HB 304-MICROLOAN REVOLVING FUND & LOANS  3:18:48 PM CHAIR KITO announced that the first order of business would be HOUSE BILL NO. 304, "An Act relating to the Alaska microloan revolving loan fund and loans from the fund." 3:19:05 PM BRITANY CIONI-HAYWOOD, Director, Division of Economic Development (DED), Department of Commerce, Community & Economic Development (DCCED), presented HB 304 on behalf of the House Rules Committee by request of the governor. She discussed the microloan revolving fund and some proposed changes. She said new businesses were responsible for about 80 percent of new jobs across the United States. She underlined that new businesses often have trouble securing standard loans. The fund was created by the legislature in 2012 to promote economic development in Alaska by helping small businesses access capital for Alaska residents. MS. CIONI-HAYWOOD continued to describe the loan. She stated the maximum amount was $35,000 and $70,000 for two people. She said loan requests of $35,000 or more require a letter of denial from the bank stating reasons for denial. She added loans are for 6 years and interest rates are fixed at the time of approval. She said that other non-state resources must be committed for the use of any project for which the loan will be used. She added the changes in the proposed bill correct for the lower tier for the bank denial from $34,999 to $35,000, increase maximum loan term from 6 years to 15 years, and increase interest rate calculation by one percentage point to put the loans in line with other state loans programs at prime plus 2 percent. 3:22:28 PM MS. CIONI-HAYWOOD stated the current loan terms do not incentivize businesses to take risks. The proposed changes would facilitate start-ups by adjusting monthly payments and due to the relatively low loan amount it was expected that the loans would not impact the private banking sector. She shared the hope that growing a small business sector would create more viable business that can be serviced by private institutions in the future. 3:23:39 PM REPRESENTATIVE BIRCH asked why the state would want to invest in something that a bank would not supply with a loan. MS. CIONI-HAYWOOD answered that the loan helps people with no established credit. She explained that the state examines different criteria. She specified that all the loans are collateralized. REPRESENTATIVE BIRCH asked about the pool from which the loans are drawn. MS. CIONI-HAYWOOD described which people would be appropriate recipients for the loan and what kind of businesses were likely to be involved. 3:27:44 PM REPRESENTATIVE KNOPP asked for confirmation that the minimum amount without a bank letter of denial was $35,000. MS. CIONI-HAYWOOD answered that was the current minimum and no change was present in the proposed bill. REPRESENTATIVE KNOPP remarked that 4 percent over 15 years stands out as low interest rate. He asked about changes in the interest rate over time. MS. CIONI-HAYWOOD answered that interest rates are set in statute at 2 percent plus prime. 3:29:48 PM REPRESENTATIVE SULLIVAN-LEONARD asked about the current balance of the fund. MS. CIONI-HAYWOOD answered the current cash amount available for lending was $2.27 million. REPRESENTATIVE SULLIVAN-LEONARD said she thought it was a lot of risk for the state. She asked about working with banks to assist people to transition to a conventional loan. She asked whether the state loan affected borrowers' credit rating. MS. CIONI-HAYWOOD answered that the loan did not affect credit ratings. She said the goal is to grow lenders out of the program and towards private lending. 3:32:01 PM REPRESENTATIVE STUTES asked how many loans had been issued and what the success rate was on the loans. MS. CIONI-HAYWOOD answered that currently 33 applications had been received, of which 14 were approved. The principal outstanding was $93 thousand. She added the department wanted to see the loan fund better utilized. She commented that due to the repayment schedule, some borrowers were not willing to accept the risk. REPRESENTATIVE STUTES asked about the rate of success in repayment. MS. CIONI-HAYWOOD answered the current delinquency rate was 6.1 percent. REPRESENTATIVE WOOL asked how much collateral was required to receive the loan. MS. CIONI-HAYWOOD answered that collateral can vary from the equipment for which the loan is being sought or an asset such as a car or home. 3:35:05 PM REPRESENTATIVE WOOL asked what the current maximum loan was. MS. CIONI-HAYWOOD answered the current maximum loan was $34,999 for one person and $70,000 for two people. REPRESENTATIVE WOOL asked what would change in the proposed bill. MS. CIONI-HAYWOOD answered the amount would change from $34,999 to $35,000 and the interest rate would change to prime plus 2 percent rather than prime plus 1 percent. 3:36:26 PM REPRESENTATIVE KNOPP asked whether the interest rate would fluctuate with prime. MS. CIONI-HAYWOOD answered the interest rate was fixed but could fluctuate when the Federal Reserve increases the prime rate. She added the rates were set quarterly. REPRESENTATIVE KNOPP asked whether an individual could be eligible for more than one loan. MS. CIONI-HAYWOOD answered they could be eligible for one loan per project. 3:37:41 PM REPRESENTATIVE WOOL asked how the program is advertised. MS. CIONI-HAYWOOD answered there is some community outreach but that it is constrained by travel limitations. She added there are different community entities that the department works with to reach out to potential loan participants. 3:40:04 PM CHAIR KITO opened public testimony on HB 304. 3:40:23 PM TIM DILLON, Executive Director, Kenai Peninsula Economic Development District, testified in support of HB 304. He stated his organization was frequently approached for information on small business loans. He spoke to the proposed improvements to the current microloan revolving loan program. He said his organization only had enough in their program for six or seven loans, and the state loan program would help them direct small businesses to loan opportunities. 3:43:42 PM REPRESENTATIVE BIRCH asked about Mr. Dillon's experience with loans, collateral, risk, and repayment. MR. DILLON answered his organization has had a lot of success. He mentioned the Kenai River Brewing Company and said his program had made the loan for the brewery's canning machine. He stated his board contains a committee which only looks at loans. He specified his organization issued a maximum loan of $25,000. He reiterated that any additional help would be welcome. 3:46:04 PM REPRESENTATIVE KNOPP asked whether Mr. Dillion had ever referred clients to the state microloan revolving loan program. MR. DILLON answered in the affirmative. He added that when he was city manager of Seldovia he had directed two businesses to the loan program. 3:47:33 PM NOLAN KLOUDA, Director, University of Alaska Center for Economic Development, testified in support of HB 304. He spoke to the importance of creating new jobs in Alaska. He said new businesses are responsible for nearly 100 percent of net employment growth in Alaska each year. He said businesses with fewer than 5 employees create around 3,600 jobs per year. He added around 60 percent of new business owners use their personal savings to start out. He spoke to the risk element. He said that small loans do not tend to be very profitable for banks, which causes banks to "shy away" from smaller loans. 3:51:05 PM REPRESENTATIVE KNOPP asked about concerns regarding the success rate of new start-up businesses. MR. KLOUDA answered that it is something that has to be taken into account. He stated loans have terms and conditions which can mitigate major risk factors. He said cash flow, collateral, and other risk factors are examined by finance staff. He said the risk factor was not particularly worrisome. 3:52:57 PM TRAVIS LEWIS, Vice President, Alaskans for Alaska, testified in support of HB 304. He stated his organization and his family and friends were direct beneficiaries of the state program. He brought up the issue of residency and said he thought it should be stricter. He spoke to family businesses and gave the example of inherited fishing boats or businesses that need to be updated in order to comply with new regulations. He pointed out that many businesses were the continuation of old businesses rather than new businesses. He said small businesses in rural areas were trying to keep winter jobs available. He reiterated his concern that people were applying for the loans who only spent a few months a year in the state, taking opportunities from local people. CHAIR KITO held over HB 304.