correct." Number 847 CHAIRMAN KOTT asked Mr. Kenworthy to point out the area in the bill that would "lead us to believe that what you will be capitalizing is, in fact, $2 million on a one-time basis." He added, "It seems to me that in 1992, the legislature, while giving up their statutory oversight authority for those grants, if you will, retained some authority through the appropriation process by appropriating from the general fund, I assume, $3 million. In this particular case, you're asking us to give up all authority for oversight. So, I'm curious as to what section of the bill I can turn to that will suggest that we're only looking at a one-time shot in the arm of $2 million, which would basically restore legislative intent, at least in 1992." Number 0898 MR. KENWORTHY indicated he was giving a budget answer, not a legal answer. He said he understood they were asking for the amendment to the bill just to extend the sunset date of the $1 million allocation that the legislature already had made. "At the same time," he said, "the board has made a parallel commitment to put $2 million in additional funds into the BIDCO fund. So, this legislation does not speak to the additional $2 million we're talking about, it just speaks to not sunsetting the $1 million." Number 937 CHAIRMAN KOTT asked about assurance that this board or future boards would not continue to appropriate money beyond what would have been expected back in 1992. MR. KENWORTHY responded, "You would have no other assurance except that annually ... the ASTF comes back to the legislature and tells them how we've allocated our funds, by project. And the legislature can, in the future, as it does now, earmark some of our earnings for non-ASTF purposes. I think there's a credibility issue there that we would want to continue to address." Number 977 REPRESENTATIVE BEVERLY MASEK referred to Section 7, page 2, line 30, which said, "the board of directors shall require that a fair and reasonable return to the foundation". She wanted to know what "fair and reasonable" meant. MR. KENWORTHY indicated the primary goal was not repayment, but to set up a private sector institution that eventually created enough jobs and economic activity in Alaska "so that we're repaid by that economic growth, not repaid to ASTF." He said, "If ASTF was seeking to be fully repaid, then we would not, in effect, in any way be sharing the additional risks of doing a BIDCO, and an effective private market could already have done that. The reason that the banks are not in this market is because it is a higher risk than return from how they raise their funds. So, we have to use our public funds, essentially share that risk, and purchase economic growth." Number 1090 REPRESENTATIVE MASEK indicated she understood that BIDCOs were not set up to pay anybody back for money that would come from the grants. She asked what interest would be paid to the grantor. MR. KENWORTHY clarified, "This will be in the form of a deal that must be repaid." He added that it would be a loan with terms set at the time of the investment. Number 1148 REPRESENTATIVE MASEK again asked what was meant by "fair and reasonable". MR. KENWORTHY said, "The terms that the board looked at last year, when we had proposals in front of us, was to loan the funds at prime and to (indisc.) a credit system." For every increase of sales of 1.5 percent, the principal of the loan would be reduced a certain amount. There would be a jobs credit as well. "We tried to restructure the loan so that if we got the appropriate level of economic activity, the loan would earn out in approximately ten years," he added. Number 1214 CHAIRMAN KOTT asked whether the "fair and reasonable" return specifically dealt with monetary return or whether there was a return that combined monetary plus economic benefit. MR. KENWORTHY responded, "Well, it's a monetary return, but the more economic return there is, the less they have to pay back [to] ASTF. The experience in Michigan was that, then, the credit system was earned out in five to ten years. And that allows them to be recapitalized, essentially, and to have more conservative money come in and have a second or third round of financing with businesses." Number 1257 CHAIRMAN KOTT asked, "As a BIDCO, if I came to you and asked for a grant of, say, a half a million dollars, would I have to repay a half a million dollars back to the endowment?" MR. KENWORTHY replied, "If you formed a BIDCO and were successful in our RFP process, and we selected you to negotiate these terms, in effect, we would put $3 million in and at the end of the year, you would owe us $3 million plus prime.... And each year, we would monitor the economic activity of the deals that that BIDCO invested in. We would count the payroll and the sales.... And the degree to which they had increased payroll and sales, we would reduce the principal you owed to ASTF." Number 1310 REPRESENTATIVE JERRY SANDERS explained he had not been in the legislature in 1992. He asked for examples of things that had been funded in Michigan, as well as examples of things ASTF was considering funding in Alaska. MR. KENWORTHY emphasized that ASTF would not be making the decisions of which businesses to fund. The private operators of the BIDCOs would make those decisions. In Michigan, 30-35 percent of the deals were in manufacturing turn-around situations. "We have them up here right now, with natural resource processing firms," he said. "They don't have the assets to qualify for bank lending but, essentially, if they can re-equip themselves and reorganize the business, those firms would be paying a higher-than- prime rate and giving up a warrant or small-equity kicker to compensate for the extra risk. And so, that's, I think, the best market they would serve up here. So, that's about 30-35 percent. The other about 30 percent were service firms, but they were service firms that were selling their services nationally." Mr. Kenworthy noted that when BIDCOs lent money, they usually received prime plus two or prime plus three, in addition to receiving a piece of the business in the form of an equity or warrant kicker. Mr. Kenworthy noted that the remaining 30 percent were "in commercial." REPRESENTATIVE SANDERS indicated he did not see how any of this applied to Alaska. Number 1425 REPRESENTATIVE PORTER asked if a BIDCO requested money to utilize in a business or if it was an intermediary group or agency looking for someone else in business to give money to. MR. KENWORTHY replied, "The latter. Think of the BIDCO as a risk capital financial institution." He added it was like an investment bank. REPRESENTATIVE PORTER asked if the loan portion was between the actual business and the BIDCO. "And you're saying you'll deplete the amount that the BIDCO will repay you, based on how good they did with their business loans themselves," he suggested. MR. KENWORTHY agreed. Number 1483 REPRESENTATIVE NORMAN ROKEBERG referred to an indication in the packet that ASTF had issued a Request for Proposals (RFP) in October and received two bids that had been turned down. He asked Mr. Kenworthy to explain who those bidders were. MR. KENWORTHY replied, "It was an open process. We granted confidential status to the bids themselves. But it's certainly a matter of record who applied." He said of three original bids, two finalists were selected. One was the Kenai economic development corporation, for which he did not know the exact name. The second proposal was from Bart Wagman and Dave Rose in affiliation with Northrim Bank. "And both were turned down," Mr. Kenworthy said, "because neither came up with the half a million required by the legislation." He explained that the legislation had set a minimum match, with authority to raise that match. He said that capitalizing a financial institution at $1.5 million was too low an amount to cover operating expenses. They now look at the $6 million as being the proper critical size, based on the Michigan experience. Number 1571 REPRESENTATIVE ROKEBERG asked if this legislation would require the funding of $2 million more, with a one-to-one match. He asked whether a BIDCO operator would end up with a $6 million capitalization and have to bring $3 million to the table, or whether it could be shared among more than one BIDCO. MR. KENWORTHY responded, "I think $6 million would only capitalize one BIDCO." REPRESENTATIVE ROKEBERG asked if Mr. Kenworthy knew of anyone interested in bringing another $3 million of private money to the table. MR. KENWORTHY replied, "There have been some expressions of interest, but until the legislature extends the sunset date, and until it's more widely known that the ASTF is willing to put more funds into it, I wouldn't expect serious proposers to go out and start raising the necessary capital. There's enough interest in this that I'm putting the time in to try to ... ask the legislature to put this bill in. And I think the analysis of the previous bids shows that there would be that degree of interest." He added that ASTF financed technology deals at three stages, a proof of concept stage, a prototype stage and a commercialization stage. "We're starting to see a number of deals up here that, in effect, BIDCOs could do if they were here," Mr. Kenworthy said, citing examples. Number 1697 REPRESENTATIVE KOTT asked if those programs would not just be conducted under the ASTF mission, rather than through a BIDCO. MR. KENWORTHY said, "I think we're better off getting to the prototype stage and proving out the technology. And when you get to the (indisc.) stage, I think it's best to have the private sector risking their own money to do that. And we don't have a group of people up here who are experienced doing equity lending and doing that investment banking function. And I think unless we can capitalize institutions in the private sector, we're not going to ... have that base of people who are experienced at putting those deals together. ASTF is creating a cadre of people who are entrepreneurs. We need another cadre of people who can help finance those businesses. And we need to work on both sides of that equation at once." Number 1737 REPRESENTATIVE SANDERS said, "I assume BIDCO is a group of people that make these decisions." MR. KENWORTHY replied, "Yes, it's a financial institution that would be regulated by the state." REPRESENTATIVE SANDERS asked if it was already in existence. MR. KENWORTHY said, "No, there is no BIDCO formed right now. Essentially, if the proposal was acceptable and they capitalized a BIDCO, then they would apply for a BIDCO license from the state financial institutions bureau." Unlike banks, which were regulated for both risk and fraud, the BIDCOs would just be regulated for fraud and disclosure, Mr. Kenworthy said. They were a risk institution and investors in the BIDCO would be told that. Number 1770 REPRESENTATIVE SANDERS asked who would operated a BIDCO. MR. KENWORTHY replied, "The private sector board that made a successful proposal would operate the BIDCO." REPRESENTATIVE SANDERS asked who made the decision to give them the money. MR. KENWORTHY answered, "ASTF would run an RFP, would make an award decision, give the BIDCO time to complete the financing, and at the point at which they raised their half of the match, then they would establish a BIDCO and as a company, as a corporation that had an agreement with ASTF to only loan funds in Alaska for these types of deals, they would start operating." Number 1825 REPRESENTATIVE PORTER asked Mr. Kenworthy whether, as a condition of furnishing funds to the village of Tyonek, ASTF had received the standard nondiscrimination pledge and waiver of any alleged sovereign immunity before granting that. MR. KENWORTHY answered that the board had approved the grant at its last meeting but had not yet finalized the negotiation. REPRESENTATIVE PORTER suggested that, since getting into the village of Tyonek required a 24-hour notice and their approval, those elements should be considered. Number 1916 REPRESENTATIVE ROKEBERG asked whether an equity kicker was something the BIDCO or ASTF would do. MR. KENWORTHY explained, "The terms of the deal between the operators of the BIDCO and the businesses they finance are their business. But based on the Michigan experience, they can't ask for too high an interest rate, because that's what their enormous cash needs demand on the businesses in the early years. So, in return for a more spread-out schedule in taking risks, they generally get prime plus two or three points and then they take a warrant or an option to buy so many shares, or a piece of the company. In many cases, the principals of the BIDCO are helping manage that company or identify management to put that company together." Number 1916 REPRESENTATIVE ROKEBERG asked about return back to the principal of the foundation. MR. KENWORTHY replied, "Those terms will be set in the agreement between ASTF and the BIDCO, and that's where the formula of how much money they owe back to ASTF and the formula of how they can repay that loan through sales and jobs, in effect, would be set." He added, "Unless you do that, you can't get private investors to help capitalize a higher-risk institution." Number 1954 REPRESENTATIVE ROKEBERG asked if there was not also a venture capital fund in Alaska. MR. KENWORTHY said the Polaris Fund did "all equity deals ... and that's a much narrower, higher-risk, higher-reward market than BIDCOs; BIDCOs are the middle-risk market." He said ASTF hoped to establish a network outside the state to foster a broker match function. "But we're not going to be helping to capitalize those deals," he said. Number 2000 REPRESENTATIVE ROKEBERG stated his understanding: "A BIDCO is like a bank and it is a high-risk, venture-capital-type bank that would loan funds and expect payment like a bank. But they would make arrangements, as you've just described, in terms of their equity being able to reduce them. So, this would be a financial institution that would be capitalized with your grant and the infusion of private money." MR. KENWORTHY replied, "That's a correct description. I'll just make one modification. Venture funds tend to do all equity deals. They put money in and there's no assets there. They're just funds. They own a piece of the company. And that's much higher risk. Maybe there's two deals a year up here that would qualify for venture capital in Alaska." He explained that BIDCOs were middle risk because they were lending funds to businesses. "So," he said, "there's assets there that could be attached and they're doing some equity on top of that." He said there was a much broader range of businesses that would qualify for that less-costly financing than venture capital. "But it is far more riskier than banks," he said, "which only lend on assets. If you think of the three different windows, the highest risk is venture capital with all equity. The BIDCO is middle risk; it's a mixture of debt and equity. And then there's organizations like AIDEA, which essentially are pretty bankable asset-based lending. Three levels of risk and reward." Number 2096 CHAIRMAN KOTT referred to repayment of principal and interest back to ASTF and asked if that would end up in ASTF's earnings account or elsewhere. MR. KENWORTHY said, "It would end up in our earnings. The legislature could reappropriate it for other purposes as we do our budget each year." Number 2107 REPRESENTATIVE MASEK referred to Section 4, page 2, line 18, of the bill, which read, "The board may exempt grants of $5,000 or less from peer review." She asked for an explanation. MR. KENWORTHY replied, "In ASTF's current statute, we do not have to do technical or scientific reviews on grants under 5K. We currently do some level of review for every grant we do." REPRESENTATIVE MASEK asked what "peer review" meant. Number 2156 MR. KENWORTHY answered, "Peer review tends to be scientific experts we find in the field of the proposal. In addition, since I became director seven months ago, for technology deals, we also do a business review in which we'll have scientists assess the technology and we'll have business people assess the business or economic logic of it. And on top of that, the board, of course, that the Governor appoints, of people who have some experience growing technology-based businesses, and they look at all the reviews and make a decision." REPRESENTATIVE MASEK asked why it was necessary to remove the peer review. MR. KENWORTHY responded, "I think the amendment that's being proposed will not change ASTF's current requirement not to have the peer review things under 5K. It will not change our operating at all. Currently, ... grants under 20K get a staff peer review and then the board reviews each of them individually." REPRESENTATIVE KOTT asked if that was under current statute, under the ASTF program, for projects less than $5,000. MR. KENWORTHY replied, "Right. We have that authority but we don't use it." Number 2209 REPRESENTATIVE MASEK referred to Section 5, which the sectional analysis indicated removed endowment grants awards from the consistency requirement of the section. She asked why that requirement was being removed. MR. KENWORTHY indicated he did not have that in front of him and could not answer the question. REPRESENTATIVE KOTT clarified the question: "Why are we carving out an exception for this particular endowment grant from the rest of the grants under ASTF?" Number 2285 MR. KENWORTHY reiterated that it was not in front of him. He speculated that there might be one of two reasons. "One is," he said, "there's a requirement that half our grants have to be for less than 100K. Does that section refer to that? And secondly, there's a requirement that our grants be for research and development in commercialization activities. So, since BIDCOs ... do not invest in (indisc.) commercialization activities directly, we are talking about financing a bank that will do those kinds of deals, in part." REPRESENTATIVE ROKEBERG commented, "A BIDCO is not a research or development project, it's a BIDCO. So, you've got to exempt it, that's all." Number 2339 CHAIRMAN KOTT asked what the status was of the $1 million appropriated in 1992. MR. KENWORTHY replied, "We have set that aside in our budget projections. We've carried those funds over each year; it was Section 19 in our authorization language last year that allowed us to do that, as well as other multi-year grant funds. So, it carried it over." He indicated it had not been formally escrowed but had been set aside in their budget projections, for use if the legislature extended the June 30th deadline and ASTF found a proposal to fund. "Otherwise, I believe the funds will lapse to ASTF," he added. Number 2371 CHAIRMAN KOTT asked if the $1 million was drawing interest. MR. KENWORTHY said, "It's drawing interest because we only draw down our earnings to the permanent fund as we need them. So the interest is currently captured in the interest earnings of the endowment." Number 2395 REPRESENTATIVE ELTON moved that HB 490 move out of committee with the attached zero fiscal note and individual recommendations. REPRESENTATIVE ROKEBERG objected. CHAIRMAN KOTT noted there was a motion to move HB 490 with individual recommendations and accompanying zero fiscal note. He acknowledged the objection. Number 2401 REPRESENTATIVE ROKEBERG asked Representative Elton, as co-sponsor of the bill, why the year 2000 was proposed. REPRESENTATIVE ELTON explained the sunset date was 1996. If that date was not changed, the forum or process would no longer be there. Number 2424 REPRESENTATIVE ROKEBERG said, "If you move it to the year 2000, the million bucks just sits there for four years, although it's not hurting the state particularly." He noted that he supported the BIDCO concept. REPRESENTATIVE ELTON added, "The simple and short answer for the date is it extends the sunset date and under the provisions of this bill, too, the BIDCO would be capitalized at the $3 million level rather than the $1 million level." CHAIRMAN KOTT asked, "Representative Elton, wouldn't the capitalization occur within 12 months if this bill were to pass, that we would find ASTF capitalizing the fund at the tune of $2 million, which we'd bring up to $3 million, then we're looking for a partnership out there?" Number 2456 REPRESENTATIVE ELTON said, "And you'd have until the year 2000, I think, to do that." He suggested if HB 490 did not pass, the $1 million would lapse back because there would be no authority for the BIDCO process without it. REPRESENTATIVE ROKEBERG reiterated his support of the BIDCO concept. He suggested it would not be easy to find a partner who would come up with the $3 million. "But four years is an awful long time," he added. Number 2482 CHAIRMAN KOTT asked Mr. Kenworthy to comment on whether four years was necessary. TAPE 96-20, SIDE B Number 001 MR. KENWORTHY said, "No, I don't think so, but please don't give me less than two. It takes about six months to get through the whole RFP process again. I'll have to go back on the street, do an RFP and comment period, give people time to make a proposal, and the finalist round. And in Michigan, it usually took about 12 to 18 months once a commitment was made. And Michigan did not run on a competitive RFP process. It ran on sort of a serial admission process because they were launching many BIDCOs at a time. But it took proposers generally 12 to 18 months to finally come up with the cash to meet the match, even after they had a commitment from the state based upon their business plan." To be safe, he suggested a minimum of two years but added that three years would be nice. Number 046 CHAIRMAN KOTT said, "Just again, to reiterate, if nothing happens by June 30 of this year, will that $1 million lapse back into the Science and Technology fund?" MR. KENWORTHY said, "Correct." CHAIRMAN KOTT asked if it was available for appropriation. (Indisc. -- several overlapping comments and coughing) MR. KENWORTHY indicated it would be available for expenditure by the legislature. Number 080 REPRESENTATIVE ELTON said, "I'm going to argue in favor of the four-year sunset because I think if you make it too much shorter, I would hate to see the pressure be to approve one of the bids they might get in the first round, simply because they may run out of authorization time if they decide to reject the first round of bids and start over. And I think that I'd rather have them feel free to reject and not see a time pressure of two or three years." CHAIRMAN KOTT responded, "I think we've just heard Mr. Kenworthy saying he'd like a minimum of two and, ideally, three. But now we're going more than the ideal." MR. KENWORTHY clarified he was not criticizing the four years. He suggested it might be a moot issue because the legislature had authority to appropriate when those funds lapsed. He said he would inform the legislature each year, at budget time, about the status of the organization." Number 133 REPRESENTATIVE GENE KUBINA referred to the second page of the ASTF position paper on BIDCOs and noted that ASTF had recommended four years. "And that was their recommendation and I believe that was the amount of years in the original BIDCO legislation," he said. CHAIRMAN KOTT concurred. "It was four years originally, but here we are four years later and we still have a million dollars and nothing has been done," he said. REPRESENTATIVE PORTER stated that unless ASTF actually encumbered that money to a BIDCO, it was available for appropriation every year, regardless. Number 167 REPRESENTATIVE ROKEBERG said, "I'd like to move a conceptual amendment to change the 2000 to 1999." He noted that was on page3, Section 8, line 7. REPRESENTATIVE KUBINA objected for the purpose of discussion. CHAIRMAN KOTT stated there was a motion to amend line 7 of the bill from 2000 to 1999 and noted the objection. REPRESENTATIVE ROKEBERG said, "I was under the impression it would be available for reappropriation." REPRESENTATIVE PORTER said, "It is, unless they actually take the money and encumber it with a deal with a BIDCO and transfer it to a BIDCO to do business, however they've made the deal." He referred to a superior court decision dealing with the constitutional budget reserve issue of what was and was not available for appropriation. "All of those kinds of funds that are just laying out there are available for appropriation," he said. REPRESENTATIVE ROKEBERG responded, "So the legislature, in its wisdom, could appropriate it (indisc.). REPRESENTATIVE PORTER replied, "That's right, next year, the whole thing, right back." REPRESENTATIVE ROKEBERG said, "Because I was concerned if we went up the $3 million level and (indisc. -- overlapping conversations). REPRESENTATIVE PORTER reiterated it was still available unless they used it. Number 235 REPRESENTATIVE ELTON referred to earlier testimony and said, "If we capitalize it at the $3 million level, as proposed in this bill, this is probably enough for one BIDCO. And I would hate to see us get into a position where they go up for an RFP, they select a BIDCO, they give that BIDCO, as Mr. Kenworthy said, 12 to 18 months to find the private capital, and 14 months later, the BIDCO comes back and says, `sorry, we can't capitalize it.' A three-year time limit may mean that that's the last shot they've got. A four-year time limit may mean they can start the process over and try to create a new BIDCO." Number 282 REPRESENTATIVE ROKEBERG pointed out a college education took four years and that was two terms in the Army. "That's a long time," he said. REPRESENTATIVE ELTON said he wished the RFP process could be condensed. REPRESENTATIVE ROKEBERG indicated he would like the program to come to fruition and not languish for a number of years without activity. He said that was the reason he had brought the amendment forward. CHAIRMAN KOTT suggested that in the same respect, they did not want people rushing in and later finding out it should have been worked out more thoroughly. "Like Representative Elton suggests," he said, "if one fails, for whatever reason, at least they have one more shot at it." He reiterated Representative Porter's comment that as long as the money was not encumbered, it was always available for appropriation. He thought there would be a strong urge to encumber those dollars to avoid appropriation by the legislature. Number 335 REPRESENTATIVE ROKEBERG withdrew his amendment. CHAIRMAN KOTT noted that the conceptual amendment had been withdrawn and that there was still a motion to move the bill out of committee. There being no objection, HB 490 moved from the House Labor and Commerce committee with individual recommendations and attached zero fiscal note. HB 502 - CONDUCTING AUCTIONS OF REAL PROPERTY Number 376 CHAIRMAN KOTT announced HB 502, "An Act relating to the auctioning of real estate," was the next order of business. REPRESENTATIVE GARY DAVIS, sponsor of HB 502, said he doesn't know how many people in the state realize that you have to have a real estate brokers license to auction off real estate. He said he didn't think you'd need a real estate license to be an auctioneer. Representative Davis said HB 502 corrects that situation. He told the committee he doesn't know why the original statute was written, but maybe there were some "fly by night" auctioneers in the state several years ago. The legislation makes it legal for an auctioneer to auction off real estate. The language in the bill is meant to allow a real estate auction to be performed by an auctioneer who has developed specific qualifications. If a person has completed a certified program in auctioneering and that program includes a course in real estate sales, then that person can auction real estate as long as a licensed real estate broker is present to supervise. This way, experts in both fields of auctioneering and real estate will be present to conduct their specified duties without inflicting an unnecessary hardship on the auctioneer. Representative Davis pointed out that there are boroughs and cities that have foreclosure auctions. He noted there are auctioneers in the state that do have a real estate brokers license, but there are also several who don't. Number 513 CHAIRMAN KOTT said if he wanted to auction off real estate, as an auctioneer, he would not only have to have an auctioneer license but also a real estate license. REPRESENTATIVE DAVIS said he believes that is true. He noted the license is a real estate "brokers" license. REPRESENTATIVE SANDERS said he knows real estate auctioneers who aren't brokers, they're real estate salesmen. Number 532 REPRESENTATIVE ROKEBERG said the committee has information which discusses the license requirements under AS 08.88.161, which says, "Unless a licensed real estate broker, associate broker salesman, etc., they may not auction." That is the prohibition. So it's any licensed real estate agent or above. REPRESENTATIVE ELTON asked what the process of an auction is. He said he has always considered an auctioneer as a middle person who promotes a sale and not the person that consummates the sale. Representative Elton said he thought sale was consummated between the owner and the new buyer. He asked if that is the way that an auction usually works or does the property transfer to the auctioneer who then transfers it through the auction process. REPRESENTATIVE DAVIS said he isn't sure of the answer. He asked if there was anyone on teleconference waiting to testify. CHAIRMAN KOTT said there was Mr. Blakely. REPRESENTATIVE DAVIS said he may be able to answer the question. Number 612 REPRESENTATIVE PORTER pointed out there are auctions where the auctioneer actually owns the property. Normally the auctioneer doesn't own the property but he does cut the final deal for selling by virtue of sole if it's an open auction. He said the terms of the sale contract would be the last bid that was awarded to bid. REPRESENTATIVE ELTON said that would set the value, but somebody else might actually be conducting the sale. REPRESENTATIVE PORTER said the auctioneer would offer the property in compliance with the owner's specifications. REPRESENTATIVE ELTON asked if the owner or the owner's agent could be a realtor. Number 664 REPRESENTATIVE ROKEBERG asked if there was a licensure for auctioning in Alaska. REPRESENTATIVE DAVIS said he would defer the question to Mr. Blakely. Number 691 NORM "BUD" BLAKELY, Auctioneer, referred to a letter in the committee files dated July 8, 1993, and said the letter was written by him in conjunction with Ron Johnson, a real estate broker. At the time the letter was written, Mr. Johnson was on the Real Estate Board. Mr. Johnson brought the issue before the board. He said he was told that this is a state law and in order for him to be able to sell any type of real estate, he would have to get a real estate license. Mr. Blakely informed the committee he went to school to become an auctioneer and has had, from time to time, opportunities to sell real estate, but under the present statute he cannot do so. He said he would like to be able to sell real estate. He noted he doesn't want to sell real estate full time and doesn't want to have to take the classes or the time to sell real estate. Mr. Blakely referred to the question regarding auctioneers having to have a license and said they are licensed through the state like any other business. CHAIRMAN KOTT asked Mr. Blakely to guess how many auctioneers there are that hold dual licenses. MR. BLAKELY responded that he has no idea how many there are. CHAIRMAN KOTT asked if the number of auctioneers is small. MR. BLAKELY said he doesn't have any idea, but said he thinks there may be about 12 in the Anchorage area. REPRESENTATIVE PORTER asked if the license Mr. Blakely holds is a regular business license or if it is an occupational license with certain criteria and training required in auctioneering. MR. BLAKELY said he thinks the state requires a business license. He noted he went to a school in Montana that has certain criteria which he had to meet. He said he was tested at the end of the term and was given a certificate from that school. REPRESENTATIVE PORTER asked if that is a requirement for an occupational license. MR. BLAKELY said he doesn't think it is in the state of Alaska, but pointed out some states require it. Number 827 REPRESENTATIVE KUBINA said his thoughts of an auctioneer is a guy that is up there almost "yodeling," calling out, and recognizing people who are giving bids. He said to him the bill sounds like it is saying that you can have an auctioneer doing that. He referred to subparagraph (2) and said it seems to him that there would be a person doing the calling and a licensed broker who would actually make the transaction. CHAIRMAN KOTT said that is his interpretation of the bill. REPRESENTATIVE PORTER noted you don't have to be a veterinarian to auction off a horse. Number 908 REPRESENTATIVE DAVIS said Representative Kubina's statement is correct. The transfer of real estate is a legal document, so an auctioneer wouldn't want that responsibility to make sure the process moves forward correctly when it comes to the consummation of the deal. He said that the bill says that a broker needs to be present for those purposes. REPRESENTATIVE ROKEBERG asked how many people would be affected by the legislation. REPRESENTATIVE DAVIS pointed out there was testimony indicating that we don't know how many auctioneers are in the state, but there was a guess of 12 in the Anchorage area. REPRESENTATIVE ROKEBERG asked if there are licensed real estate brokers and competent auctioneers in the state of Alaska. REPRESENTATIVE DAVIS said he thinks there are two. REPRESENTATIVE ROKEBERG pointed out that there has been real estate auctions going on in the state of Alaska for a number of years. REPRESENTATIVE DAVIS said he isn't sure how the court house foreclosure auctions/sales are have been pursued. REPRESENTATIVE ROKEBERG said there have been a number of auctions in the state of Alaska for real property over the years. He said he doesn't think there has ever been a problem before. The fact of the matter is several auctioneers are licensed real estate agents that do perform this function. KEN LANCASTER, Broker, Beluga Realty, came before the committee to testify. He said he fully supports Representative Davis' bill agrees totally with his sponsor statement. Mr. Lancaster informed the committee said he has been in real estate and has been licensed for 20 years. He said he believes there is one licensed real estate broker auctioneer combination on the Kenai Peninsula, one in Anchorage and he has heard of one in Fairbanks. He said there is a lot of property being auctioned off, obviously not by realtors, and that's where the possibility of some misdoing could happen. If there isn't a realtor involved, maybe it isn't being done properly. Number 1116 CHAIRMAN KOTT asked Mr. Lancaster if he is suggesting that there are about three people in the state that have a dual license. REPRESENTATIVE ROKEBERG said he would like to point out that there is not a license procedure for auctioneers in the state and he has introduced a bill that would address the licensing of auctioneers. REPRESENTATIVE PORTER said it seems to him that there is a requirement in the Municipality of Anchorage to license auctioneers. REPRESENTATIVE ROKEBERG said it seems to him it is just a business license. REPRESENTATIVE PORTER said he thinks that in addition to the state business license, the Municipality of Anchorage requires an auctioneer license with occupational criteria. REPRESENTATIVE ROKEBERG referred to selling real estate and asked how often auctions are used. MR. LANCASTER informed the committee that auctions aren't a common element of real estate marketing, but they do come up occasionally. He said there are probably about six a year that he is aware of. He noted with state sales, many auctions are related to subdivisions with recreational property. MR. LANCASTER informed the committee that in other countries one of the rules is that after property is on the market so long, like six months, it automatically goes to auction. Their auctioneers are licensed professionally by the country. He noted New Zealand is one he is familiar with. Number 1290 REPRESENTATIVE PORTER said from the testimony he has heard, there just could be some auctions of real estate going on where the auctioneer doesn't have a real estate license and the bill would provide some additional protection. REPRESENTATIVE ROKEBERG asked Mr. Lancaster if he has ever used an auction to sell property. MR. LANCASTER said he hasn't. He explained he has never found the opportunity to have that licensed auctioneer in the vicinity where they could do that. What typically happens, those sales are held over and are taken to Anchorage or Homer to auction them off with Dick Sinhorst (Sp.?) or Gold Strike Realty of Anchorage. Number 1401 MR. BLAKELY pointed out an auctioneer is a professional like any other. He said he has had an opportunity to sell a subdivision for an estate but he couldn't do it because he was not a licensed real estate person. Mr. Blakely referred to cities and boroughs that sometimes have auction sales on properties which are delinquent for taxes and said he isn't able to do that without obtaining a real estate license. He said he really doesn't want to sell real estate as a real estate sales person. Number 1471 REPRESENTATIVE KUBINA made a motion to move HB 502 with individual recommendations. REPRESENTATIVE ROKEBERG objected. He said he has given committee members a letter from the Alaska Association of Realtors objecting to HB 502. He said he thinks the reason there is one word in the real estate licensing statute where realtors are (indisc.) perhaps professional profession, but they are certainly a licensed profession with significant education, continuing education, and other safeguards for the consuming public that requires that they perform their jobs in a responsible manner. Representative Rokeberg said there is no licensure for auctioneers in Alaska. He said a constituent in his district requested he introduce a bill that requires licensing of auctioneers, but because of the crunch of business, it hasn't been able to be pursued. However, he thinks there is a need for this type of thing and as a result, he is very concerned that we would allow a totally unlicensed person to have the ability to market real estate. Notwithstanding the fact, the bill rightly conjoins the operation of auctioneering with a licensed broker. Representative Rokeberg said HB 502 is an addition to the real estate law. It is a number of pages long and is an intrusion of the auctioneers into the real estate title and statute. He noted there are individuals who are dually qualified to do this, they have businesses and are protecting a business they have worked hard for. By passing HB 502, we could be allowing people who are unlicensed auctioneers to encroach on certain areas and could possibly destroy certain businesses that are in existence. Representative Rokeberg said he thinks HB 502 should be put in a subcommittee. Number 1692 REPRESENTATIVE KUBINA said as he reads the bill, it gives all real estate people who don't feel comfortable about (indisc.) people, to be sitting right next to an auctioneer as he auctions off real estate and then the real estate broker would still do all the work. He said the bill gives the ability to have things auctioned, to all real estate people and not only the three in the state. REPRESENTATIVE ROKEBERG indicated the bill would allow auctioneers to enter the real estate market sales. As things currently are, it offers real estate people to get into the auctioneering business and visa versa. It certainly isn't a total effort for auctioneers to enter into real estate with the caveat that a broker be present, which he thinks is a strong recommendation in the legislation and it serves the purpose that the realtors are objecting to. REPRESENTATIVE ELTON said he would like to point out that not only does a real estate broker or an associate broker have to be present, they have to be supervising. The bill allows a broker to contract with an auctioneer to move a piece of property. He said he sees the bill as something that enhances the realtor and gives the realtor another option. REPRESENTATIVE ROKEBERG said he thinks he heard testimony that there has been real estate auctions in Alaska that were probably carried out without the auctioneer being a licensed broker. There has been clear breaches of this existing statute previously. The reason there probably hasn't been problems is that there is no enforcement. The Real Estate Commission has one executive director and one or two investigators in which to police their entire industry of 2,200 people. He asked Chairman Kott if he could tell him how many enforcement people the Department of Commerce has to enforce their licensing. They've got very little. He said he is looking at the (indisc.). The bill would allow someone to conduct a real estate auction because they say there is nothing forbidding it. They could say, "Well, we're under the supervision of a broker." Right now, the only enforcement procedure to police this is to have it done under the Department of Commerce, the Real Estate Commission and the executive director and investigators. By passing this bill, it would be taken out from underneath them. REPRESENTATIVE PORTER said if there are or aren't enough resources to do inspections, there are aren't enough resources to do inspections under this bill or under the existing situation. He said he would submit whoever is supposed to be doing those things, all they have to do is get a copy of the newspapers to find out where the auctions are and who is doing them. It is not that tough of a deal. Representative Porter said he sees HB 502 as eliminating perhaps several of those sales that aren't occurring under the correct supervision, enhancing realtors positions to do more and perhaps taking a little work away from three people, which isn't a big deal when you're balancing the betterment for the most. He said he would submit that the committee move HB 502. Number 2103 REPRESENTATIVE ROKEBERG withdrew his objection. CHAIRMAN KOTT said there is a motion to move HB 502 from committee with individual recommendations and the accompanying zero fiscal note. He asked if there was an objection. Hearing none, HB 502 moved from the House Labor and Commerce Committee. ADJOURNMENT CHAIRMAN KOTT adjourned the House Labor and Commerce Committee meeting at 4:40.