Legislature(1995 - 1996)

05/04/1996 10:45 AM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                    SENATE FINANCE COMMITTEE                                   
                           May 4, 1996                                         
                           10:45 a.m.                                          
  SFC-96, #109, Sides 1 (000-500)                                              
  CALL TO ORDER                                                                
  Senator Rick  Halford, Co-chairman, convened the  meeting at                 
  approximately 10:45 a.m.                                                     
  In  addition  to  Co-chairmen Halford  and  Frank,  Senators                 
  Phillips, Rieger, Sharp, and Zharoff  were present.  Senator                 
  Donley arrived as the meeting was in progress.                               
  ALSO  ATTENDING:    Laurie  Otto, Deputy  Attorney  General,                 
  Criminal Division, Dept.  of Law; Ed Crane,  Chief Executive                 
  Officer, Commercial  Fishing and  Agriculture Bank;  Juanita                 
  Hensley,  Chief, Driver  Services, Dept.  of Public  Safety;                 
  Diane  Shriner,  Division of  Elections,  Office of  the Lt.                 
  Governor; Julie  Tauriainen,  aide  to  Representative  Gary                 
  Davis;  Patti Swenson, aide to Representative Bunde; Richard                 
  Vitale,  aide  to  Representative  Parnell;   and  aides  to                 
  committee members and other members of the legislature.                      
  SUMMARY INFORMATION                                                          
            Continued  discussion  was  had  with  Ed   Crane.                 
            Amendments  4,   5,  and  6  were  discussed,  and                 
            Amendment  No. 6 was adopted.   SCS CSHB 284 (Fin)                 
            was  then  REPORTED  OUT of  committee  with  zero                 
            fiscal notes from the Dept.  of Fish and Game  and                 
            Dept. of Revenue (Treasury).                                       
  CS FOR HOUSE BILL NO.  284(FIN)                                              
       An Act relating  to the  Alaska Commercial Fishing  and                 
       Agriculture Bank.                                                       
  Co-chairman Halford directed that CSHB  284 (Fin) be brought                 
  on for discussion.  Senator Zharoff noted that the committee                 
  had  previously  worked  through  three  amendments and  was                 
  considering Amendment No. 4, which would add new sections to                 
  Section 20  (Limitations on the  Pledge of Permits)  at Page                 
  11,  line  15.    The  proposed  additions  were  originally                 
  included in  the bill  but removed  in the  course of  House                 
  consideration.    The  Senator  spoke  to need  for  greater                 
  flexibility allowing commercial fishermen holding permits to                 
  collateralize loans for other purposes.  Proposed subsection                 
  (5) would  allow the borrower to collateralize the permit if                 
  a majority of his or her income is derived from fishing.   A                 
  medical emergency was used as an example of  need to use the                 
  permit as collateral for something unrelated to fishing.                     
  Subsection (6) would  allow a fisherman to borrow moneys for                 
  enhancement of productivity or diversification of commercial                 
  fishing activities.   Senator Zharoff  spoke to benefits  of                 
  greater  variety  in   seafood  industries  which   increase                 
  marketing   and   provide   possibilities  for   value-added                 
  Subsection (7) relates  to payment of obligations.   Senator                 
  Zharoff  used  taxes,  divorce,  child  support,  and  other                 
  litigation as examples of need for flexibility.                              
  The Senator then MOVED for adoption of Amendment No. 4.  Co-                 
  chairman Frank OBJECTED.   He voiced his  understanding that                 
  the purpose  of  CFAB (Commercial  Fishing  and  Agriculture                 
  Bank)  is to  finance  fishing/agricultural  endeavors.   He                 
  acknowledged situations in which fishermen might need "other                 
  financing for other purposes" but  expressed his belief that                 
  the focus of CFAB  should be limited to the  industry rather                 
  than serving other  credit needs of fishermen.  He suggested                 
  that  expanding  the   focus  might,  over  time,   lead  to                 
  degradation of the quality of the loan portfolio.                            
  Co-chairman Halford asked how much is presently  outstanding                 
  and secured by permits.   ED CRANE, Chief Executive Officer,                 
  Commercial  Fishing and  Agriculture Bank, estimated  $25 to                 
  $26 million (approximately 80 percent of outstanding loans).                 
  He clarified that a portion of the loans are secured by both                 
  permits  and vessel mortgages.   A much larger percentage is                 
  secured by permits only.  Some loans are secured by vessels,                 
  only, or other collateral.                                                   
  Co-chairman  Halford explained  that his concern  stems from                 
  the fact  that if  the federal  government should  take over                 
  fishery management and restrictions on entry do not apply to                 
  rural residents, there would be  major adjustments in permit                 
  Senator Rieger noted that the permit  is the major asset for                 
  some fishermen.  That is what is available to borrow against                 
  much as  other individuals borrow  against their homes.   He                 
  suggested that the quality of the loan (rather than what the                 
  proceeds will be used for) should be the focus.                              
  In response to  a question from Senator Phillips,  Mr. Crane                 
  advised that permits  in most fisheries have  market values.                 
  Under existing  statutes, CFAB  has the  right to  acquire a                 
  permit  when a loan  defaults and to  sell the permit.   The                 
  bank  is mandated  to make considerable  effort to  sell the                 
  permit to a  resident.  A permit is much like any other form                 
  of collateral.  Mr. Crane  acknowledged that certain permits                 
  in  certain  fisheries,  at the  present  time,  are not  as                 
  attractive as they were two or three years ago.                              
  Mr. Crane cited as particularly troubling the extent and the                 
  manner in which the Internal  Revenue Services has attempted                 
  to apply a "scorched earth" policy in  rural Alaska.  It has                 
  the  opportunity  and  right to  seize  permits  quickly and                 
  easily.    The  state  has  spent  considerable  amounts  in                 
  attempts to  resist that  and bring  rationality to  the IRS                 
  process.  The IRS  can levy a tax lien, seize  a permit, and                 
  attempt to sell the permit within 30 days.  However, the IRS                 
  has not yet  acquired the  legal right to  sell the  permit.                 
  That issue is now under litigation.                                          
  When a borrower from CFAB defaults, the bank must go through                 
  a  considerable process  in demonstrating  default  that has                 
  existed over a considerable period of time.  The foreclosure                 
  process then takes a  minimum of 120 days.   After acquiring                 
  the permit, there is  typically a minimum of 60  days before                 
  it can be sold.                                                              
  In the course  of further discussion with  Senator Phillips,                 
  Mr. Crane advised that  the bank has suffered losses  on not                 
  only permit loans  but other kinds  of loans where the  bank                 
  foreclosed and subsequently disposed of  the collateral.  He                 
  acknowledged that if,  at the  time of sale,  the permit  is                 
  equal to or more than what  is owed, the bank is essentially                 
  reimbursed for  what was  loaned.   If the  permit value  at                 
  foreclosure  and  sale  is  more  than  the  amount  of  the                 
  remaining loan, the excess goes back to the borrower.  If it                 
  is worth  less, the bank has  the legal right  to pursue the                 
  borrower for  the deficiency.   The  foregoing is  generally                 
  true of all loans and not  unique to the proposed paragraphs                 
  in Amendment No. 4.                                                          
  Co-chairman Halford  said that  exposure rests  in the  fact                 
  that  (to close the fishery or preclude extension of federal                 
  authority over the  fishery) a state could change  the value                 
  of the permit  and might  diminish it to  nothing.   Foreign                 
  action in the  Japanese market  to reduce the  value of  the                 
  product  by a substantial  amount also impacts  the value of                 
  the  permit.   The  bank  portfolio  is thus  exposed  to an                 
  extensive  schedule of  permit values  that "go up  and down                 
  with the market."  The bank traditionally loans a percentage                 
  of a value  which is based  on a state-created entity.   The                 
  combined total of permit values is  "over $1 billion."  That                 
  is totally  paper-created by  the state.   The state  could,                 
  theoretically,  repeal  the  entire system,  and  that value                 
  would disappear.                                                             
  Mr.  Crane remarked  that  CFAB  was  created to  serve  the                 
  financial needs  of resident fishermen.   Subsections within                 
  Amendment No 4  reflect means by which the bank  can be more                 
  useful to fishermen.  He acknowledged  that CFAB is "subject                 
  to severe  damage by systemic  failure."  However,  the bank                 
  has  been built to a sufficiently strong capital position to                 
  withstand two or three "bad" fishery years.                                  
  Mr. Crane  concurred in  prior comments  by Senator  Rieger.                 
  For many fishermen, a  limited entry permit is a  major part                 
  of both the operational and family financial base.  The bank                 
  also finances agriculture.  A  typical family farmer can use                 
  any asset he owns to meet any family need.  That is  true of                 
  most types of businesses.                                                    
  Mr. Crane next testified to House action on the bill.                        
  Senator Zharoff  noted an  attempt to  repeal limited  entry                 
  soon after it  was enacted.  That attempt failed.   Both the                 
  state and  federal government  appear to  be  moving in  the                 
  opposite direction with recent limited  entry in halibut and                 
  sable fish industries.  The present limited entry system, in                 
  terms  of  participants,  would likely  carry  over  under a                 
  federal take over.   Co-chairman  Halford voiced his  belief                 
  that the value  of permits would be substantially diluted by                 
  rural residents who  could fish (under other  provisions, in                 
  commercial  quantities)  under   current  federal  case  law                 
  relating to customary and traditional trade.                                 
  Senator Zharoff voiced his understanding that CFAB would not                 
  be  loaning  the  full  value  of  the permit.    Mr.  Crane                 
  explained that loans are based on the projected cash flow of                 
  the  fishing  operation  as well  as  the  general financial                 
  condition of the fisherman.  It is not uncommon for the bank                 
  to lend a borrower  100 percent of the  purchase price of  a                 
  permit.  On  the other  hand, there are  many applicants  to                 
  whom the bank  will not lend at  all.  Mr. Crane  voiced his                 
  belief that what are  generally viewed as permit values  are                 
  misleading and distortions.   What  has happened to  permits                 
  has done economic damage to both  individuals and the state.                 
  The legislature has always had the ability to influence that                 
  in a favorable  way.  The system  has allowed permits to  be                 
  viewed as investment vehicles rather as tickets to fish.  It                 
  is totally inappropriate for CFAB or  any other lender to be                 
  basing loans on published values.                                            
  Co-chairman Halford asked if any piece of proposed Amendment                 
  No.  4  would  allow  only  for  CFAB loans  in  defense  of                 
  immediate IRS attack.   He voiced his belief  that fishermen                 
  were  being  treated  differently  than  other  classes   of                 
  businesses and borrowers.  To extend  the list of things for                 
  which they may borrow (from an  entity that is not available                 
  to anyone else)  poses problems.   However, use  of CFAB  to                 
  recapture  permits for  Alaskans  is  supportable.   Senator                 
  Zharoff  advised  that subsection  (7)  would apply  to that                 
  purpose.      Co-chairman   Halford    inquired   concerning                 
  alternative wording  so that  the  subparagraph would  cover                 
  only IRS problems.  Mr. Crane  asked that the committee also                 
  consider covering  divorce situations.   Co-chairman Halford                 
  questioned why a fisherman should have access to CFAB to pay                 
  off an estranged  spouse when  other Alaska business  people                 
  and residents do not enjoy that  access.  The public purpose                 
  here is not to treat  classes of Alaskans differently  based                 
  on  occupation  and  their  financial  options but  to  keep                 
  permits in Alaska.   Mr.  Crane reiterated that  individuals                 
  and businessmen can  access local banks and  obtain loans on                 
  personal or business collateral when financial  needs arise.                 
  Fishermen do not have access to local banks for permit-based                 
  loans.    Fishermen  commit a  substantial  amount  of their                 
  financial base to  acquisition of a  permit.  They often  do                 
  not have the real estate or personal property accumulated by                 
  others.  CFAB  was founded to meet needs that cannot or will                 
  not be met by other institutions.                                            
  Co-chairman  Halford reiterated  that  he  would support  an                 
  amendment that deals  only with loss  of the permit to  IRS.                 
  Further discussion  followed regarding IRS attempts  to take                 
  permits.    Co-chairman  Halford noted  that  the  state has                 
  always held  that  permits  are not  property  and  are  not                 
  Senator Zharoff called for a vote  on Amendment No. 4.   The                 
  motion failed on a hand vote of less than four votes.                        
  Senator  Zharoff then MOVED for adoption  of Amendment No. 5                 
  which he explained  would consist  of subparagraph (7)  from                 
  failed Amendment No.  4.  Discussion followed  regarding the                 
  process used by  the IRS when  attempting to take a  limited                 
  entry   permit.   Senator   Zharoff  subsequently   withdrew                 
  Amendment No. 5.                                                             
  Co-chairman Halford advised that he  would have no objection                 
  to a reworded subsection (7) that states:                                    
       (7) the payment of obligations whose status places                      
       the permit of  a borrower in  jeopardy of sale  on                      
       execution of judgment.                                                  
  That would satisfy the public purpose of keeping permits  in                 
  Alaska and make loans upon permits more tolerable.                           
  Senator Randy Phillips requested a brief recess.                             
                       RECESS - 11:20 A.M.                                     
                     RECONVENE - 11:30 A.M.                                    
  Upon  reconvening, Co-chairman  Halford  restated the  above                 
  rewording of subsection (7) and advised that it would  cover                 
  any  execution  or   judgment.     He  then  noted   current                 
  limitations on execution of judgment in civil matters.  That                 
  is part of the dispute with the IRS.   Senator Zharoff MOVED                 
  for adoption of the foregoing rewording of subsection (7) as                 
  Amendment No. 6.  No objection having been raised, Amendment                 
  No. 6 was ADOPTED.                                                           
  Senator Sharp noted  that subsection (6) appears  to protect                 
  the value  of the  license and  asked if  discussion of  the                 
  proposed change had occurred.   (Review of language at  Page                 
  11 of  CSHB 284  (Fin) indicated  that subsection  (3) would                 
  cover the same type of costs.)                                               
  Senator Zharoff MOVED for passage of SCS CSHB 284 (Fin) with                 
  individual  recommendations.    No   objection  having  been                 
  raised, SCS CSHB 285 (Fin)was REPORTED OUT of committee with                 
  zero fiscal notes  from the Dept. of Fish and Game and Dept.                 
  of  Revenue  (Treasury).   Co-chairman  Halford  and Senator                 
  Zharoff  signed  the  committee  report  with  a  "do  pass"                 
  recommendation.  Senators Phillips, Rieger, and Sharp signed                 
  "no recommendation."                                                         
  The meeting  was recessed  for floor  session attendance  at                 
  approximately 11:45 a.m.                                                     

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