Legislature(1995 - 1996)

03/08/1995 09:00 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    SENATE FINANCE COMMITTEE                                   
                          March 8, 1995                                        
                            9:00 a.m.                                          
  SFC-95, #10, Side 1 (000-575)                                                
  SFC-95, #10, Side 2 (575-800)                                                
  CALL TO ORDER                                                                
  Senator  Rick Halford,  Co-chair,  convened  the meeting  at                 
  approximately 9:00 a.m.                                                      
  In addition to Co-chair  Halford, Senators Donley, Phillips,                 
  Rieger,  Sharp,  and Zharoff  were  in attendance.   Senator                 
  Frank joined the committee at approximately 9:45 a.m.                        
  Also Attending:                                                              
  Senator   Taylor,   Joe   McCormick,   Executive   Director,                 
  Postsecondary  Education  Committee, Jim  Baldwin, Assistant                 
  Attorney  General,  Department  of  Law,  and  Mike  Greany,                 
  Director, Legislative Finance Division.                                      
  SUMMARY INFORMATION                                                          
       SB  59 REGULATIONS FOR STUDENT LOANS                                    
       HB 135 STUDENT LOANS                                                    
              Discussion was had with Joe McCormick, Executive                 
              Director,  Alaska  Committee   on  Postsecondary                 
  Education             Committee.  HB 135 was REPORTED OUT of                 
  committee with               a "do pass" recommendation  and                 
  zero fiscal  note from                    the Department  of                 
       SB  21 FINES FOR COMMERCIAL FISHING VIOLATIONS                          
              SB 21 REPORTED OUT of committee with a "do pass"                 
                  recommendation and zero fiscal note from the                 
  Dept. of              Law, Alaska Court System, and Dept. of                 
  Public Safety.                                                               
       SB  39 MEMORIAL SCHOLARSHIP LOANS                                       
              Discussion   was   had   with  Senator   Taylor.                 
              ADOPTED to  CS 39.   SB 36 to  roll into SB  39.                 
              Draft was requested, to be taken up at the next                  
       SJR 14 CONFIRMATION OF MEMBERS OF PUBLIC CORP                           
              Discussion was  had with Jim  Baldwin, Assistant                 
              General,  Department  of  Law.    The  Bill  was                 
  referred to                                                                  
              the Judiciary Committee.                                         
       SENATE BILL NO. 59                                                      
              "An Act authorizing the Alaska Commission on                     
                   Postsecondary     Education    to     adopt                 
  regulations necessary                to determine and set an                 
  interest rate applicable to a               student loan for                 
  which money is disbursed on  or after                July 1,                 
  1995, and regulations  necessary to implement                                
  certain loan  default sanctions and consolidation of                         
       loan provisions  beginning July 1, 1995;  and providing                 
              for an effective date."                                          
       HOUSE BILL NO. 135                                                      
              "An Act relating to student loans; and providing                 
  for             an effective date."                                          
  Co-chair Halford announced that SB  59 is the companion bill                 
  to HB 135 which passed out of  the House.  Joe McCormick was                 
  invited to speak to  the committee.  Mr. McCormick  spoke to                 
  HB 135.   He  stated it is  a technical  bill that  requires                 
  transition language be enacted by the legislature before the                 
  commission can  pass regulations regarding  legislation that                 
  passed this  legislative body  last year  in HB  506.   Most                 
  specifically, he  said, the transition language  would allow                 
  the commission to pass regulation  setting the interest rate                 
  on student loans beginning July 1, 1995.  If the regulations                 
  are not in  place legally, funds  cannot be disbursed  after                 
  July 1.                                                                      
  Senator Rieger stated he has  a reservation on the servicing                 
  of the student loans.  He said that this bill would  make it                 
  more possible to set an interest  rate which covers not only                 
  the  interest  cost  of the  borrowed  funds,  but  also the                 
  servicing  costs.   His concern  comes from  a Pete  Marwick                 
  Study  that  the   commission  on  postsecondary   education                 
  commissioned.  Discussion followed regarding out-sourcing.                   
  Mr.   McCormick  responded   that  the   adoption   of  this                 
  legislation has  nothing  to do  with  that  recommendation.                 
  This legislation, if adopted, would  allow the commission to                 
  set the interest rate on the loans that will be disbursed on                 
  July 1  and thereafter.   Neglecting  to pass  HB 135  would                 
  impact 13,000  Alaskan students  for an  approximate sum  of                 
  disbursement   of   $50   million.     The   issue   of  the                 
  recommendation to the Pete Marwick Study says that  while it                 
  is  the most attractive  offer from a  cost benefit analysis                 
  standpoint, it is  probably not a  practical offer.  With  a                 
  very small  loan program  located in  a remote  part of  the                 
  United States,  and the  likelihood of  obtaining good  out-                 
  sourcing service  at a  reasonable  cost is  unlikely.   The                 
  recommendation  is  to  fix  the   problem  in-house.    Mr.                 
  McCormick reiterated that this is another issue, but that he                 
  would be happy to discuss it further.                                        
  Senator Rieger testified  that the bill enables  adoption of                 
  regulations to implement 1443120F, which includes charging a                 
  fee which is sufficient to cover  the cost of servicing. Mr.                 
  McCormick responded  that  in  his  professional  experience                 
  there is a loan  program that has historically never  been a                 
  part  of,  or close  to, the  way  the general  student loan                 
  programs in the lower 48 operate. In order to out-source the                 
  servicing  of   loans,  there   would  have   to  be   major                 
  modifications  in  order  to  service  Alaska  student loans                 
  according to Alaska law.  The problem is further complicated                 
  by the  fact that  it is  a small  loan program.   Servicers                 
  would be asked  to serve a  portfolio of approximately  $500                 
  million.  Most of the  out-sourcing companies, that would be                 
  considered and  who  are experienced  in  servicing  student                 
  loans,  serve federal  student  loans  which have  different                 
  requirements.  The  servicers  maintain  portfolios  in  the                 
  billions  of  dollars. The  Pete  Marwick reports  that this                 
  would be a major  problem to finding an  out-sourcing entity                 
  that could perform the service on a cost-benefit basis.  Mr.                 
  McCormick  supports the  opportunity  to  build  a  software                 
  system that the  committee thought it  was getting in  1991.                 
  He stated  that it didn't  happen because it  was contracted                 
  with a company in Anchorage  Alaska, that had no  experience                 
  in  the  student  loan  industry.    The  company  purchased                 
  software  that was  not related  to the proper  servicing of                 
  student loans.  To  make matters worse, six months  into the                 
  development of that  project, the company  went broke.   Mr.                 
  McCormick stated that when he started with the commission in                 
  December of  1993, there  was not even  one data  processing                 
  employee on the staff of the commission.  There are now four                 
  data  processors,  which he  recruited  from a  student loan                 
  servicing operation in Denver, Colorado.  The commission now                 
  has  the  infrastructure, experience  and  expertise  on the                 
  payroll   in-house    to   implement   the    Pete   Marwick                 
  recommendation successfully.   The commission  projected for                 
  the LB&A committee in December that  upon completion of that                 
  installation, within 5 years, the staff would be reduced  by                 
  9.  Total cost would be paid for in lower cost of servicing.                 
  Senator Donley questioned if local people are being trained.                 
  Mr.  McCormick stated there  are no  open positions  at this                 
  time.   There  is existing staff  who will  receive training                 
  within the commission to support the new system.                             
  Senator Rieger asked  what the  interest rate  on the  loans                 
  will be  when the regulations  are adopted?   Mr.  McCormick                 
  responded  that the  interest rate  based  on the  1994 bond                 
  issue which was 5.83%,  will be in the range of  8 to 8-1/2%                 
  interest rate.  The administrative portion of that amount is                 
  2.5%.   He  stated that  there is  legislation pending  that                 
  would help  defray losses  to the  fund, especially  default                 
  costs. Senator Rieger asked  when the last bond was  issued?                 
  Mr. McCormick stated it was in July  1994.  He said it was a                 
  $50 million bond issue fully insured, based on changes being                 
  made in servicing loans.  The  1993 issue of $43 million was                 
  uninsured  because of the  lack of confidence  that New York                 
  had  in  the ability  of  the commission  to  service loans.                 
  Based on the management plan which includes the upgrading of                 
  the  servicing  system, they  issued  the $50  million fully                 
  insured.  If  the  loan  defaults,  it  is  not  covered  by                 
  insurance  and  is a  loss.    The State  of  Alaska  is not                 
  responsible for any of these loans, the collateral for these                 
  bonds are the assets of the fund itself.                                     
  Co-chair  Halford  called for  additional  testimony on  the                 
  bill.   None was  forthcoming.   Senator Phillips MOVED  for                 
  passage  of  HB  135 with  individual  recommendations.   No                 
  objection  having been raised,  HB 135  was REPORTED  OUT of                 
  committee  with a  zero fiscal note  from the  Department of                 
  Education. Co-chairs  Halford and Frank  along with Senators                 
  Phillips and  Sharp signed the  committee report with  a "do                 
  pass" recommendation.   Senators Rieger, Donley  and Zharoff                 
  signed "no recommendation."                                                  
       SENATE BILL NO. 21                                                      
       "An  Act  relating  to   penalties  for  violations  of                 
  commercial        fishing laws."                                             
  Co-chair Halford remarked that SB 21  is a lesser version of                 
  a bill that passed  both houses in the last  legislature and                 
  was not transmitted back  from the house.  It  increases the                 
  penalty for  commercial fishing violations  after the second                 
  violation.    The  bill  that  passed  last  year  was  more                 
  stringent than this.  It has a zero fiscal note.                             
  Senator  Zharoff stated  the  Finance  Committee  Report  is                 
  better  than  the  original  bill, but  he  still  had  some                 
  concerns.  Co-chair  Halford  assured  him  that  this  bill                 
  addresses  the maximum kind of violation.   When the maximum                 
  kind  of violation can  gain $20-$30,000, a  maximum fine of                 
  $6,000 is  not a  very significant  deterrent. This bill  is                 
  aimed for closed period, closed waters violations.                           
  Senator Donley  reiterated how difficult it is  to get close                 
  to  the maximum  in  the  fine  situations  because  of  the                 
  standard set by the court, so  it almost never happens.  Co-                 
  chair  Halford  responded by  saying  that this  bill  is an                 
  improvement over existing  law.   At some point  there is  a                 
  problem because these  are violations not misdemeanors.   He                 
  pointed out  there is  a standard  at which  intent must  be                 
  proven when the penalty gets beyond a certain level.                         
  Co-chair  Halford  called for  additional  testimony on  the                 
  bill.    None  was forthcoming.    Senator  Sharp  MOVED for                 
  passage of SB  21 (RES) with individual  recommendations and                 
  three zero fiscal notes.   No objection having  been raised,                 
  SB 21 (RES)  was REPORTED OUT  of committee with three  zero                 
  fiscal notes from the Dept. of Law, Alaska Court System, and                 
  Public  Safety.  Co-chairs  Halford  and  Frank  along  with                 
  Senators  Rieger,  Phillips, Donley,  and  Sharp signed  the                 
  committee report with a "do  pass".  Senator Zharoff  signed                 
  "no recommendation".                                                         
       SENATE BILL NO. 39                                                      
       "An Act relating to memorial scholarship loans."                        
  Co-chair Halford asked Senator Taylor to join the committee.                 
  Senator Taylor expressed his appreciation in addressing this                 
  bill.  He stated that the  bill passed the House unanimously                 
  last  year,  it  carries zero  fiscal  notes.    The primary                 
  purpose of the bill is to allow a slight modification in the                 
  law which would permit the memorial scholarship, named after                 
  Trooper  Michael  Murphy,   to  be   utilized  in   two-year                 
  certification programs instead of just four-year programs.                   
  Co-chair Halford asked Senator  Zharoff for an understanding                 
  SB  36.  Senator  Zharoff stated that SB  36 would allow for                 
  50% forgiveness and cap the interest rate.  Co-chair Halford                 
  asked  the commission  to  join the  table.   Mr.  McCormick                 
  responded that the commission recommended in SB 36 to change                 
  the law  insofar  as  the  manner in  which  forgiveness  is                 
  calculated from 1/5th  loan indebtedness and ask that  it be                 
  changed to 1/5th principal on the loan.  When cancelling the                 
  principal and  interest, it  is a  more complex  calculation                 
  administratively.    The cancelling  to  the principal  only                 
  makes it much easier to calculate. The conflict arises in SB
  39 as there is not an  amendment to change this feature. The                 
  term "total loan indebtedness" remains in SB 39.                             
  However, SB 36 contains a new statement to "principal only".                 
  He recommended it be changed to read the same in both bills.                 
  Co-chair  Halford asked how many  loans exist in the special                 
  scholarship programs?   Mr. McCormick  stated not many,  the                 
  numbers  are  small  and  a half-time  clerk  is  devoted to                 
  administering the  loan programs. Co-chair  Halford asked if                 
  the change of law costs the  borrower more money in payback?                 
  Mr. McCormick  stated it would  represent a payback  of more                 
  money.   The result  being in  the hundreds  of dollars  not                 
  Co-chair Frank joined the committee.                                         
  Co-chair Halford asked the will  of the committee.   Senator                 
  Phillips MOVED to  amend page 2  line 13, changing the  word                 
  "indebtedness" to  "principal."  No  objection  having  been                 
  raised, the Amendment was ADOPTED.                                           
  After some  discussion regarding SB  36 and SB  39, Co-chair                 
  Halford indicated that  what was needed was an  amendment to                 
  roll in the provisions of SB 36  (HES) into SB 39 with three                 
  zero fiscal notes.                                                           
  Senator Zharoff MOVED to adopt a CS for SB 39 which includes                 
  SB 36 with three zero fiscal notes. No objection being made,                 
  the CS for SB 39 is ADOPTED and a Work Draft will before the                 
  committee tomorrow.                                                          
       SENATE JOINT RESOLUTION NO. 14                                          
       Proposing an amendment to the Constitution of the State                 
  of       Alaska relating to certain public corporations.                     
  Co-chair  Halford stated  that  SJR 14  did  not go  through                 
  Judiciary   Committee.     He  asked   Senator  Taylor   for                 
  information regarding SJR  14.   Senator Taylor stated  that                 
  the  bill  is  straight  forward  and  didn't  feel  it  was                 
  necessary to go to Judiciary.                                                
  Senator Phillips asked State Affairs and wanted to get it on                 
  the  record that it  didn't go through  Judiciary.  Co-chair                 
  Halford stated  that it could go to  Judiciary after Finance                 
  as long as the fiscal notes do not change.                                   
  Co-chair Halford asked  Jim Baldwin, Dept.  of Law, to  step                 
  forward.   Jim Baldwin stated  his concern.  In 1955-56  the                 
  framers  got  together  and  produced  a  spectacular  state                 
  constitution. It is considered the best in the nation if not                 
  in the  world, some  very fine  distinctions were  made.   A                 
  system was set  up of  checks and balances,  which was  very                 
  finely balanced.  One of the  checks on the governor's power                 
  of  appointment is  the  legislature's  ability  to  confirm                 
  certain appointments.   He  contends that  the framers  made                 
  some very specific decisions to make it a limited check on a                 
  broad power because  the governor should be  responsible for                 
  the management of the executive  branch of state government.                 
  Since the adoption of the constitution, there have been some                 
  very good amendments.  He would ask the committee to proceed                 
  very deliberately on a further amendment of the constitution                 
  in this area because  it does tip the balance in  a way that                 
  was not intended by the original framers.                                    
  Mr. Baldwin spoke about  the ambiguities.  He stated  that a                 
  public corporation that manages  state assets is  ambiguous.                 
  He would encourage Judiciary to look  at it with the thought                 
  in mind to fine tune the language.   He cited as an example,                 
  he heard  the amendment  being described  as one  that would                 
  apply to all public corporations.   He stated that he wasn't                 
  sure that  was the case because the  public corporations, as                 
  the court  has observed,  are of  varying  degrees of  under                 
  state control.  The enabling act of AHFC, says that it  is a                 
  public corporation with  a legal existence that  is separate                 
  and independent from the state.   If the language is applied                 
  literally,  then are the assets of AHFC really state assets,                 
  or are they  the assets  of a political  subdivision of  the                 
  Senator Rieger  asked what  is  the definition  of a  public                 
  corporation?    Mr.  Baldwin  stated  that there  isn't  one                 
  definitely.  Basically,  it  is  a  corporate body  that  is                 
  chartered by the state itself.   Private corporations have a                 
  code that specifies how to be chartered.  The state does not                 
  have articles  of incorporation  other than  state law  that                 
  creates it.   It's  a corporate  body established either  by                 
  law,  such  as  AHFC,  or  the  constitution,  such  as  the                 
  university.  Co-chair  Halford stated  that this is  exactly                 
  the definition that this  bill reaches.  He stated  that Mr.                 
  Baldwin's definition  of public  corporation is  just as  he                 
  described it, and it manages state assets.                                   
  Senator  Rieger asked if a board  could be set up without it                 
  being a  corporation to  manage a billion  dollars of  state                 
  assets?   He stated that  theoretically it would escape this                 
  constitutional provision.  Mr. Baldwin stated that it could.                 
  There are two different entities that can issue bonds within                 
  the state.  Public corporations issue revenue bonds.   State                 
  agencies issue  bonds for  example, international  airports.                 
  He stated that the  assets that belong to AHFC  for example,                 
  are  not  assets that  the  state  would want  to  have. Mr.                 
  Baldwin  stated  that  he  recommended  that  SJR  14 go  to                 
  Judiciary. Co-chair Halford asked that  the resolution go to                 
  the Judiciary Committee.   He felt it should be  returned in                 
  two weeks to the committee.                                                  
  The meeting was adjourned at approximately 10:25 a.m.                        

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