Legislature(2001 - 2002)
04/19/2001 01:37 PM Senate L&C
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* first hearing in first committee of referral
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+ 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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