Legislature(2001 - 2002)

04/19/2001 01:37 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     ALASKA STATE LEGISLATURE                                                                                   
                 SENATE LABOR & COMMERCE COMMITTEE                                                                            
                          April 19, 2001                                                                                        
                             1:37 p.m.                                                                                          
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Randy Phillips, Chair                                                                                                   
Senator Alan Austerman                                                                                                          
Senator Loren  Leman                                                                                                            
Senator John Torgerson                                                                                                          
Senator Bettye Davis                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All Members  Present                                                                                                            
                                                                                                                              
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL  NO. 176                                                                                                            
"An Act relating to distributorships."                                                                                          
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE BILL  NO. 189                                                                                                            
"An Act relating to motor vehicles; and providing for an effective                                                              
date."                                                                                                                          
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
SENATE BILL  NO. 168                                                                                                            
"An Act relating to loans made by the commercial fishing loan                                                                   
program."                                                                                                                       
                                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
SB 176 - No previous action to record.                                                                                          
                                                                                                                                
SB 189 - No previous action to record.                                                                                          
                                                                                                                                
SB 168 - See Labor and Commerce minutes dated 4/12/01.                                                                          
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
Mr. John Haxby                                                                                                                  
Waukeshaw Alaska Corporation                                                                                                    
P.O. Box 111098                                                                                                                 
Anchorage AK  99501                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Ms. Deborah Luper                                                                                                               
Eagle River AK                                                                                                                  
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Mr. Ronald Young, President                                                                                                     
Young's Gear,  Inc.                                                                                                             
1711 Van Horn Rd.                                                                                                               
Fairbanks AK  99701                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Ms. Janeece Higgins, General Manager                                                                                            
Alaska Rubber Supply                                                                                                            
587 Old Seward Hwy.                                                                                                             
Anchorage AK  99518                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Mr. Kurt Winkler, Owner                                                                                                         
Global Services                                                                                                                 
8000 King St.                                                                                                                   
Anchorage AK  99518                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Mr. Don Dunnavant, Owner                                                                                                        
Polar Supply Co.                                                                                                                
300 E 54th Ave.                                                                                                                 
Anchorage AK  99518                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Mr. Chuck Vanormer                                                                                                              
3801 Barbara Dr.                                                                                                                
Anchorage AK  99517                                                                                                             
POSITION STATEMENT:  Supported SB  176.                                                                                       
                                                                                                                                
Mr. Ed Sniffen                                                                                                                  
Department of Law                                                                                                               
1031 4th Ave., Ste. 200                                                                                                         
Anchorage AK  99501                                                                                                             
POSITION STATEMENT: Commented on SB 176 and SB 189.                                                                           
                                                                                                                                
Mr. Ralph Seekins                                                                                                               
Alaska Automobile  Dealers Association                                                                                          
No address provided                                                                                                             
POSITION STATEMENT: Supported SB 189                                                                                          
                                                                                                                                
Mr. Steve Conn, Executive Director                                                                                              
Alaska Public Interest Research Group (AKPIRG)                                                                                  
P.O. Box 101093                                                                                                                 
Anchorage AK  99510                                                                                                             
POSITION STATEMENT: Opposed SB 189.                                                                                           
                                                                                                                                
Ms. Susan Duncan, Executive Director                                                                                            
Alaska Automobile Dealers Association                                                                                           
129965 Lindsey  Dr.                                                                                                             
Anchorage AK  99517                                                                                                             
POSITION STATEMENT: Supported SB 189.                                                                                         
                                                                                                                                
Mr. Rick Morrison, Secretary                                                                                                    
National Automobile Dealers Association                                                                                         
Chairman, Anchorage Chamber of Commerce                                                                                         
935 Gambell                                                                                                                     
Anchorage AK  99501                                                                                                             
POSITION STATEMENT: Supported SB 189.                                                                                         
                                                                                                                                
Mr. Steve Conn, Executive Director                                                                                              
Alaska Public Interest Research Group                                                                                           
P.O. Box 101093                                                                                                                 
Anchorage AK  99510                                                                                                             
POSITION STATEMENT: Opposed SB 189.                                                                                           
                                                                                                                                
Mr. Stan Hearst                                                                                                                 
Daimler Chrysler Dealer                                                                                                         
Anchorage AK                                                                                                                    
POSITION STATEMENT: Commented on SB 189.                                                                                      
                                                                                                                                
Mr. Mark Mueller                                                                                                                
General Motors                                                                                                                  
Detroit MI                                                                                                                      
POSITION STATEMENT: Commented on SB 189.                                                                                      
                                                                                                                                
Ms. Mary Marshburn                                                                                                              
Department of Motor Vehicles                                                                                                    
Department of Public Safety                                                                                                     
PO Box 111200                                                                                                                   
Juneau, AK  99811-1200                                                                                                          
POSITION STATEMENT: Commented on SB 189.                                                                                      
                                                                                                                                
Mr. Ed Crane, CEO                                                                                                               
Commercial Fishing and Agriculture Bank                                                                                         
2550 Denali St. #1201                                                                                                           
Anchorage AK  99503                                                                                                             
POSITION STATEMENT: Supported SB 168.                                                                                         
                                                                                                                                
Mr. Greg Winegar, Director                                                                                                      
Division of Investments                                                                                                         
Department of Commerce and Economic Development                                                                                 
P.O. Box 34159                                                                                                                  
Juneau AK 99803                                                                                                                 
POSITION STATEMENT: Opposed SB 168.                                                                                           
                                                                                                                                
Mr. Jerry McCune, Executive Director                                                                                            
United Fishermen of Alaska                                                                                                      
Cordova District Fishermen United                                                                                               
211 4th Ste., #110                                                                                                              
Juneau AK 99801                                                                                                                 
POSITION STATEMENT: Opposed SB 168.                                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 01-20, SIDE A                                                                                                            
Number 001                                                                                                                      
                                                                                                                                
                      SB 176-DISTRIBUTORSHIPS                                                                               
                                                                                                                              
CHAIRMAN  RANDY   PHILLIPS  called  the  Senate  Labor   &  Commerce                                                          
Committee meeting  to order at 1:37 p.m. and announced  SB 176 to be                                                            
up for consideration.                                                                                                           
                                                                                                                                
MR. JOHN HAXBY,  Waukeshaw Alaska Corporation, said  his business is                                                            
about 30  years old. They  have been in  the machinery industry  all                                                            
that time  and have  a number  of relationships  with manufacturers                                                             
around the  country. They  support this bill,  he said, "Because  it                                                            
levels  the legal  playing  field between  major  manufacturers  and                                                            
small businesses in Alaska."                                                                                                    
                                                                                                                                
MR. HAXBY explained:                                                                                                            
                                                                                                                                
     Some  of the key salient  points that  are good for  small                                                                 
     businesses  are that it keeps  manufacturers from forcing                                                                  
     unwanted  or unordered inventory  on the small businesses                                                                  
     in Alaska.                                                                                                                 
                                                                                                                                
     The second  good point is that  it allows for the orderly                                                                  
     disposition   of   inventory  in   the  event   that   the                                                                 
     distributor agreement was somehow yanked or canceled.                                                                      
                                                                                                                                
     The  other thing it  allows for is in  the event there  is                                                                 
     the  death of  a distributor  or a  distributor principal                                                                  
     that there  is an orderly and  reasonable recovery of  the                                                                 
     inventory  that  might be  left over  as of  the date  the                                                                 
     agreement  is  yanked.  It becomes  especially  important                                                                  
     when,  in  the  case of  a  death,  the IRS  comes  in  to                                                                 
     evaluate  the value  of a  business and  they evaluate  it                                                                 
     based   upon  the  past  performance   of  that  business                                                                  
     assigning  a value in a corresponding  tax amount. In  the                                                                 
     event that the distributor  agreement is yanked, there may                                                                 
     not be  any value to the business  in the future, however                                                                  
     the tax obligation remains.                                                                                                
                                                                                                                                
MS. DEBORAH LUPER, Eagle River former small business owner,                                                                     
supported SB 176. She said:                                                                                                     
                                                                                                                                
     There  are many  reasons  why I  personally  support  this                                                                 
     bill.  One is that I  spent approximately  two years as  a                                                                 
     representative  of a major small business organization,  a                                                                 
     national   organization,   and  talked   to  hundreds   of                                                                 
     businesses over the course of those two years.                                                                             
                                                                                                                                
     Businesses in Alaska have  unique challenges as it is, but                                                                 
     when they  are pitted against the megaforces,  represented                                                                 
     by  manufacturers and  wholesalers in  the Lower 48,  they                                                                 
     have  fairly shallow  pockets  in comparison  to the  deep                                                                 
     pockets  that   these  manufacturers  have.  They  cannot                                                                  
     afford, just by the nature  of being a small business with                                                                 
     limited  staff  and  limited  finances,   to  fight  legal                                                                 
     battles when the playing field is already so uneven.                                                                       
                                                                                                                                
     There  are  three areas  of this  bill  that I  think  are                                                                 
     excellent.  One is preventing the manufacturer  from using                                                                 
     coercion  to  force  a  dealer  or  distributor  to  carry                                                                 
     product  or purchase  product that they  did not want  and                                                                 
     did not order.                                                                                                             
                                                                                                                                
     Secondly,   it  sets  in  place  a  mechanism  where   the                                                                 
     inventory  will be purchased  back. In some cases that  is                                                                 
     in the hundreds of thousands  of dollars. It sets in place                                                                 
     a  mechanism  to  purchase  the  inventory   back  if  the                                                                 
     distributor  agreement is yanked and that can  be done for                                                                 
     any  number of reasons  including -  in Alaska, a product                                                                  
     has not been  offered before, the manufacturer  is up here                                                                 
     looking  for someone  to distribute  it.  He finally  gets                                                                 
     someone to  do so. That person, then, develops  the market                                                                 
     for it.  Once that market is  established, the wholesaler                                                                  
     manufacturer  has firmer  ground to stand  on and at  that                                                                 
     point,  they  may  decide  to go  for  someone  larger  or                                                                 
     someone   who  has  more  offices  around  the  state   or                                                                 
     something  like that. So, they  do have the right to  yank                                                                 
     the agreement, but in a  case such as that, when inventory                                                                 
     has been  purchased to facilitate  the agreement that  was                                                                 
     in  existence before  that date,  this law  would require                                                                  
     that  they  purchase   it  back  at  the  value  that  was                                                                 
     established  at  the time  the  inventory  was originally                                                                  
     purchased.                                                                                                                 
                                                                                                                                
     Finally, the portion that  is most meaningful to me is the                                                                 
     area where,  if the dealer dies, that the heirs  have some                                                                 
     recourse,  if the manufacturer  or wholesaler declines  to                                                                 
     allow  the heir to carry forward  the agreement, which  is                                                                 
     perfectly  within their  rights. But in  the case where  a                                                                 
     loved  one  dies  and  you're  dealing  already  with  the                                                                 
     emotional  loss, you also have to deal with a  significant                                                                 
     financial  loss in terms of that business, not  being able                                                                 
     to  do  anything  with  that  inventory.  You  might  have                                                                 
     hundreds of thousands of  dollars worth of capital tied up                                                                 
     in inventory.  It's just simple  human interest to set  in                                                                 
     place a mechanism  where the manufacturer, if  he declines                                                                 
     to  further  the  agreement   with  the  heirs,  buys  the                                                                 
     inventory back.                                                                                                            
                                                                                                                                
Number 200                                                                                                                      
                                                                                                                                
MR. RON YOUNG, President, Young's Gear, Inc., supported SB 176. He                                                              
related:                                                                                                                        
                                                                                                                                
     Over  the last  few years  and one particular  case  about                                                                 
     five  years ago, as  an example, we were  a large CD  axel                                                                 
     supplier  in the state. We were  a dealership for a  major                                                                 
     manufacturer  in the eastern seaboard. We built  up a very                                                                 
     large  business for  this company and  the product became                                                                  
     very  popular  and  what  happened,  the  company  in  the                                                                 
     eastern seaboard  basically went to large chain  warehouse                                                                 
     wholesale  outlets, like  Napa. The  product got devalued                                                                  
     and  part of  the behind the  scenes agreements,  which  I                                                                 
     will never see, was to squeeze  out or eliminate the small                                                                 
     local  representatives. Consequently,  they refused  to do                                                                 
     business  short-term;  they  would not  buy back  any  old                                                                 
     stock.  Virtually the old stock  that I had on the shelf,                                                                  
     which  was current at  the time, I should  say, it became                                                                  
     old stock, outdated nonsellable.  I talked to an attorney,                                                                 
     but there  is no way to legally force them on  the eastern                                                                 
     seaboard  to come  to court for  the amount  of the  money                                                                 
     involved, well over $100,000 cash in reality.                                                                              
                                                                                                                                
     That  is one  of the  reasons I  came here  to testify.  I                                                                 
     strongly  believe there is a  need for a law of this  sort                                                                 
     to be passed in the State of Alaska.                                                                                       
                                                                                                                                
MS. JANEECE HIGGINS, Alaska Rubber Supply, said:                                                                                
                                                                                                                                
     In 1995, we had a distributorship  pulled. The corporation                                                                 
     was  a large corporation.  They were  given assurances  by                                                                 
     another  company  in Alaska  that they  would  be able  to                                                                 
     triple the  business. We were in the top 12 in  the nation                                                                 
     for   three    years   in   their   distributorship    for                                                                 
     organizations.  They pulled the distributorship  with a 30                                                                 
     day  notice, refused  to buy  back any  inventory. We  had                                                                 
     close  to $600,000 worth of inventory  on the shelf.  They                                                                 
     went through our customers  and notified them that we were                                                                 
     no longer  the authorized distributor  and they would  not                                                                 
     get factory support from  us and that they should be going                                                                 
     with  the new  distributor.  Therefore, we  couldn't  even                                                                 
     sell  the product  to our  customers. We  lost a $600,000                                                                  
     customer  right off the  bat. The fall  out from that  was                                                                 
     close to $2 million in sales.                                                                                              
                                                                                                                                
     We  counter  sued  and  it  has  been  through  the  Ninth                                                                 
     Circuit. They  have appealed every decision that  has gone                                                                 
     our  way. We have  won in  every court  battle; they  have                                                                 
     appealed  every  one  of them.  It  has  cost us  over  $1                                                                 
     million  in legal fees. In hindsight,  we probably should                                                                  
     have settled, but the owner  decided that he didn't have a                                                                 
     lot to leave,  but he had his word and he was  going to go                                                                 
     to the grave  with it. So, here we are $1.2 million  later                                                                 
     in  legal  fees. We  still  have over  $100,000  worth  of                                                                 
     inventory  on the shelf that we have not been  able to get                                                                 
     rid  of. We have other  customers that  have slowly  taken                                                                 
     the  inventory  at a  reduced cost.  This loss  was  quite                                                                 
     significant  to  our company.  This bill  certainly  would                                                                 
     have been  welcome five years  ago and I urge you to  pass                                                                 
     it.                                                                                                                        
                                                                                                                                
MR. KURT  WINKLER, Global  Services,  said he had  been in  business                                                            
here for about 20 years.  He supported SB 176. "I'd see the far away                                                            
Alaskans get  mistreated by the people  in the Lower 48,  especially                                                            
the  east coast.  We  are  so far  away  from  them and  we're  only                                                            
Alaskans. I'd like to see the mistreatment stop…"                                                                               
                                                                                                                                
MR. DON DUNNAVANT,  Owner, Polar Supply  Co., said he got  his first                                                            
business license in 1975  and employs 50 - 60 Alaskans currently. He                                                            
said, "I have plenty of horror stories to tell."                                                                                
                                                                                                                                
He testified  on behalf of  his employees  who work hard on  getting                                                            
trained  and  bringing  technology  to Alaska.  Their  families  are                                                            
dependent  on the  success of their  businesses.  He supported  this                                                            
bill, because it would make life a lot less risky for them.                                                                     
                                                                                                                                
MR. CHUCK  VANORMER said  his is  a department  manager for  a large                                                            
supply house in  Anchorage. He has been in customer  service product                                                            
support in Alaska for about 28 years. He said:                                                                                  
                                                                                                                                
     As   an    employee   of   companies    that   have    had                                                                 
     distributorships cancelled,  I have been forced to lay off                                                                 
     other  employees due to loss  of business as well as  pick                                                                 
     up a lot of  dead stock inventory as has been  alluded to.                                                                 
     It suddenly becomes wasted  shelf space and is still taxed                                                                 
     under   the  inventory  tax   system,  but  is  basically                                                                  
     worthless.   It eventually   ends  up  in  a scrap   pile.                                                                 
     Additionally,   most of  the  products  I  handle  are  an                                                                 
     engineered   product  and  when  there  is  a  change   in                                                                 
     distributorship,  sometimes you can no longer  support the                                                                 
     products  you have sold  and you're forced  to go to  your                                                                 
     competition to purchase  items to repair those things that                                                                 
     you still  have under your warranty  control and do  start                                                                 
     ups and service to.                                                                                                        
                                                                                                                                
     There  is  a  major  concern  of  mine  on rolling   stock                                                                 
     equipment.  As more  and more  large firms  move into  the                                                                 
     state  of Alaska,  especially  oil  yards, they  bring  in                                                                 
     national agreements of distributorships  of equipment from                                                                 
     manufacturers  that give  them basically  predatory  price                                                                 
     due   to  volume   buying   against  the   local  Alaskan                                                                  
     distributorships.                                                                                                          
                                                                                                                                
MR. VANORMER  said  he knew  many businessmen  who had  given up  on                                                            
developing a line because  someone else came up from the Lower 48 as                                                            
a national concern  and now has that product available  at a cheaper                                                            
price. He  thought this bill  was of the  utmost importance  for the                                                            
Alaskan distributor  and it's  going to become  more important  with                                                            
the passage of the gas line.                                                                                                    
                                                                                                                                
SENATOR LEMAN asked if  the inventory system required him to pay tax                                                            
on the  original purchase  price of  the item and  if that was  true                                                            
when the value became worthless.                                                                                                
                                                                                                                                
MR.  VANORMER   answered  that  unless   you  devalue  the   product                                                            
immediately upon cancellation,  you're stuck with it at the occurred                                                            
value. He is not  sure how it's depreciated, but you  carry it for a                                                            
couple of years  in hopes that you can move it out  as good stock or                                                            
find a wholesaler who's willing to take it off your hands.                                                                      
                                                                                                                                
MR. DUNNAVANT  inserted that his bank  finances him on the  value of                                                            
his inventory  and  if that  value goes,  they are  less willing  to                                                            
finance  him.  So, it  does  not necessarily   work to  devalue  the                                                            
product.                                                                                                                        
                                                                                                                                
MR. ED  SNIFFEN, Department  of Law, said  they didn't see  too many                                                            
problems with  this bill, but there might be one potential  conflict                                                            
with the  definition of distributor  if it  was intended to  include                                                            
auto manufacturers.                                                                                                             
                                                                                                                                
CHAIRMAN PHILLIPS asked him to fax the recommendations to him.                                                                  
                                                                                                                                
SENATOR LEMAN  asked if he had any other significant  comments about                                                            
this legislation.                                                                                                               
                                                                                                                                
MR. SNIFFEN replied that  he had looked through it and it appears to                                                            
be good legislation and  he didn't see anything that would cause DOL                                                            
any concern.                                                                                                                    
                                                                                                                                
SENATOR  TORGERSON asked  which would prevail:  two willing  parties                                                            
that enter into a contract  for a distributorship - that document or                                                            
this piece of legislation.                                                                                                      
                                                                                                                                
MR. SNIFFEN replied:                                                                                                            
                                                                                                                                
     That's a good  question and that's why we have  lawyers, I                                                                 
     suppose. Contract  rights between private individuals  are                                                                 
     hard to  disrupt, but the state  does have an interest  in                                                                 
     enacting   legislation   to   further   legitimate   state                                                                 
     interests.  I would think if  this law were in effect,  it                                                                 
     would  have some authority  over a  private contract  that                                                                 
     was  entered   after  the  law  was  on  the  books   that                                                                 
     conflicted with this legislation,  but I don't' know if we                                                                 
     could   enact  something   like  this   that  would   take                                                                 
     retroactive  effect.  That might  be a problem.  There  is                                                                 
     also an  issue that comes up  sometimes dealing with  some                                                                 
     constitutional  question about impairment of contracts.  I                                                                 
     could  talk for an hour about  what all that entails,  but                                                                 
     in this case I think that  most of the problems that arise                                                                 
     under an impairment of contract  analysis are not present.                                                                 
                                                                                                                                
SENATOR TORGERSON  said he'd had several dealerships  and franchises                                                            
and he didn't  have any choice. He signed a deal as  it was laid out                                                            
and it had all  kinds of provisions on buying back  stock and how to                                                            
dissolve the contract.  He was concerned if the manufacturer outside                                                            
the  state was  not aware  of this  law and  someone  enters into  a                                                            
willing contract, what was the basis of this law.                                                                               
                                                                                                                                
MR. SNIFFEN  replied  that the  manufacturer is  almost presumed  to                                                            
know the  laws of the  state that  it's doing  business in.  "So, if                                                            
they're not aware of our law, it's almost shame on them."                                                                       
                                                                                                                                
If two people  enter into a contract and the terms  are inconsistent                                                            
with this legislation,  he thought it was a gamble on behalf of both                                                            
parties. He thought in most cases, the statute would prevail.                                                                   
                                                                                                                                
SENATOR TORGERSON  asked if he thought this would  be detrimental to                                                            
getting distributorships up here.                                                                                               
                                                                                                                                
MR. SNIFFEN replied that he couldn't' answer that.                                                                              
                                                                                                                                
Number 1100                                                                                                                     
                                                                                                                                
MS.  LUPER  commented  on  page  5,  number  3,  under  exceptions,                                                             
specifically  excludes motor  vehicle distributors  and dealerships                                                             
and that should take care of the DOL's concerns.                                                                                
                                                                                                                                
Regarding Senator  Torgerson's concerns about whether  manufacturers                                                            
would be  willing to enter  into agreements  with Alaskan  business,                                                            
she said, "Alaska is one  of the few states that does not have a law                                                            
that is  similar to  this. Businesses  located in  other states  are                                                            
doing fine  under laws that are actually  more stringent  than this.                                                            
In fact, some states have  made some of these provisions rather than                                                            
being civil, they have actually gone to criminal ramifications."                                                                
                                                                                                                                
SENATOR LEMAN  asked her if she wanted to respond  to what prevails,                                                            
a contract or the statute.                                                                                                      
                                                                                                                                
MS. LUPER said she wasn't qualified to comment on it.                                                                           
                                                                                                                                
CHAIRMAN PHILLIPS  noted that this  bill was going to the  Judiciary                                                            
Committee where these questions would be addressed.                                                                             
                                                                                                                                
MR.   YOUNG  commented   that   before   a   person  goes   into   a                                                            
distributorship   with  a large  corporation,   they  have  to  sign                                                            
hundreds  of contracts  saying that  they are  liable for  attorneys                                                            
fees, collection  fees, on and on  and on. He didn't see  that there                                                            
would be  a difference where  the large corporation  is held  liable                                                            
for a change.                                                                                                                   
                                                                                                                                
CHAIRMAN PHILLIPS  said he would hold  the bill while he  checks out                                                            
some questions with the Department of Law.                                                                                      
                                                                                                                                
              SB 189-MOTOR VEHICLE SALES AND DEALERS                                                                        
                                                                                                                              
CHAIRMAN PHILLIPS announced SB 189 to be up for consideration.                                                                  
                                                                                                                                
MR. RALPH SEEKINS,  Chairman, Alaska Automobile Dealer  Association,                                                            
said he  is a Ford  dealer in  Fairbanks and  Soldotna. He said  the                                                            
Association  has spent  about two  and half  years researching  this                                                            
issue. It came  about because Alaska  is the last state without  any                                                            
effective motor  vehicle franchise  legislation. "When we  looked at                                                            
this, we  didn't want  to just look  at those  things that  affected                                                            
relationships  between manufacturers and dealers,  we also wanted to                                                            
take  a look  at  those things  that  affect  relationships  between                                                            
dealers and manufacturers and the consumer in the end."                                                                         
                                                                                                                                
He said  the National  Automobile  Dealer Association  provides  two                                                            
huge bound volumes of laws  of all the other states. His association                                                            
looked at the  business cases that needed to be addressed  in Alaska                                                            
and used these  volumes to find which  state dealt with it  best. He                                                            
thought  that about 90  percent of  the language  in SB 189  is what                                                            
other states have already done.                                                                                                 
                                                                                                                                
Number 1573                                                                                                                     
                                                                                                                                
MS. SUSAN DUNCAN,  Alaska Automobile Dealers Association,  supported                                                            
Mr. Seekins testimony and reiterated:                                                                                           
                                                                                                                                
     It  sets  up  if  there  are  any  disputes  between   the                                                                 
     manufacturers  and  the Alaska  dealer,  that  it will  be                                                                 
     followed  through the  Alaska Court System.  It brings  in                                                                 
     many   consumer  friendly  provisions   making  sure   for                                                                 
     instance,  advertising   and  high pressure   tactics  are                                                                 
     regulated.  So, when a consumer purchases a vehicle,  they                                                                 
     don't  get  home  with  that vehicle  and  find  that  the                                                                 
     financing  terms are different  than what they understood                                                                  
     them  to be at the  dealer. Again,  it provides licensing                                                                  
     that  identifies  all  the players,  including  the  sales                                                                 
     people. They have a card  with their picture on it and you                                                                 
     know  when you  walk  into that  dealership,  that you're                                                                  
     dealing  with  an employee  at  that dealership.  It  also                                                                 
     provides definitions for  specific terms that might not be                                                                 
     clearly understood  or used in different methods.  It also                                                                 
     provides franchise  protection so that dealers  who invest                                                                 
     a  lot of time  and money can  be assured  they will  have                                                                 
     their  dealership available for  years to come, that  they                                                                 
     can keep  providing the level  of service their customers                                                                  
     depend upon.  This act really covers a lot of  things that                                                                 
     have been missing in the state of Alaska.                                                                                  
                                                                                                                                
SENATOR LEMAN  said he assumed most  of the bill was established  on                                                            
well-established case law.                                                                                                      
                                                                                                                                
MS. DUNCAN responded that was correct.                                                                                          
                                                                                                                                
CHAIRMAN  PHILLIPS asked  if  Alaska Sales  and Service  is part  of                                                            
their organization.                                                                                                             
                                                                                                                                
MS. DUNCAN replied yes.                                                                                                         
                                                                                                                                
MR. RICK  MORRISON, founding-President,  Alaska  Automobile  Dealers                                                            
Association, said  he currently serves on the Board  as Secretary of                                                            
the National Automobile  Dealers Association and is  the Chairman of                                                            
the Anchorage Chamber of  Commerce. He strongly supported SB 189. He                                                            
said in reality, they have  been working on this bill for over seven                                                            
years. He said the dealership  laws are already in every other state                                                            
out  there  and  this bill  has  involved  a  tremendous  amount  of                                                            
research.  "When   you  look  at  this  bill,  it  isn't   just  for                                                            
manufacturers.  This is about protection  for consumers,  protection                                                            
for small business people and protection for the manufacturers."                                                                
                                                                                                                                
MR. MORRISON  said that  there really aren't  any negotiations  with                                                            
the "big  guns." He said,  "It's either you  sign it or you  give it                                                            
back and you're out of business."                                                                                               
                                                                                                                                
He also said that,  "Contracts are what make friends  stay friends."                                                            
                                                                                                                                
TAPE 01-20, SIDE B                                                                                                            
                                                                                                                              
MR. MORRISON  said that this bill  would give dealers and  consumers                                                            
a way  to resolve  differences.  There are provisions  for  contract                                                            
issues, training  and licensing, stocking, disclosures  on damage on                                                            
new vehicles and advertising.  The Customer Satisfaction Index (CFI)                                                            
is the buzzword and has  become very important to the manufacturers.                                                            
                                                                                                                                
He said there  is a misconception  in the news media. Dealers  think                                                            
that about  85 percent of  their customers  were very or  completely                                                            
satisfied.  A Gallup poll showed that  75 percent of customers  were                                                            
completely  satisfied. The  news media thought  five percent  of the                                                            
customers would  be unhappy with dealers.  He hoped this  bill would                                                            
help clear some of that up.                                                                                                     
                                                                                                                                
MR. MORRISON  reiterated that  about 90 - 95  percent of what  is in                                                            
this  bill  is boilerplate  from  other  states.  A few  things  are                                                            
different. One  of them is the training aspect and  a stronger parts                                                            
and warranty section.                                                                                                           
                                                                                                                                
He said  there  is a question  from  DMV about  whether dealers  are                                                            
bonded  and he  said they  are  currently required  to  get a  state                                                            
license with a bond for  $10,000, which is very inadequate. They are                                                            
asking to change it to $100,000 - $200,000.                                                                                     
                                                                                                                                
MR. MORRISON  said they  have had  some difficulty  with "the  small                                                            
corner lots,"  which are set  up very easily  and sell junk  cars or                                                            
cars without disclosing  what is wrong with them.  A tougher bonding                                                            
process  would help  ensure that people  who get  into the  business                                                            
have the means to back it up.                                                                                                   
                                                                                                                                
Another  thing that  has come up  is hazardous  waste and  hazardous                                                            
waste disposal.  Right now  manufacturers are  not liable for  parts                                                            
that  dealers  take off  under  warranty.  Dealers are  100  percent                                                            
responsible  for it,  but  this bill  says that  manufacturers  must                                                            
assist them in the process.                                                                                                     
                                                                                                                                
MR. STEVE CONN, Executive  Director, Alaska Public Interest Research                                                            
Group (AKPIRG), opposed  SB 189. He said there were many interesting                                                            
provisions in this bill  and he wouldn't try to address them all. He                                                            
thought this was a bill  that was written for the automobile dealers                                                            
with a very limited amount  of concern for the consumer. The attempt                                                            
to  establish  a  Motor  Dealer's  Advisory  Board  falls  short  of                                                            
protecting  the consumer who deserves  more than just a seat  at the                                                            
table. He said:                                                                                                                 
                                                                                                                                
     The  consumer guides  the economy and  the system and  the                                                                 
     market. At the end of the  day, it's the consumer's needs,                                                                 
     even  the unorganized  consumer, it's  his and her buying                                                                  
     dollar that makes things  happen. This idea that the motor                                                                 
     dealer should  be lent state authority and then  should be                                                                 
     positioned  so that  they can  vet, in  essence, consumer                                                                  
     related   laws  that   have   to  do  with   industry   is                                                                 
     unacceptable by any stretch of the imagination.                                                                            
                                                                                                                                
     The further  concern for the  fly-by-night, of course,  is                                                                 
     the concern  that all professions have. However,  it would                                                                 
     seem  that  this bill  is  tilted  towards  protection  of                                                                 
     extant dealerships  and would be in many ways  restrictive                                                                 
     of new entrants  into the market. There is a jointly  held                                                                 
     concern on  the part of the dealers and the consumers  for                                                                 
     protection  of the consumers,  if for no other reason,  to                                                                 
     enhance  the credibility  of the  established profession.                                                                  
     That  could be  best dealt with,  of course,  if we  could                                                                 
     garner the  support of the Motor Vehicles Association  and                                                                 
     enhancing the budget of  the Department of Law in the area                                                                 
     of consumer protection.                                                                                                    
                                                                                                                                
     Further, a bill of this  nature that tries to address both                                                                 
     the  evident  needs  of  the  dealerships  vis-à-vis   the                                                                 
     manufacturers, the relationship  between the consumers and                                                                 
     the  dealers and  many  things in  between would  be  best                                                                 
     dealt  with  had  there  been   and  if there   were  real                                                                 
     collaboration  between  consumer organizations  and  those                                                                 
     representing  the dealerships.  Our door is open to  those                                                                 
     forms  of  collaboration  and I  would  strongly suggest,                                                                  
     particularly  given the history of this bill on  the House                                                                 
     side where  it's been sent back to committee for  a little                                                                 
     bit  of reworking, that  an opportunity  be taken to  have                                                                 
     that  sort of discussion  and collaboration.  It may  very                                                                 
     well  be that a  bill that  is truly satisfactory  to  the                                                                 
     dealerships  and to  the consumers  can  evolve from  this                                                                 
     bill, but as it presently  stands, it is a bill written by                                                                 
     the  dealerships for  the dealerships,  with some concern                                                                  
     placed   as  to  others,   some   legislation  replacing,                                                                  
     effectively  speaking,  common law, but  so many problems                                                                  
     that  I would hope the  bill is not  passed forward  until                                                                 
     there is a moment to pause  and reflect to assure that the                                                                 
     needs of the  consumer, the driver of this market,  no pun                                                                 
     intended,  and  his and  her concerns  about  today's  and                                                                 
     tomorrow's  automobile  market find  their  way into  this                                                                 
     legislation.  The consumers also  guide the Department  of                                                                 
     Law in the  development of useful and productive  laws and                                                                 
     regulations  pertaining  to the sale  and repair of  motor                                                                 
     vehicles.                                                                                                                  
                                                                                                                                
CHAIRMAN  PHILLIPS asked him  to have his  suggestions prepared  and                                                            
submitted by next Monday.                                                                                                       
                                                                                                                                
Number 1400                                                                                                                     
                                                                                                                                
SENATOR  LEMAN   asked  Mr.  Conn  to  look  at  page   41  and  the                                                            
"Requirement  of  Principle  Place  of  Business."  He asked  if  he                                                            
thought the specific  requirement that an office be  a permanent and                                                            
enclosed building  unduly restricted  either other small  businesses                                                            
or consumers.                                                                                                                   
                                                                                                                                
MR. STAN  HEARST, Anchorage  Daimler Chrysler  Dealer, said  that 49                                                            
other  states   have  passed   legislation   similar  to  this   and                                                            
conceptually   he  agrees  that  certain   rights  granted   through                                                            
contracts between  dealer and manufacturers should  be codified, but                                                            
he takes  exception to  the number  of issues  where this bill  goes                                                            
beyond  existing  legislation in  other  states. Wording  is  overly                                                            
burdensome  and restrictive  and would ultimately  increase  cost to                                                            
the consumer.  He hoped a subcommittee  could work with dealers  and                                                            
manufacturers to develop a workable bill.                                                                                       
                                                                                                                                
MR. HEARST pointed out several significant problems:                                                                            
                                                                                                                                
     Initially,  the bill equates  warranty work with extended                                                                  
     service   contracts  and  they  put  the  same  sorts   of                                                                 
     restrictions  on  the  manufacturers  as  it  pertains  to                                                                 
     warranty  work that's  in the services  contracts. Let  me                                                                 
     just  give you  a little  history  with regards  to  those                                                                 
     businesses.  A manufacturer of any kind issues  a warranty                                                                 
     and  it's really a  marketing tool,  because it makes  the                                                                 
     consumer  feel more confident  about buying a product.  If                                                                 
     something  goes wrong, the manufacturer stands  behind it.                                                                 
     So, it really  comes part and parcel with the  sale of the                                                                 
     product.                                                                                                                   
                                                                                                                                
     Extended   service  contracts   is  a  separate  business                                                                  
     altogether   and  manufacturers  offer  extended  service                                                                  
     contracts,  but independents are in that market,  as well.                                                                 
     The two are  totally separate businesses. Dealers  have no                                                                 
     obligation  to enter  into  an extended  service business                                                                  
     with a manufacturer.  They can go anywhere and  enter into                                                                 
     a  partnership   with  an  independent  extended  service                                                                  
     contract company.                                                                                                          
                                                                                                                                
     This bill,  because it equates extended service  contracts                                                                 
     as warranty  places restrictions  on the manufacturer  and                                                                 
     obligations  on the  manufacturer that  are not placed  on                                                                 
     independent offerers of  extended warranty contracts. As a                                                                 
     result,  this bill, if  it were to  pass, would basically                                                                  
     take  four major  competitors  out  of the  market.  Those                                                                 
     major  competitors being  Daimler Chrysler,  Ford, GM  and                                                                 
     Toyota  - out of  that extended service  contract market,                                                                  
     because   it   greatly   increases   the   cost   to   the                                                                 
     manufacturers and as a result,  the manufacturers won't be                                                                 
     able  to  successfully  compete  with  the  independents.                                                                  
     That's bad for the consumers,  because when you have fewer                                                                 
     competitors  in the market, naturally  the price is  going                                                                 
     to go  up, because there  is less supply.  So, that's  bad                                                                 
     for everybody around…                                                                                                      
                                                                                                                                
MR. HEARST said that several provisions actually hurt the dealers:                                                              
                                                                                                                                
     There's   a  provision  that  tries  to  eliminate   price                                                                 
     discrimination,   but what  it  does  is also  eliminates                                                                  
     various  programs that the manufacturers  provides to  the                                                                 
     dealers  -  cash payments  to  dealers  that  the dealers                                                                  
     really  want. We  in the industry  call  these stair  step                                                                 
     programs where  there's an objective that is set  and it's                                                                 
     based  upon the dealer's size.  So that small dealers  get                                                                 
     smaller   objectives   and  larger  dealers   get  larger                                                                  
     objectives.  So, it's functionally available to  everyone.                                                                 
     If  the dealer meets  that objective,  they get graduated                                                                  
     cash payments  depending upon  the volume of the vehicles                                                                  
     they sell.  I don't think the  dealers want to make  those                                                                 
     programs illegal,  because most of the dealers  like those                                                                 
     programs.                                                                                                                  
                                                                                                                                
     There's  another provision, AS  25.25.402, which makes  it                                                                 
     unlawful  for dealers  to do a contract  where they  waive                                                                 
     their  rights.  That  also eliminates  the  ability  of  a                                                                 
     dealer to settle [indisc.]  with the manufacturer. To give                                                                 
     you   an  example  of   how  that  would   work,  if   the                                                                 
     manufacturer  wants to  put another dealer  in the market                                                                  
     and the  neighboring dealer objects  to that as this  bill                                                                 
     would  allow,  and  we  don't   want  to  go through   the                                                                 
     administrative  battle,  sometimes we'll  work out a  deal                                                                 
     where  we can put another dealer  in and we'll give  you a                                                                 
     point   somewhere  else.   That  language   is  basically                                                                  
     eliminated…                                                                                                                
                                                                                                                                
MR. HEARST said that other provisions are impossible to comply                                                                  
with:                                                                                                                           
                                                                                                                                
     One  pertains   to  distribution  or  the  allocation   of                                                                 
     vehicles.  We allocate  vehicles  nation-wide.  We have  a                                                                 
     computer  system that  is designed to  try and distribute                                                                  
     those  vehicles fairly.  It's based  upon what  we call  a                                                                 
     turn  and earn  system. The more  you sell,  the more  you                                                                 
     get. We  really can't think of  a fairer way of doing  it.                                                                 
     Most  of the  manufacturers allocate  on  the same basis.                                                                  
     What  this provision  would do would,  in essence, make  a                                                                 
     prima  fascia case that if one  dealer received a vehicle                                                                  
     subsequent  to another dealer,  and the dealer who didn't                                                                  
     get  the vehicle  first, that  dealer would  have a  prima                                                                 
     fascia case that we unfairly  distributed the vehicles not                                                                 
     taking  into account  whether the dealer  who did not  get                                                                 
     the   vehicle  first   had   already  gone   through   his                                                                 
     allocation, had not sold  as many cars as the other dealer                                                                 
     and that sort  of thing. Since our computers are  designed                                                                 
     that way,  it would cost us literally millions  of dollars                                                                 
     to change the programs. We couldn't comply with that.                                                                      
                                                                                                                                
     Another  provision in the bill  would also require that  a                                                                 
     manufacturer not consider  vehicles that are in transit as                                                                 
     part  of  the  dealer's  inventory.  Again,  it  would  be                                                                 
     impossible for us to comply  with that, because we look at                                                                 
     what  a  dealer has  in  his  inventory,  what he  has  in                                                                 
     transit,  to determine  how many  more vehicles  he  would                                                                 
     need.  So,  that would  be  extremely  difficult,  if  not                                                                 
     impossible, for us to comply with.                                                                                         
                                                                                                                                
     There  are  a  couple of  provisions  in  there  that  are                                                                 
     unconstitutional.   One  requires  that  we  don't charge                                                                  
     dealers  in  Alaska  any  more  than  we  charge  dealers                                                                  
     anywhere  else  in  the  country.   We do  have  regional                                                                  
     marketing  programs  that are based  upon the  needs of  a                                                                 
     particular market. We'll  give discounts on vehicles where                                                                 
     as  in other markets,  we'll give  discounts on different                                                                  
     vehicles,  but clearly,  that  would be  a restriction  on                                                                 
     interstate  commerce. Likewise, the provision  with regard                                                                 
     to  destination  charges  we  think is  unconstitutional,                                                                  
     again, a violation of the interstate commerce clause.                                                                      
                                                                                                                                
     So,  that just  gives you  an idea  of some  of the  major                                                                 
     problems  there are  in the bill  that need  to be worked                                                                  
     out.                                                                                                                       
                                                                                                                                
CHAIRMAN PHILLIPS asked  Mr. Hearst to submit his suggestions to the                                                            
committee by Monday.                                                                                                            
                                                                                                                                
MR. MARK MUELLER,  General Motors, said that Mr. Hurst  covered most                                                            
of their concerns. He said  he had met with his Alaskan dealers last                                                            
week and  the spirit was  very cooperative.  He was invited  back to                                                            
try and work  out a lot of details.  An area that Mr. Hearst  didn't                                                            
discuss was brokers and Internet.                                                                                               
                                                                                                                                
     We, the manufacturers have  developed our own Internet web                                                                 
     sites  and are trying  to drive customers  to the dealers                                                                  
     through sales  and the service departments. We  have a lot                                                                 
     of third parties  trying to get into our business  and try                                                                 
     to  take business  away from  our dealers  and our Alaska                                                                  
     dealers.  We want to be able  to provide that service  and                                                                 
     have  spent a lot of  time and money  on the Internet  and                                                                 
     broker areas…                                                                                                              
                                                                                                                                
CHAIRMAN PHILLIPS requested his suggestions by Monday.                                                                          
                                                                                                                                
Number 800                                                                                                                      
                                                                                                                                
MR. MORRISON  said he appreciated  Mr. Conn's comments, but  he said                                                            
it was  not the intent  to have the consumer's  issues addressed  in                                                            
the Dealer Advisory Board  for the state. The consumer interests are                                                            
best taken  care of in the Attorney  General's Office or  the Better                                                            
Business Bureau.  The intent behind  the design of the Board  is for                                                            
state issues, manufacturers issues and things like that.                                                                        
                                                                                                                                
He also said regarding  Mr. Hearst's concerns about the warranty and                                                            
the  service  contract  difficulties,  that they  are  only  seeking                                                            
consistency.                                                                                                                    
                                                                                                                                
He said the  National Automobile Society  is against the  stair step                                                            
programs that sell vehicles  wholesale to one dealer cheaper than it                                                            
does to  the dealer across  the street from  him. He said that  most                                                            
manufacturers  have a good allocation system set up,  although there                                                            
have been some difficulties  in the past where franchises were given                                                            
for money under the table. This bill makes it clearer.                                                                          
                                                                                                                                
The  vehicle  inventory  issue  does  not  change  a manufacturer's                                                             
computer program, but changes  when the vehicles are counted. It's a                                                            
simple process.  He said  that just about  every manufacturer  has a                                                            
one  price  for destination  charge  to  all  states in  the  United                                                            
States. Most  of them include  Alaska, but  the bill is saying,  "If                                                            
they are going  to have the same price  for a destination  charge in                                                            
Detroit  where  a car  is made,  and  the  same price  for  southern                                                            
California,  it should  be the same  price in  Anchorage, Alaska  or                                                            
Fairbanks or Juneau or any place in Alaska at the same time."                                                                   
                                                                                                                                
CHAIRMAN PHILLIPS  asked him to send  his comments to the  committee                                                            
by Monday.                                                                                                                      
                                                                                                                                
MR. SNIFFEN said he would  also provide written comments, but he had                                                            
"anti-trust flags going off all over my head."                                                                                  
                                                                                                                                
At  first, Mr.  Sniffen  thought this  bill  did nothing  more  than                                                            
protect  automobile dealers  from territory  infringement,  erecting                                                            
all kinds  of barriers  to entry  and exist from  the market.  After                                                            
some research,  he found all  kinds of cases  that say this  kind of                                                            
legislation  is O.K. if it's  properly done.  "Don't be fooled  into                                                            
thinking  that  this  bill exists  anywhere  else  in  the  country,                                                            
because it does  not. This bill cherry picks sort  of a selection of                                                            
laws from other  states that are favorable to dealers  and it really                                                            
doesn't have a lot of the  other more negative parts of other laws…"                                                            
                                                                                                                                
He concluded,  "This is really an over reaching bill  and I think it                                                            
needs to be limited in little, but significant ways."                                                                           
                                                                                                                                
MR. SNIFFEN thought  the retroactive effect provisions  brought up a                                                            
whole lot  of very serious  questions about  impairment of  contract                                                            
analysis, an  issue is being challenged  in other states  right now.                                                            
                                                                                                                                
MS. MARY  MARSHBURN, Department  of Motor  Vehicles, said that  they                                                            
currently  register  only  dealers and  it  is a  relatively  simple                                                            
process and needs improving. She said:                                                                                          
                                                                                                                                
     The bill does  make some improvement; however,  in reading                                                                 
     the bill,  we find there a number  of provisions that  are                                                                 
     ambiguous.   Several   provisions  conflict   with   other                                                                 
     statutes and need clarification.                                                                                           
                                                                                                                                
     We  are  concerned,  as  well,  with  the  Motor  Vehicle                                                                  
     Advisory  Board and the insertion  of the Commissioner  of                                                                 
     Administration   into   the  mediation   process  between                                                                  
     manufacturers   and  the  distributors.   We,  too,   have                                                                 
     concerns,  and believe Senator  Leman raised the question                                                                  
     about  the principle place of  business issue. Obviously,                                                                  
     it  is a policy  call, but  it would  restrict businesses                                                                  
     that do not have a permanently  enclosed structure. Again,                                                                 
     we  believe  there is  improvement  needed in  the dealer                                                                  
     licensing  law,  but  there   are some   areas  that  need                                                                 
     clarification  in this bill and  we will send those  down.                                                                 
                                                                                                                                
She added that  $10,000 bonding is  totally inadequate for  any sort                                                            
of an automobile issue and should be raised.                                                                                    
                                                                                                                                
CHAIRMAN  PHILLIPS  announced  that they  would  hold  the bill  for                                                            
further work.                                                                                                                   
                                                                                                                                
              SB 168-COMMERCIAL FISHING LOAN PROGRAM                                                                        
                                                                                                                              
CHAIRMAN PHILLIPS announced SB 168 to be up for consideration.                                                                  
                                                                                                                                
MR. ED CRANE, CEO, Commercial Fishing and Agriculture Banks (CFAB),                                                             
said he would answer questions, but explained his earlier comment                                                               
about the Division of Investments being subsidized competition.                                                                 
                                                                                                                                
     Both CFAB and Division of  Investments were created by the                                                                 
     legislature   to  do,  at  least  superficially,  similar                                                                  
     things, one  with public money and the other with  private                                                                 
     money.  First of all, the Division  of Investments is  not                                                                 
     burdened  with any cost of funds  over the last 10 years.                                                                  
     CFABs  annual interest  expense is  average $687,000.  The                                                                 
     Division  of Investments  is not required  to establish  a                                                                 
     reserve for loan losses  - that we have set aside $168,000                                                                 
     per year on  average over the last 10 years. The  Division                                                                 
     of Investments pays no taxes.  CFAB has paid an average of                                                                 
     $152,000 in  state and federal income taxes over  the last                                                                 
     10  years. The  Division of  Investments  is not burdened                                                                  
     with the cost  of the board of directors; there's  $25,000                                                                 
     or so per year. The Division  of Investments does not bear                                                                 
     the  burden  of a  statutorily  mandated annual  audit  or                                                                 
     annual   examination   by  the   state.  That   costs   us                                                                 
     approximately   $30,000   per   year.  The   Division   of                                                                 
     Investments  enjoys considerable  infrastructure provided                                                                  
     by  the Department  of Administration,  the Department  of                                                                 
     Revenue, and the Department  of Law, and I have no idea of                                                                 
     who else and  have no idea how to measure that.  There are                                                                 
     other aspects,  as well, simply the cooperative  structure                                                                 
     our statute mandates for  CFAC. It's a good structure, but                                                                 
     the  fact is  that we  spend a  good $35,000  per year  on                                                                 
     record keeping  and communications with members  on things                                                                 
     other than simply loans,  because of that structure. If we                                                                 
     were simply a lender, if  we simply shoveled money out the                                                                 
     door, we would  be able to get by with probably  less than                                                                 
     10 people  in our organization rather than the  15 that we                                                                 
     have.  I think there is a considerable  subsidy the  state                                                                 
     has  provided to the  Division of  Investments, again,  in                                                                 
     competition with CFAB.                                                                                                     
                                                                                                                                
     But   the  most  important   element   from  a  practical                                                                  
     standpoint,  is  really  unquantifiable,  but it  is  very                                                                 
     significant  and  that's  the lack  of  accountability  or                                                                 
     oversight  and the ability of the Division of  Investments                                                                 
     to  change  directions   and  policies  at  will  with  no                                                                 
     analyses  and  no  concern  for the  bottom  line.  I,  as                                                                 
     manager  of  CFAB,  provide  a  report  to  our  board  of                                                                 
     directors  each month. We have  to meet with the board  of                                                                 
     directors  six times  a year and are  accountable to  them                                                                 
     and  I do  mean accountable.  We  are accountable  to  our                                                                 
     members  through an annual report  and our members expect                                                                  
     to  receive the  patronage refunds  we pay  and they  also                                                                 
     expect the dividends on  the stock. I mentioned before the                                                                 
     cost  of our  annual  audit by  outside auditors  and  the                                                                 
     examination  by the State of Alaska banking examiners.  We                                                                 
     are  required   by  statute   to  provide  those  to   the                                                                 
     legislature  as well as to our  members. You have nothing                                                                  
     that's   anywhere   analogous   from   the   Division   of                                                                 
     Investments.  They set their  own standards in many  ways…                                                                 
                                                                                                                                
SENATOR AUSTERMAN said he could tell that CFAB has done well over                                                               
time and asked if they are in trouble now and that's why they need                                                              
the other loans to keep going.                                                                                                  
                                                                                                                                
MR. CRANE replied that they are not in trouble, although this year                                                              
hasn't been particularly good:                                                                                                  
                                                                                                                                
     I won't say  that we necessarily need more loans.  I would                                                                 
     stress  and reemphasize what  is mentioned in the sponsor                                                                  
     statement  and what is illustrated in the page  of numbers                                                                 
     you  have in your  packets there.  CFAB actually provides                                                                  
     significant  benefits to those people who borrow  from it.                                                                 
     I  have,  and our  Board  of  Directors  has and  all  our                                                                 
     management  has a very clear  fiduciary responsibility  to                                                                 
     those  people who are the owners  of CFAB - our borrowing                                                                  
     members.  Those  are  the people  we  have to  attempt  to                                                                 
     protect and provide for.  Fortunately, everything we do in                                                                 
     that  regard is  totally consistent  with  our effort  and                                                                 
     intent  to  keep  CFAB  strong  so that  we  can  lend  to                                                                 
     fishermen  in the  future. It  is not really  a matter  of                                                                 
     survival or  anything like that. It is, perhaps  in a more                                                                 
     general sense,  a desire to have as much good  loan volume                                                                 
     and as diverse  a loan portfolio as we can get.  But as to                                                                 
     what   has  precipitated   this  bill,   again,  I'm   not                                                                 
     necessarily  trying to  pick a fight  with anybody, but  I                                                                 
     would say over the last  three or four years in particular                                                                 
     we   have    become   increasing    frustrated   by    the                                                                 
     aggressiveness   of  the  Division  of  Investments,   the                                                                 
     liberalization  of certain of  their policies and what  we                                                                 
     see as  irrationality in some  of their practices. One  of                                                                 
     the effects  of that and we see it in some of  the letters                                                                 
     we   have   seen  about   this   bill   from  fishermen's                                                                  
     organizations,  it's almost an  instinctive perception  on                                                                 
     the part of many people  of, "Gee, if it's state money, it                                                                 
     must be a better deal."                                                                                                    
                                                                                                                                
     There  are many loans that we  never get a chance for  and                                                                 
     we  never have  the  opportunity  to address.  We believe                                                                  
     there   is  some   exploitation.   I'm   not  questioning                                                                  
     anybodies'   motives.  This  bill  is  also  part  of  our                                                                 
     reaction to our concern…                                                                                                   
                                                                                                                                
TAPE 01-21, SIDE A                                                                                                            
                                                                                                                                
MR. CRANE continued:                                                                                                            
                                                                                                                                
     "…I'll  give you a reference  to it on the top of page  3,                                                                 
     line  1, this  is a  reference to  the quota  share  loans                                                                 
     (IFQs).  The statute  has said for about  five years  now,                                                                 
     the  Division  of Investments  can  make loans  for  quota                                                                 
     shares to  people who are not eligible for financing  from                                                                 
     other  recognized  commercial  lending  institutions.  Our                                                                 
     view, and  I know the Division will disagree with  us, but                                                                 
     our  view,  and we  have  seen  considerable  evidence  to                                                                 
     support our  view, is that the Division has ignored  that.                                                                 
     That has  been troubling to us.  In summary that's really                                                                  
     what's behind this bill, Senator.                                                                                          
                                                                                                                                
MR. GREG WINEGAR, Director, Division of Investments, testified:                                                                 
                                                                                                                                
     We   have  several   problems   with   this  legislation,                                                                  
     especially  under section (a). Borrowers currently  have a                                                                 
     choice as  to which program they wish to utilize.  If this                                                                 
     legislation  passes, basically, they will have  one choice                                                                 
     and  that's to go to  CFAB first. The  concern we have  is                                                                 
     that  most of our  borrowers under this  section will  not                                                                 
     qualify for  CFAB financing. There may be a few,  but most                                                                 
     will  not.  So, those  applicants  are  going to  have  to                                                                 
     through the  extra process, the extra paperwork,  time and                                                                 
     effort necessary to go through the process twice.                                                                          
                                                                                                                                
     The other  thing we are concerned  about is that although                                                                  
     the  number of applications  are relatively  small,  those                                                                 
     are  going  to be  the stronger  loans  and so  CFAB  will                                                                 
     basically  pick and choose which  loans they wish to  have                                                                 
     for their portfolio. Those  stronger loans do help balance                                                                 
     out the risks  of our portfolio and that does  benefit the                                                                 
     program as a whole.                                                                                                        
                                                                                                                                
     Some  of the  things I  mentioned  last week  that we  are                                                                 
     still concerned  about - the use of the word "identical,"                                                                  
     which  is used in  several places  here in  the bill -  on                                                                 
     page 1,  line 12; page 3, line  2; page 4, lines 1 and  8.                                                                 
     We are concerned  about the use of that term,  because our                                                                 
     rates and our terms are  not related to CFAB's or not tied                                                                 
     to CFAB's nor are they tied  to any private sector lender.                                                                 
     So, we're  concerned that the use of "identical"  may make                                                                 
     it  very difficult  for borrowers  to actually  meet  that                                                                 
     requirement.                                                                                                               
                                                                                                                                
     In section  10 of our statutes, which is actually  page 3,                                                                 
     line  29, of  the bill, this  is an  internal refinancing                                                                  
     program and  the sole purpose of this section  is to allow                                                                 
     existing  borrowers to  take advantage  of lower interest                                                                  
     rates when  they occur to lower the rates on their  loans.                                                                 
     As I testified last week,  requiring these borrowers to go                                                                 
     through  a whole new application  process through another                                                                  
     lender, the  time involved in that, the money  involved in                                                                 
     that, is going to pretty  much eliminate the usefulness of                                                                 
     this program.                                                                                                              
                                                                                                                                
     I  think it's  important  to note  that  since inception,                                                                  
     we've  had 1,300 borrowers  that have  taken advantage  of                                                                 
     this program and have been  able to lower their rates. And                                                                 
     also, because  rates are dropping rapidly right  now, this                                                                 
     will  have  an  effect  on  future  borrowers   under  the                                                                 
     program.                                                                                                                   
                                                                                                                                
     I think  it's very important  to point out that this  fund                                                                 
     has been a very successful  program for the last 29 years.                                                                 
     A House Research  Agency report done a few years  ago said                                                                 
     it was  one of the healthiest  loan programs ever created                                                                  
     by the state. The fund is  totally self sufficient. We get                                                                 
     no general  fund monies;  it's been  that way since  1985.                                                                 
     There  was a total of about $60,201,000  that was used  to                                                                 
     set up  the program that went  from the general fund  into                                                                 
     this fund.  Sixty-nine million  dollars has actually  been                                                                 
     transferred  back  out of the  fund with  the majority  of                                                                 
     those  funds going  back to the  general fund.  On top  of                                                                 
     that,  we've been able to leverage  those funds into  $341                                                                 
     million in loans.                                                                                                          
                                                                                                                                
     Certainly,  we've had  some challenges.  The industry  has                                                                 
     had a  lot of changes. We have  had to work with a lot  of                                                                 
     our borrowers;  we've had some  difficult seasons; market                                                                  
     conditions  have changed and  so, we have had to modify  a                                                                 
     number  of loans for  our borrowers.  But the flexibility                                                                  
     that  we have because  we are a public  sector lender  has                                                                 
     been  very important  in a  real important  public policy                                                                  
     issue,  which is to  try to keep Alaska  fisheries in  the                                                                 
     hands  of  Alaskans.  So,  we  are  concerned   about  the                                                                 
     legislation.  We're  worried  it  is going  to  limit  the                                                                 
     effectiveness  of  this  program  and we  do  continue  to                                                                 
     oppose the bill. Thank you  Mr. Chairman, I appreciate the                                                                 
     opportunity  to testify and will answer any questions  you                                                                 
     might have.                                                                                                                
                                                                                                                                
SENATOR AUSTERMAN asked when this program was originally set up,                                                                
was it set up to help pick up those loans that were not eligible                                                                
for other funds.                                                                                                                
                                                                                                                                
MR. WINEGAR replied:                                                                                                            
                                                                                                                                
     There  has been a number  of changes  in the program  over                                                                 
     the years, but I think that  was one of the very important                                                                 
     purposes of the fund - was  to make financing available to                                                                 
     a majority  of Alaskans. A lot of those harvesters  do not                                                                 
     meet your  standard lending type of criteria.  I think the                                                                 
     program  was created  to try and insure  that those  folks                                                                 
     have  access to  financing  - so that  we can  keep  those                                                                 
     fisheries in the hands of Alaskans.                                                                                        
                                                                                                                                
SENATOR AUSTERMAN asked if they currently require them to be                                                                    
declined from another agency first.                                                                                             
                                                                                                                                
MR. WINEGAR answered:                                                                                                           
                                                                                                                                
     It depends on the section.  Our statute is divided up into                                                                 
     several   different  sections   and  each  has  different                                                                  
     eligibility  requirements.  The  situation Mr.  Crane  was                                                                 
     referring  to, for example, under  section (c), loans  for                                                                 
     quota shares,  there is language in the statute  that says                                                                 
     you  need  to  not have  access  to  financing  through  a                                                                 
     private sector lender. The  Division was basically looking                                                                 
     at those  applications and in  cases where it was obvious                                                                  
     they  did not  have access  to  that financing,  we  would                                                                 
     consider  the request  without  the turn  down letter.  In                                                                 
     November Mr.  Crane indicated a concern about  that policy                                                                 
     to  us and so  we actually  had two meetings  with him  in                                                                 
     January  and February. We amended  our policy so that  now                                                                 
     in  every case,  we require  a turn  down letter  now  for                                                                 
     someone to apply under section (c).                                                                                        
                                                                                                                                
     On the  other hand,  like section (a),  loans for limited                                                                  
     entry  permits, currently there  is no restriction.  There                                                                 
     are only two options available,  our program or CFAB's and                                                                 
     right  now borrowers  have a  choice as  to which program                                                                  
     they  wish  to pursue.  So, I  guess  what I'm  saying  is                                                                 
     different parts of the statute have different eligibility                                                                  
      requirements. Some require turn downs and some do not.                                                                    
                                                                                                                                
Number 600                                                                                                                      
                                                                                                                                
CHAIRMAN PHILLIPS  said he understood that no other  industry, other                                                            
than  the fishing  industry,  has a loan  program  like this  within                                                            
state government and asked if that was right.                                                                                   
                                                                                                                                
MR. WINEGAR replied that  they have a couple of other small business                                                            
programs.                                                                                                                       
                                                                                                                                
CHAIRMAN PHILLIPS asked if they were for a specific industry.                                                                   
                                                                                                                                
MR. WINEGAR  replied that they cover  lots of different industries.                                                             
He explained  that the small  business program  they had was  turned                                                            
over to  the Alaska  Industrial  Development  and Export  Authority.                                                            
They  provide  financing  for different  types  of  industries  like                                                            
mining and tourism, etc.                                                                                                        
                                                                                                                                
CHAIRMAN PHILLIPS  said that was a multi-industry  portfolio and his                                                            
was for just the one industry.                                                                                                  
                                                                                                                                
MR. WINEGAR said that was true of this particular loan program.                                                                 
                                                                                                                                
SENATOR LEMAN commented  that the state has other incentive programs                                                            
for other industries.                                                                                                           
                                                                                                                                
SENATOR AUSTERMAN stated:  "This program has been there 29 years and                                                            
I think the reason it's  there obviously is that it's the number one                                                            
industry  in the State  of Alaska…It's  the number  one exporter  of                                                            
product in the State of  Alaska. It's not oil; it's fish. We need to                                                            
make sure that we do protect our fishermen."                                                                                    
                                                                                                                                
SENATOR TORGERSON added  that the reason the program was started was                                                            
that the  fishing industry  was in  bad array.  You couldn't  borrow                                                            
anything from a commercial lender.                                                                                              
                                                                                                                                
MR.  JERRY MCCUNE,  United  Fishermen  of Alaska,  Cordova  District                                                            
Fishermen  United, said when  CFAB was created,  there was a  lot of                                                            
discussion,  and Cordova  fishermen  thought an  alternative to  the                                                            
state program  would be good, because banks couldn't  use permits as                                                            
collateral.                                                                                                                     
                                                                                                                                
He said that the  two are very useful loan programs.  He thought the                                                            
Division  of Investments was  a good program  because it  encourages                                                            
permits to stay in residents' hands.                                                                                            
                                                                                                                                
     CFAB  is a very  conservative  bank and  has high profile                                                                  
     loans,  but in a lot of cases  in the villages and out  in                                                                 
     the  other  places,  young  people  don't  have  a credit                                                                  
     history. They  have to have some experience to  be able to                                                                 
     get  this loan. This  helps a  lot of young  folks. I  can                                                                 
     name  four or  five guys  in Cordova  coming  out of  high                                                                 
     school that  took part in the educational fishing  program                                                                 
     that  got loans  from  the state  and are  now successful                                                                  
     fishermen  and  have paid  their  loans back.  That's  the                                                                 
      usefulness of the Division of Investment Loan Program.                                                                    
                                                                                                                                
     If you were  to do away with the Division of Investments'                                                                  
     loan  program and  leave CFAB  on its own,  I don't  think                                                                 
     we're  encouraging residents  to keep  the permits in  the                                                                 
     state.                                                                                                                     
                                                                                                                                
He added that CFAB has  a floating interest rate and the Division is                                                            
more flexible and the reason  is encourage residents to get into the                                                            
fishery.                                                                                                                        
                                                                                                                                
Number 1000                                                                                                                     
                                                                                                                                
MR. CRANE  responded that  at CFAB, "None of  us have any desire  or                                                            
intent to see  the Commercial Fishing Revolving Loan  Fund done away                                                            
with or no longer be able to do what it does."                                                                                  
                                                                                                                                
MR. CRANE agreed with Mr.  McCune's remarks, but he thought the loan                                                            
administrator  should not look upon  the program as a loan  program.                                                            
"It should  not be  looked at or  talked about as  being one  of two                                                            
programs. It is  not. It is a state loan program.  CFAB is a private                                                            
lending institution. They are not two loan programs…."                                                                          
                                                                                                                                
He said that five or six  years ago, there was a requirement that an                                                            
applicant  be denied by  two other  lenders before  a loan could  be                                                            
made  and he  didn't know  why it  was changed.  He  said it  wasn't                                                            
impossible for  anybody to live with at the time and  he pointed out                                                            
the letter of intent, which  describes the program that was in place                                                            
then when CFAB  would often forward  applicants' paperwork  and some                                                            
of their analysis  to the Division of Investments.  So, there was no                                                            
redundancy.  He also  didn't  know why  this bill  would affect  the                                                            
opportunity to change interest rates.                                                                                           
                                                                                                                                
SENATOR  TORGERSON  interrupted  him and  asked  what  they do  with                                                            
CFAB's profits.                                                                                                                 
                                                                                                                                
MR. CRANE replied that they distribute them to their borrowers.                                                                 
                                                                                                                                
CHAIRMAN  PHILLIPS   thanked  everyone   for  their  testimony   and                                                            
adjourned the meeting at 3:30 p.m.                                                                                              

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