Legislature(1995 - 1996)
05/04/1996 10:45 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
May 4, 1996
10:45 a.m.
TAPES
SFC-96, #109, Sides 1 (000-500)
CALL TO ORDER
Senator Rick Halford, Co-chairman, convened the meeting at
approximately 10:45 a.m.
PRESENT
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
HB 284 - ALASKA COMMERCIAL FISHING AND AGRICULTURE BANK
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
resources.
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
values.
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
transferrable.
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."
ADJOURNMENT
The meeting was recessed for floor session attendance at
approximately 11:45 a.m.
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