SJR 2-CONST. AM: G.O. BONDS FOR STUDENT LOANS  8:23:41 AM CHAIR KELLER announced that the next order of business would be SENATE JOINT RESOLUTION NO. 2, Proposing an amendment to the Constitution of the State of Alaska relating to contracting state debt for postsecondary student loans. 8:24:38 AM REPRESENTATIVE VAZQUEZ noted that the corporation has enough cash to meet its loan obligations. She directed attention to the committee packet handout titled, "State of Alaska Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2015," issued by the Division of Finance, Department of Administration, and the attached page 252, to review the column headed, Alaska Student Loan Corporation. The report provides that the assets of the corporation show cash and investments totaling $35 million, with a bottom line total net position of nearly $221 million. Thus, she surmised that the corporation doesn't appear to be strapped for cash and unable to fund loans. The costs reported during the previous hearing of SJR 2 [3/23/16], were about $30 million. Thus, having to enter the bond market and making a change to the constitution to access that market, is not warranted, she opined. She questioned whether there might not be another avenue to explore, which would prove less draconian than changing the constitution. 8:27:48 AM DIANE BARRANS, Executive Officer, Alaska Student Loan Corporation, Executive Director, Postsecondary Education Commission, Department of Education and Early Development (EED), responded that at issue is whether the commission can meet the volume of new loans, as well as the refinance requirements of existing, loans. The estimated volume of the combination for these two loan categories, in the first year, could exceed $40 million. She reported that, minus operating costs, the corporation's capacity does not meet this level of demand. Speaking to the question of possible alternatives to using GO debt, she said the state, since 2009, has provided two different types of supports to the corporation. One was to enable the Department of Revenue (DOR) to serve as a stand-by bond purchase provider; an agreement whereby the corporation can access the market using the liquidity support from the state. The arrangement ensures that, in the event the corporation defaults on the obligation, the state will buy the outstanding bonds. In structuring that deal, she reported, the corporation was able to, at a relatively low cost, secure a liquidity provider letter of credit, but only on a standby basis. Thus, the loan structure allows access to the market, but it doesn't afford the cost reducing benefits that the GO bonds provide. The other type of assistance that the state offered was authorization in statute, allowing DOR to extend a $100 million loan, of which $70 million has been used. It was structured as a bridge loan, which is not a viable long term strategy for meeting loan demands or for achieving the low cost interest rates that the corporation would like to offer to Alaskans. 8:31:18 AM REPRESENTATIVE COLVER inquired whether the revenue bonds have been leveraged to finance student loans. MS. BARRANS responded yes, and added that it has been the practice since 1988; however, with the change in the market it has become a costly method. REPRESENTATIVE COLVER asked about the point spread between the revenue bonds versus GO financing. MS. BARRANS answered that, if the state maintains its AAA credit rating, the spread would be about 120 basis points, but if the rating drops to AA it would be about 97 basis points. 8:32:51 AM REPRESENTATIVE DRUMMOND asked for an average amount of an Alaska student loan. MS. BARRANS estimated $6,000, and offered to provide further information. The allowed maximums have recently been raised, she said, and predicted that the average total will also increase. REPRESENTATIVE DRUMMOND opined that, estimating an $11,000 loan and considering 11,000 students, $220 million doesn't go very far. She conjectured that, should the Performance Scholarship fund be jeopardized, the corporation will see an increase in loan applications. 8:34:20 AM CHAIR KELLER noted that typically a getting out the vote investment will be made on either side of a ballot issue and asked who the corporation anticipates will get behind promoting, as well as opposing this legislation. MS. BARRANS explained that when a state agency puts an item on a ballot the advocacy is not through the agency. Media relations would allow factual statements to be broadcast, but there is no expectation for promotional efforts. CHAIR KELLER asked if there are any groups that might pursue advertising to advocate for or against the measure. MS. BARRANS said there is no expectation of any campaigns being waged. 8:37:01 AM REPRESENTATIVE VAZQUEZ returned to the testimony predicting a surge in loan applications and asked what information the prediction is based on. MS. BARRANS replied that a number of moving pieces effect loan demand. The commission expects an increase in enrollment levels at the university in the coming years, and tuition costs are also expected to increase. 8:38:21 AM STERLING GALLAGHER stated opposition to SJR 2, and described a personal history of financial work within the state, including commissioner of the DOR and underwriting state bonds. He said the Student Loan Corporation was designed around cash flow, and represents the weakest type of loan that the state can make, due to the lack of collateral. One thing that does make this type of loan work is the fact that it cannot be discharged through bankruptcy. The national average student loan is $60,000, with high end profession graduate debt at about $160,000. Because the commission is designed around cash flow, he opined, other means could be implemented for loan purposes and GO bonds reserved for construction programs and emergency situations. The loan program has been soundly run, he offered, but a young person carrying heavy student loan debt can become a socio- economic burden as their lives change. The national concern for the level of systemic student debt is on the fore burner, and there is pressure to change bankruptcy laws in order to accommodate the fallout, which in turn could affect the states credit rating. Collateral versus the states moral obligation would be a better approach, he suggested, and returned to the figures from the previously cited financial report to state that the need for further assets is appropriately noted. However, ways and means should be accomplished by drawing on other, sufficiently collateralized, state loan balances and programs. 8:45:40 AM CHAIR KELLER asked about the current debt load carried by the state and its rating on Standard and Poor's. MR. GALLAGHER said Alaska has about $600 million in general obligation debts, and opined that, overall, the state is in good shape. 8:47:35 AM REPRESENTATIVE COLVER asked for a general statement of the outlook for GO bonds in the state, and whether SJR 2 appears to present any problem. A state/national disaster would require GO bonds, he noted, and asked about other future needs. MR. GALLAGHER responded that the state has ample flexibility at this point and federal matching funds continue to prove helpful. He suggested that other means could be employed to meet the current financial crisis in the state. 8:51:32 AM REPRESENTATIVE SEATON asked what loans could be appropriated to the commission, without compromise. MR. GALLAGHER answered that the fishermen loans would be one, with about $130 million collaterally extended on quality assets. REPRESENTATIVE SEATON surmised that fishermen loans are collateralized using fishing vessels and questioned how much money could actually be made available. If the loans were based on the payment receipts, it seems that it may be insignificant, he opined. MR. GALLAGHER responded that other agency loans may be based more on cash flow and it's the quality of the cash flow that should be considered. 8:53:46 AM REPRESENTATIVE VAZQUEZ asked if there is a link connecting the fishing loans, as made by the Division of Investments, Department of Commerce, Community & Economic Development (DCCED), and the Alaska Student Loan Corporation program. MR. GALLAGHER responded no; however the fishing program has $60 million in cash, in the till, earning about a half of a percent. Thus, extending that cash to cover $130 million in loans would be an appropriate leverage of funds. REPRESENTATIVE VAZQUEZ clarified that the suggestion is to direct fishing loan funds to the commission. MR. GALLAGHER responded that, instead of appropriating cash to the program, appropriate the loans. 8:55:04 AM REPRESENTATIVE COLVER stated his understanding of the scenario being described and said it utilizes the cash flow for reinvestment. MR. GALLAGHER answered yes, and said it's a smarter use of money and doesn't consume the available balances. 8:56:29 AM The committee took an at-ease from 8:56 a.m. to 8:57 a.m. 8:57:11 AM REPRESENTATIVE COLVER commented that amending the constitution is a weighty affair. He said he does not object to advancing the bill for further scrutiny and debate in the next committee of referral. 8:58:42 AM REPRESENTATIVE TALERICO clarified that the members are not casting a vote to amend the constitution by passing this legislation out of committee. He said many facets will come into play as the bill advances forward. The voting public may be called upon for the final determination and opined that GO bonds may be the best financing alternative. He said he is neutral on the bill, but appreciates opportunities to put decisions before the voters. 9:00:24 AM REPRESENTATIVE SEATON said student loan debt is a big problem nationwide, primarily due to the high interest rates that accumulate and compound debt, even as graduates enter the work force. Lowering the student loan interest rate could be very beneficial, he opined, however, using money from other programs, such as the fishing vessel program, presents a concern. 9:02:10 AM CHAIR KELLER opined that the committee has done its due diligence. 9:02:42 AM REPRESENTATIVE VAZQUEZ commented that the student loan program is critical, especially in light of the tuition rate increases that may be imposed. She maintained her concern for amending the constitution, Article 9, and said that other mechanisms would be more appropriate. 9:04:40 AM REPRESENTATIVE TALERICO moved to report SJR 2, 29-LS0010\W out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, SJR 2 was reported from the House Education Standing Committee. 9:05:02 AM The committee took a brief at-ease at 9:05 a.m.