Legislature(2009 - 2010)SENATE FINANCE 532
04/01/2009 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB57 | |
| HB109 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 57 | TELECONFERENCED | |
| + | HB 109 | TELECONFERENCED | |
| + | HB 172 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
April 1, 2009
9:04 a.m.
9:04:50 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting
to order at 9:04 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Jody Simpson, Staff, Senator Charlie Huggins; Eddy Jeans,
Director, School Finance and Facilities, Department of
Education and Early Development; Brenda Taylor, President,
Academic Policy Committee, Juneau Community Charter School;
Katie Koester, Staff, Representative Paul Seaton; Diane
Barrans, Executive Director, Alaska Commission on
Postsecondary Education, Department of Education and Early
Development and Executive Officer, Alaska Student Loan
Corporation; Charlene Morrison, Chief Financial Officer,
Alaska Commission on Postsecondary Education, Department of
Education and Early Development.
PRESENT VIA TELECONFERENCE
Kiki Abrahamson, Teacher, Fireweed Academy and Alaska
Charter School Association, Homer; Lee Donner, Managing
Director, First Southwest Company.
SUMMARY
SB 57 "An Act relating to charter school funding."
CS SB 57(FIN) was REPORTED out of Committee with a
"do pass" recommendation and with attached fiscal
note by the Department of Education and Early
Development.
HB 109 "An Act relating to eligibility for the Alaska
supplemental education loan program and to the
interest rate for a loan made under the Alaska
family education loan program; and providing for
an effective date."
HB 109 was HEARD and HELD in Committee for further
consideration.
CS HB 172(FIN)
"An Act relating to an investment in the education
loan fund; relating to authority for the
commissioner of revenue to enter into a bond
purchase agreement and letter of credit with the
Alaska Student Loan Corporation; and providing for
an effective date."
CS HB 172(FIN) was SCHEDULED and not HEARD.
SENATE BILL NO. 57
"An Act relating to charter school funding."
9:05:36 AM
Senator Joe Thomas, Sponsor, explained that the legislation
corrects a flaw in school funding law as it applies to
charter schools with fewer than 150 students, which he
called the "charter school penalty." He read parts of the
Sponsor Statement (Copy on File):
Current law results in these charter schools receiving
30 to 45 percent less state funding than neighborhood
schools of their same size. SB 57 funds these charter
schools at a per-child rate closer to that of average,
urban elementary schools.
Charter schools are public schools that provide
valuable education options to Alaska families. They
increase learning opportunities and encourage parent
and community involvement in our schools. Charter
schools are designed and managed by parent-elected
boards, under contracts with local school districts.
They create school choice within the public school
system. The process of choosing engages parents and
gives them a feeling of ownership, which encourages
student achievement.
In 1995, the legislature passed Alaska's initial
charter school law. SB 57 solves the funding problem in
an equitable, fiscally responsible manner. It will
support our schools and districts as they carry out the
legislature's intent in creating the charter school
law.
The root of the problem is the way the foundation
formula calculates the "adjusted student count" for
charter schools versus neighborhood schools.
Charter schools with an enrollment of less than 150
students are not treated as separate schools for the
purpose of the adjusted student count calculations. The
impact of this system on charter schools is shown in
the attached graph. The consequences are that the law
provides an inadequate amount of money for charter
schools with fewer than 150 students to survive, and
there is dramatic decrease in funding when a charter
school's enrollment drops from 150 to 149 students.
School districts can be penalized for allowing school
choice.
SB 57 states that charter schools with fewer than 150
students will have their student count adjusted by the
same per-student rate as neighborhood schools with 400
students. It also contains a one-year, hold-harmless
provision for charter schools that are either in their
first year of operation or who had more than 150
students the previous year. These schools will receive
95 percent of the per-student rate of neighborhood
schools with 150 students.
9:09:04 AM
Senator Huggins MOVED to ADOPT Amendment 1, 26-LS0238\E.2,
Mischel, 4/1/09:
Page 1, line 1, following "charter":
Insert "and alternative"
Page 2, following line 6:
Insert a new subsection to read:
"(e) If an alternative school has a student count
of more than 120 but less than 175 for the current year
and is in the first year of operation, or had a student
count of 175 or more in the previous year of operation,
the adjusted student count for the school shall be
calculated by multiplying the student count by 95
percent of the student rate for a school that has a
student count of 175."
Reletter the following subsection accordingly.
Page 2, line 7:
Delete "(c) and (d)"
Insert "(c) - (e)"
Page 2, line 10:
Delete "AS 14.17.905(b)"
Insert "AS 14.17.905"
Page 2, following line 10:
Insert new material to read:
"Sec. 14.17.905. Facilities constituting a school.
(a) For purposes of this chapter, the determination of
the number of schools in a district is subject to the
following:
(1) a community with an ADM of at least 10,
but not more than 100, shall be counted as one school;
(2) a community with an ADM of at least 101,
but not more than 425, shall be counted as
(A) one elementary school, which
includes those students in grades kindergarten
through six; and
(B) one secondary school, which
includes students in grades seven through 12;
(3) in a community with an ADM of greater than
425, each facility that is administered as a separate
school shall be counted as one school, except that each
alternative school with an ADM of less than 175 [200]
shall be counted as a part of the school in the
district with the highest ADM."
Co-Chair Stedman OBJECTED for discussion.
Senator Huggins described past experience with charter
schools in the Matanuska-Susitna (Mat-Su) Valley. He
commented that the original charter school law was put in
place in a different era and the provisions can cause
schools to lose significant funding when the loss of one
student changes the count from 150 to 149. He has been
supportive in the past of financial correction to the
situation and he wanted the change to be put into statute.
Senator Huggins described similar issues for alternative
schools and noted a resolution from the Mat-Su Borough
School District ("Resolution No. 09-002," Copy on File). In
the same way charter schools must have a minimum of 150
students, alternative schools must have a minimum of 200.
Alternative schools suffer from the same funding problems if
they lose a single student below the minimum. The amendment
would address the issue for alternative schools.
9:11:24 AM
JODY SIMPSON, STAFF, SENATOR CHARLIE HUGGINS, SPONSOR,
addressed the mechanics of Amendment 1. She explained that
the threshold for alternative schools would be lowered from
200 to 175 students. Alternative schools that consistently
have fewer than 175 students will continue to be funded as
if their students attended the largest in the district, and
will not get the 1.18 rate that SB 57 gives to charter
schools. The amendment also puts in place the one-year hold-
harmless provision for alternative schools with more than
175 students the previous year or schools in the first year
of operation. Alternative schools will receive 95 percent of
the per-student rate for the 175 count. Alternative schools
will have to submit a plan for the hold-harmless year and
work with their school board to determine a course of action
if enrollment projections are not met and the school no
longer qualifies for the hold-harmless provision. She
stressed that the measure is a legislative priority for the
Mat-Su School Board.
EDDY JEANS, DIRECTOR, SCHOOL FINANCE AND FACILITIES,
DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, expressed
support for the amendment. He pointed out that the amendment
addresses the problem that occurs when an alternative school
falls below the 200 student mark.
9:14:16 AM
Co-Chair Hoffman asked how many schools would be covered by
the bill before the amendment and how many schools had
between 175 and 200 students. Mr. Jeans answered that the
original bill addressed four charter schools with student
counts below 150. The amendment would address one
alternative school. A total of five schools would be
affected.
Senator Olson requested the Sponsor's opinion of the
amendment. Senator Thomas replied that he was supportive of
the amendment.
Co-Chair Stedman WITHDREW his OBJECTION to Amendment 1.
There being NO further OBJECTION, Amendment 1 was adopted.
9:15:43 AM
Mr. Jeans referred to the fiscal note and emphasized that
page 2 lists the four charter schools that would qualify for
the additional funding for small schools. The schools with
enrollment under 150 would be funded at the 1.18 rate. Page
3 of the note shows the fiscal impact of the amendment. One
school would generate an additional $600,000. The total
fiscal note is $1,314,300.
Co-Chair Stedman asked if the fiscal note would change from
the draft version. Mr. Jeans did not expect a change.
Co-Chair Stedman opened public testimony.
KIKI ABRAHAMSON, TEACHER, FIREWEED ACADEMY and ALASKA
CHARTER SCHOOL ASSOCIATION, HOMER (testified via
teleconference), testified in support of the legislation.
She emphasized the importance of providing equitable funding
for educational alternatives.
9:18:22 AM
Senator Ellis thought the legislation addressed unfinished
business and stated support for the improvements to the
bill.
Senator Huggins informed the committee that his wife was
employed by the Mat-Su school district.
Senator Olson spoke for constituents in his district who
support the bill, particularly the Nome Charter School.
Senator Ellis noted the presence of Juneau charter school
students in the audience.
9:19:52 AM AT EASE
9:20:31 AM RECONVENED
BRENDA TAYLOR, PRESIDENT, ACADEMIC POLICY COMMITTEE, JUNEAU
COMMUNITY CHARTER SCHOOL, introduced four students who were
present in the room. The group supported the legislation.
Co-Chair Stedman commended the students for taking part in
the legislative process. Ms. Taylor told the committee that
the students were representing other students who wanted to
be there but were unable to attend.
Co-Chair Stedman closed public testimony.
Senator Thomas MOVED to report SB 57 out of Committee with
individual recommendations and the accompanying fiscal note.
There being NO OBJECTION, it was so ordered.
CS SB 57(FIN) was REPORTED out of Committee with a "do pass"
recommendation and with attached fiscal note by the
Department of Education and Early Development.
HOUSE BILL NO. 109
"An Act relating to eligibility for the Alaska
supplemental education loan program and to the interest
rate for a loan made under the Alaska family education
loan program; and providing for an effective date."
9:22:36 AM
KATIE KOESTER, STAFF, REPRESENTATIVE PAUL SEATON, SPONSOR,
explained that the legislation would allow the Alaska
Commission on Postsecondary Education (ACPE) to sell bonds
to generate money for student loans in the current fiscal
climate. House Bill 109 was brought to Representative Seaton
and the House Education Committee by Diane Barrans, the
director of ACPE. The legislation requires a borrower to
have either good credit or a co-signer with good credit in
order to get a student loan from the state of Alaska.
Ms. Koester noted that the requirement only applies to state
loans called alternative education loans. The restrictions
would not apply to federally guaranteed loans such as
Stafford loans. Currently, a borrower can get an Alaska
student loan as long as they do not have bad credit, which
means they can get a loan with no credit. In the current
fiscal climate, investors are not willing to back the loans.
The commission cannot use loans as currently structured for
collateral. Without the change, ACPE will either be forced
to stop lending to Alaska borrowers or the state will have
to directly fund the program with $40 to $50 million in
general funds.
Ms. Koester added that HB 109 makes a change to the Family
Education Loan (FEL). Through the FEL program a family
member can borrow on behalf of other members. The current
interest rate for the loan is set in statute at 5 percent;
HB 109 would allow the student loan corporation to set the
rate to not exceed 8.25 percent. She explained that the FEL
rate would be set in the same manner as the Alaska student
loan is currently set.
Senator Ellis queried the feedback the legislation was
receiving from students and student organizations across
Alaska. Ms. Koester reported that there have been some phone
calls from the student community. She explained that in the
current fiscal climate, the loans are viewed as sub-prime.
The state will have to address the issue if it wants to
continue borrowing.
Senator Ellis asked if the legislation would self-correct
when the economy got better. Ms. Koester replied the change
would be permanent until the legislature addressed the issue
again.
9:27:24 AM
Senator Olson asked how many students would not be able to
go to college if the bill did not go through. Ms. Koester
replied that there has never been an assessment of the
credit standard of loan applicants. She believed
hypothetical scenarios had been run.
Senator Olson asked when the funds would be available for
eligible students if the legislation were to pass. Ms.
Koester replied that it would take a fiscal year for the
changes to take effect. She referred to HB 172, which would
provide for a bridge loan from the state to the Alaska
Student Loan Corporation and enable the commission to offer
loans during the upcoming academic year.
Co-Chair Stedman asked if young citizens from families
without good credit would be excluded from the program. Ms.
Koester acknowledged the possibility of exclusion of some
people. She stated that statistical analysis of the 2008-
2009 academic year reveals that the only 24 percent of
Alaska student loan applicants are under 21 years of age.
Older applicants usually have had other ways to establish
credit. An applicant would be limited if they were too young
to establish credit, did not have a family with good credit,
and were unable to find someone else to sign. However, the
federal loan would still be available to those individuals
and had been increased.
9:30:59 AM
Senator Ellis commented that students he had spoken to
thought the loan would make life more difficult, especially
for students with low-income families. He asked that the
sponsor be informed of the Alaska Achievers Incentive
Program [SB 33], legislation designed to make college more
affordable for Alaskan students. He acknowledged that loans
outlined by HB 109 may be necessary, but noted that Alaska
ranks poorly regarding college affordability. Graduation
rates are not great and the state lacks a strong needs-based
financial aid system. Ms. Koester replied that she would
give the information to the sponsor and added that Senator
Seaton was looking at legislation to help students.
Senator Thomas stated concerns about credit for older
students, since people tended to go back to school when the
economy is struggling.
9:33:38 AM
DIANE BARRANS, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON
POSTSECONDARY EDUCATION COMMISSION, DEPARTMENT OF EDUCATION
AND EARLY DEVELOPMENT, and EXECUTIVE OFFICER, ALASKA STUDENT
LOAN CORPORATION, echoed the urgency of the situation.
Co-Chair Stedman queried other possible solutions that would
not exclude low-income families. Ms. Barrans replied that
the federal guaranteed education loan is available for low-
income families without credit. Parents can borrow on behalf
of students through the Stafford and Federal PLUS loan
programs, which have a very modest adverse credit review.
Federally guaranteed loan limits have been increased. An
independent student can borrow $9,500 in their freshman
year. The amount increases up to graduate level, when over
$20,000 per year can be borrowed.
Ms. Barrans added that another way to serve low-income
families would be for Alaska to create a state guaranteed
loan program. Following the federal model, Alaska would
guarantee repayment of any loan the borrower did not repay.
She stated a proposal could be made to the legislature if
there was interest.
9:36:38 AM
Senator Ellis asked how interest rates were determined. He
reported that students he had spoken to had many questions
about interest rates compared to other financing mechanisms.
He also wondered if there should be a self-correcting
mechanism imbedded in the [FEL] program.
Ms. Barrans explained that historically the rate was set by
statute at 5 percent. The current rate is tied to the state
alternative loan rate, which is capped at 8.25 percent. The
rate is set by factoring in the cost of funds and of
administering the program. The base rate is the federal rate
plus 50 basis points or 0.5 percent. Currently the interest
rate is 7.3 percent, the lowest rate in the country for an
alternative loan. The only loan rate lower would be an
equity loan.
Senator Ellis asked if the Alaska Student Loan Corporation
could be available on various campuses to discuss financial
issues affecting students. Ms. Barrans replied that the
commission had met with students regarding the legislation.
She agreed that a forum would be helpful. She expressed
dissatisfaction with the change that was needed.
9:40:26 AM
Co-Chair Stedman asked what other states were facing
regarding student loans and how other states had responsed.
Ms. Barrans replied that every state is facing the
situation. In some states the non-profit entity stopped
making education loans. In other states, the state has
stepped in and purchased the bonds sold by the issuer at a
negotiated rate that was beneficial to the issuer. Some
states, such as New York, are creating a new alternative
loan program, a pre-funded guaranteed loan. She added that
in each case, good credit criteria are in place. States are
intervening to assist with the current lack of liquidity and
with the ability to finance things in the market, not to put
a program in place that is widely available. Alaska's
program, even with the modest credit criteria in place since
1998, is an anomaly in terms of how widely available the
loan is. She estimated that 13 to 15 other states have taken
some sort of action.
9:42:37 AM
Senator Thomas requested the default rate on the student
loans in Alaska. Ms. Barrans responded that the seasoned
rate after aging the loans into repayment for several years
is over of 11 percent.
Co-Chair Stedman asked if the default rate was changing. Ms.
Barrans answered that the default rate has vastly improved
since the first decade of lending; one of the things that
prompted the 1998 credit review was default rates
approaching 30 percent. The commission hoped that adding
credit criteria would be sufficient. She opined that the
program would have gone forward if it had not been for the
meltdown in the credit markets and the change in posture by
rating agencies and investors with respect to the underlying
loans. However, the effect of the economy in the past year
and a half has permanently changed the ways rating agencies,
banks, and investors view underlying assets for loans.
Senator Olson commended the commission for bringing the
default rate down and asked what kind of losses the state
has had to cover.
9:45:02 AM
Ms. Barrans responded that the commission continues to
aggressively collect on default loans. She noted that
students at smaller debt levels usually default, especially
students who did not complete school. The average default
debt is less than $20,000.
CHARLENE MORRISON, CHIEF FINANCIAL OFFICER, ALASKA
COMMISSION ON POSTSECONDARY EDUCATION, DEPARTMENT OF
EDUCATION AND EARLY DEVELOPMENT, reported that the dollar
value of the commission's loans in default is $46 million in
principal.
Co-Chair Stedman asked for the definition of default status.
Ms. Morrison replied that a loan is in default when a
borrower is over 270 days past due on their current
repayment plan.
Co-Chair Stedman wondered if the statistics included anyone
who was outside their original repayment schedule, which
would include restructuring.
9:48:28 AM
Senator Olson asked how much borrowers were in default. Ms.
Morrison answered approximately $40 million as of 12/31/2008
[Note: Ms. Morrison changed the default number to $82
million at the end of the meeting].
Senator Olson asked how many borrowers in default have been
written off completely. Ms. Morrison replied that the
commission writes off loans after a student has been
delinquent for seven years. Prior to that time the
collection process can be used. The total principal plus
interest to be written off is approximately $5 million.
Senator Olson queried the forecasted default rate for
students who will be impacted because of the proposed credit
rating. Ms. Morrison replied that they expect the rate to be
less because of more co-signers. She could not give a dollar
amount.
Senator Thomas wondered how many individuals are represented
in the $40 million default total and asked the process of
collections. Ms. Morrison answered that she did not know how
many individual borrowers were in default, but said she
would get the information.
9:51:29 AM
Ms. Barrans explained the collection process, which begins
at 15 days past due and includes reminder notices on monthly
statements, phone calls, and counseling borrowers on ways to
avoid being delinquent or in default. Once a borrower is 180
or more days past due, there are collection levers that can
be used, including garnishment of wages or the permanent
fund dividend and liens on Alaskan property. After a year,
the commission will transfer the borrower to a collection
agency.
Co-Chair Stedman opened public testimony.
LEE DONNER, MANAGING DIRECTOR, FIRST SOUTHWEST COMPANY and
ADVISOR, ALASKA STUDENT LOAN CORPORATION (testified via
teleconference), explained that the market for securities,
the proceeds of which are used for alternative student
loans, has changed dramatically in the last year and a half.
A recent review of current market conditions and the status
of alternative loan programs around the country revealed
that there have only been three tax-exempt fixed-rate
alternative loan financings executed by state agencies, or
tax exempt issuers in the category of the student loan
corporation. Most of the programs require a FICO (or credit
quality) score for the borrower or co-signer of 670 to 720.
The current standard for up-front fees to offset losses
ranges from 4 to 7 percent of the face amount of the loan,
depending on whether there is a co-signer. For alternative
loan programs with very good default history and a
significant duration of good history, the rate ranges from
7.5 to 8 percent. For programs with bad default history or
new start-up programs, the rate ranges from 8 to over 9
percent.
Mr. Donner referred to a recent comparable example in the
market place: Sallie Mae, or the Student Loan Corporation,
did a $1.5 billion financing. To obtain an investment-grade
rating, Sallie Mae had to over-collateralize the transaction
by almost 50 percent. The average FICO score for the loans
involved was 726 and the interest rate on the debt they sold
ranged over three months from 425 to 750 basis points
because it was for alternative loans.
Mr. Donner stated that the provisions in HB 109 were prudent
and necessary, and as restrained as realistically possible
for refinancing in current market conditions.
9:56:58 AM
Mr. Donner strongly recommended passage of the bill as
advisor to the state and to a number of other student loan
entities struggling with the same market conditions.
Ms. Morrison corrected her earlier total of loans in default
from $40 million to $82 million.
9:58:15 AM RECESSED
3:09:28 PM RECONVENED
ADJOURNMENT
The meeting was adjourned at 3:09 PM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Amendment 1 Version E 2.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| articles and back-up.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| Letters of Support SB57.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| SB57-EED-ESS-amendment_3-31-09Fiscal NoteDraft.pdf |
SFIN 4/1/2009 9:00:00 AM |
SB 57 |
| HB172 DOR GeFONSI.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 172 |
| Briefing on ASLC Liquidity Issues and Proposed Paln of Action.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| Chart from ACPE website explaining loans that are affected by Hb 109.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |
| HB 109 sponsor statment.pdf |
SFIN 4/1/2009 9:00:00 AM |
HB 109 |