HB 121-LOAN FUNDS:CHARTERS/MARICULTURE/MICROLOAN  1:23:04 PM CO-CHAIR SEATON announced that the next order of business is HOUSE BILL NO. 121, "An Act establishing the commercial charter fisheries revolving loan fund, the mariculture revolving loan fund, and the Alaska microloan revolving loan fund and relating to those funds and loans from those funds; and providing for an effective date." [Before the committee was CSHB 121(FSH).] 1:23:43 PM CURTIS THAYER, Deputy Commissioner, Office of the Commissioner, Department of Commerce, Community & Economic Development (DCCED), said HB 121 would create a suite of three new revolving loan funds that would help Alaska entrepreneurs build their businesses and contribute to the state's economy. Revolving loan funds have a proven track record in the state and are administered within the department's financing section. These new revolving loan funds would make it easier for entrepreneurs to invest in business expansion, which would stimulate economic activity. The bill would incentivize the development of the shellfish mariculture industry, assist Alaska charter operators in acquiring halibut permits to transition to the new regulatory and management regime instituted by the National Oceanic and Atmospheric Administration (NOAA); and would seed microenterprise development across the state. MR. THAYER explained that the Commercial Charter Fisheries Revolving Loan Fund would provide access to capital for Alaskan- owned charters. It would repatriate permits to Alaskans and would increase economic benefits to Alaska by re-circulating earnings from this sector into Alaska. He informed members that an interest rate change in a previous committee of referral could conflict with the private sector loan program and the department is working with that committee to rectify this conflict as the bill moves forward. 1:25:22 PM MR. THAYER said the Mariculture Revolving Loan Fund would provide a spark to a growing industry with great year-round potential for coastal Alaska communities and entrepreneurs. Currently, 67 farms are permitted in the state, but only 25 of them are producing farms - 10 in Southeast, 15 in Southcentral. Twenty years ago in British Columbia, mariculture was a $500,000 industry; today it is a $30 million industry because the province seeded these mariculture forms. Alaska's mariculture economy is currently at $473,000 and this revolving loan fund would act to seed this industry. MR. THAYER stated that the Alaska Microloan Revolving Loan Fund would help small businesses grow by providing loans for start-up costs, working capital, inventory expansion, and other commercial purposes. Alaska is one of a few remaining states without a microloan program, which has a proven track record in other states and through the Small Business Administration (SBA). He reminded members that last year this very same bill passed the House 40-0, and said that this year it is packaged with some other revolving loan funds. 1:26:28 PM MR. THAYER noted that these programs would complement two existing small business loan programs administered by the Division of Economic Development - the Small Business Economic Development Revolving Loan Fund and the Rural Development Initiative Fund, both of which are geared toward long-term financing. Small businesses are the number one creator of private-sector jobs, so HB 121 would be good for Alaska's economy and families because it would spur sustainable economic growth in the state. The department is on a mission to foster a business climate in Alaska that is conducive to job creation and economic growth. The department is examining how it operates in an effort to be more responsive to the needs of the business community and deliver services that are relevant and useful to the private sector. Recent realignment of resources and services within the department has bolstered the state's economic development toolbox and is reasserting the state's role in creating a business-friendly environment in Alaska. MR. THAYER added that the department has spent a lot of time listening to the private sector. The commissioner recently formed an economic advisory task force comprised of industry leaders that has been instrumental in reaching out to the private sector. This was done through non-governmental organizations, trade associations, helping this administration plot a productive course to economic development. Additionally, the department solicited input from non-governmental organizations, trade associations, Alaska Regional Development Organizations (ARDORs), Alaska Native Claims Settlement Act (ANCSA) corporations, and legislators. A commonly heard theme has been to increase financing options for small businesses because access to critically needed capital can be the difference between simply getting by, and thriving. He said HB 121 is a step in the right direction and urged its passage. 1:28:03 PM CO-CHAIR SEATON requested an explanation about the relationship of microloans in terms of HB 121 and ARDORS. MR. THAYER replied that, currently, one of the twelve ARDORS in the state has a very successful microloan program that is in the Kenai Borough. In the past the department and borough have discussed working together and having the department possibly operate the borough's fund. The department would continue to work with the ARDORS individually and actually prefers that people work with the ARDORS first before coming to the state. Since only this one ARDOR is providing a microloan program, the majority of the state does not have one. In further response to Co-Chair Seaton, Mr. Thayer confirmed that the microloan provision of HB 121 would not override or necessarily replace a microloan program from an ARDOR, but if an ARDOR wanted to work with the department in doing a microloan program this provision would enable it. 1:29:15 PM REPRESENTATIVE P. WILSON asked whether a person who has a microloan from an ARDOR would also be able to get a microloan from the state. MR. THAYER deferred to the director of the Division of Economic Development for an answer. WANETTA JO AYERS, Division Director, Division of Economic Development, Department of Commerce, Community & Economic Development, replied it is conceivable that there could be circumstances where that would happen, but the borrower would have to have the collateral in place to make that possible. The circumstances of that individual borrower, the project, and the kind of collateral that the borrower can bring forward would have to be looked at. REPRESENTATIVE P. WILSON observed that two of the three revolving loan funds are water related. She presumed that the microloan fund would be available for any other kind of business. MS. AYERS responded that is correct. 1:30:40 PM REPRESENTATIVE HERRON understood that a microloan is what financial institutions call pre-bankable. MS. AYERS answered that in terms of that specific definition she would say that most of these borrowers would have issues in that by definition they would have been turned down by an existing private lender, but may be able to achieve the circumstances of the microloan fund in order to get to a credit decision. REPRESENTATIVE HERRON agreed, saying his understanding of this proposed legislation is that microloans are for individuals who have lack of collateral. He asked whether a person's employment and credit history are considered. MS. AYERS replied that all of those factors would be considered by a loan officer prior to being taken to a committee for a decision. 1:32:06 PM CO-CHAIR FEIGE asked whether these loans would be made to people who previously had not qualified for commercial loans. MR. THAYER responded yes, there is a turn-down provision by a commercial institution before a person goes to the state. CO-CHAIR FEIGE presumed these loans are inherently more risky than standard commercial loans. MR. THAYER answered yes. CO-CHAIR FEIGE inquired whether the interest rates should be higher than what has been indicated in order to account for the risk. MS. AYERS replied that characterizing these as riskier loans is correct; however, that risk would be mitigated largely through collateral requirements. The interest rates are what would be common with other comparable microloan programs offered in other states. CO-CHAIR FEIGE asked what collateral would be acceptable to the commissioner. MS. AYERS responded that in the past, collateral has included real property, fishing vessels, gear and equipment, and in some cases inventory is considered. Based on the risk and assessment of the loan officer, a determination will be made about how much collateral is required for achieving the loan. The national average microloan value is about $12,000 to $13,000. [The division] is requiring anything above $35,000 to have the turn down and expects it will be close to or slightly higher than that number. 1:34:40 PM REPRESENTATIVE GARDNER said she is very glad to see that someone with past-due child support obligations cannot receive a loan. She inquired how the department would track whether a borrower had fulfilled the requirements in Section 1 of the bill. She further inquired whether the sponsor would be receptive to requiring a report to the legislature regarding repayments. MS. AYERS, regarding Section 1, explained that the department has several objective measurements as to whether things are manufactured in the state of Alaska, including the Alaska product preference statute and the Made in Alaska standard. There would be ways for borrowers to determine whether a particular vendor had achieved those standards. Additionally, that is guidance for the loan officers as well. MR. THAYER pointed out that both of the aforementioned programs are run by DCCED. MS. AYERS, regarding the reporting standard, noted that the department does provide an annual report that indicates loan origination and servicing activities, as well as performance standards such as defaults and delinquencies. 1:37:01 PM REPRESENTATIVE HERRON asked what the prediction is for the rate of successful microloan repayment. MS. AYERS answered that [the department] believes it will be in the range of 90-95 percent. While there is no definitive source that provides a national average, the MicroCapital Monitor estimates that the average default rate is about 5 percent, which tracks fairly well with the department's Small Business Economic Development Revolving Loan Fund. 1:37:53 PM REPRESENTATIVE P. WILSON inquired as to what the default rate is for the Commercial Fishing Revolving Loan Fund. MS. AYERS replied that she does not have that specific number on the top of her head, but in general for last year the default rate was less than 1 percent for the entire portfolio. 1:38:24 PM CO-CHAIR SEATON opened public testimony. PAUL FUHS, Pack Alaska Sea Farms, said he first went to work for Pack Alaska Sea Farms to help untangle some extremely complex regulatory issues, but he came to believe so much in this industry and its potential that he became a part-owner of one of these farms, primarily focusing on geoducks. The farms began putting in seed about eight years ago and the first successful harvest of geoducks was just this last month. An adult geoduck ideal for the Chinese and Japanese markets weighs about one-and- a-half to two pounds. MR. FUHS said the timing of this loan program is good because the technology has now been proven. People mortgaged their houses and drained their bank accounts to get to this point. It takes six to seven years for a geoduck to reach market size, so the fairly long loan repayment terms in the bill are balanced with the lifecycle of these animals. Justification for the state to establish this program is that it is hard for a bank to give a loan when the person cannot show any revenue coming in for six or seven years. Additionally, there are lease expenses to the Department of Natural Resources (DNR); for example, his farm pays an annual lease to DNR of about $10,000. 1:40:33 PM MR. FUHS said economic development is another reason for doing this. In addition to the farmer, there is quite a chain of people involved in the product. Behind the numbers of overall harvest is the boat that is hired for planting, the mechanics who work on the boat, the people the fuel is purchased from, the processing of the geoducks which is done during the salmon offseason thereby allowing processing staff to work longer, the purchase of seed from the Seward hatchery, the transportation of the seed, and the shipping of the product. During his time as the commissioner of the Department of Commerce, Community & Economic Development quite a few years back, the loan programs for fisheries were very successful with a very low default rate and therefore he expects the same with this. 1:41:52 PM SEAN RUDDY stated that he has an oyster farm in Kachemak Bay and is part of the Kachemak Shellfish Mariculture Association and the Kachemak Shellfish Growers Co-op. He has been farming oysters for about eight years and this would be a very beneficial fund, especially for new farmers. In this business it takes a long time to become profitable. Furthermore, it takes many resources, including money, to make it happen. He had to buy his own boat, build his own boat, customize gear, get gear to hold the oysters on the farm, pay his DNR fees as well as Department of Environmental Conservation (DEC) fees, along with the labor of working on the farm. He urged the committee to approve the loan fund. 1:43:26 PM GERRY ANDREWS offered his agreement with all of the testimony provided by Mr. Thayer. He said he has owned Icy Bay Oyster Company since 2005 as a startup. He has yet to produce an oyster, but that is not because he didn't try. One big hurdle for an individual like himself coming into the industry is the financing and not having that legacy of production, and this has slowed down getting into production. As a result he has changed his business plan and is now looking at purchasing a farm in Kachemak Bay and becoming a member of the Kachemak Bay Shellfish Mariculture Association and also the greater community of the [Alaska Shellfish Growers Association]. He urged the committee to move HB 121 forward. 1:45:19 PM MEGHAN CLARK, Crabby Sisters, testified that her Anchorage-based seafood company brought its product of gluten-free Alaska king crab cakes to market this past January. Over the last two years her company has developed a strong relationship with its local small business development center and have taken over 40 hours of group trainings and seminars. Additionally, she [and her business partner] routinely meet with their business advisors, specifically focusing on the development of their company's current financial analysis and future projections. Her company's market research and development and current production numbers demonstrate a high consumer and commercial demand for its product, and this demand means growth and expansion. To achieve this growth her small, local manufacturing business will need a loan to meet its cash flow needs. Unfortunately, it has been her experience that despite her ability to demonstrate good character, capacity to repay, favorable market conditions, and previous small business experience, her company is simply categorized as a startup lacking marketing history, which is a red flag for financial institutions. This microloan legislation would assist in breaking down this barrier to expansion by providing sufficient cash flow to grow her Alaska business at a healthy and steady pace. 1:47:25 PM TIM DILLON, City Manager, City of Seldovia; Executive Director, Seldovia Holding Corporation, said the community of Seldovia, like many small coastal communities in Alaska, has had a struggling economy for years. "Things are starting to come back and this kind of an opportunity, this kind of a loan fund, would be a huge shot in the arm for a small community like Seldovia." He encouraged the committee to move HB 121 forward. 1:48:29 PM ADAM GALINDO, Taco Loco, stated that he is representing Taco Loco products. He is a strong supporter of HB 121. Taco Loco is an established business that is one of Alaska's largest food manufacturers, but it is having a hard time securing capital to grow its business and create jobs without having to pay 12 percent interest and put 35 percent down to the banks that the business has dealt with for many years. The current economy is putting a crunch on a lot of Alaska businesses and manufacturers. He urged that HB 121 be passed from committee. CO-CHAIR SEATON closed public testimony on HB 121 after ascertaining that no one else wished to testify. 1:50:03 PM REPRESENTATIVE P. WILSON inquired whether the startup funding for the provisions of HB 121 would come from the "Commercial Fishing Revolving Loan". MS. AYERS replied no, that is not part of the proceeds from the Commercial Fishing Revolving Loan Fund. In response to further questions from Representative P. Wilson, she confirmed that under the current fiscal note the funding would come from the general fund. Currently, capitalization for the Microloan Revolving Loan Fund would be $3.5 million, for the halibut commercial charters revolving loan fund it would be $5 million, and for the [Alaska] Mariculture Revolving Loan Fund it would be $3 million. She said there would also be a separate operating cost but she does not have that amount in front of her. CO-CHAIR SEATON interjected that fiscal note number 1 would provide $169,000 for operating expenses in Fiscal Year 2012 and it would be approximately the same amount for subsequent years. 1:52:53 PM REPRESENTATIVE MUNOZ asked whether current loan funds are accessible to business people involved in mariculture or the commercial charter fisheries. MS. AYERS responded that there is not currently something that is designated for these specific activities of mariculture or sport fish. With regard to microloans, there are two funds more designed for long-term financing: the Small Business Economic Development Loan and the Rural Development Initiative Fund. However, both of those funds have certain restrictions, geographic restrictions, and other complications due to federal requirements that make it difficult to lend on a statewide basis. 1:54:02 PM CO-CHAIR FEIGE allowed that it sounds from the testimony like there is a fair amount of difficulty in getting standard financing through normal commercial channels. However, he is loathe to put the state in the position of being a bank because the state would then be competing with banking institutions, although he recognizes that in this case it does have a certain degree of merit. He inquired of the committee and Mr. Thayer whether it would be wise to put a sunset on this, keeping in mind that while economic times may be tough currently they could be rosy in 10 years. REPRESENTATIVE P. WILSON commented that for the "commercial fishermen's revolving loan" the fisherman's boat or permit is the collateral so that person will do everything possible to keep from losing his or her boat because that is the person's only livelihood. She asked what the collateral would be in the case of a shellfish farmer who might have another livelihood besides the shellfish farm or is retired and undertaking the farm as an investment. 1:56:55 PM CO-CHAIR SEATON pointed out that many times the collateral for the loan also includes the person's house or other real estate, not just the boat. Oftentimes a boat does not matter because the borrower needs to have other collateral for backup on the loan. He cautioned that since this is a revolving loan fund, a term on it would create uncertainty for prospective borrowers. People would be unable to make business decisions when the sunset date is approaching. He pointed out that the legislature does have the ability to make adjustments in the future to the revolving loan funds if it is found that they are necessary. REPRESENTATIVE HERRON noted that Ms. Ayers earlier confirmed that this is a pre-bankable model. Had Ms. Ayers said that the repayment rates might fall below 90 percent, then he would have been concerned. But a 95-97 percent repayment rate should be looked at in a positive way and not be looked at overly critically because the important part in this repayment plan is the borrowers. He said he thinks it is an important finance method that the state should deploy. 1:59:45 PM CO-CHAIR FEIGE questioned whether DCCED would support a sunset provision in the bill. MR. THAYER answered that if it is the will of the legislature, then the department would support a sunset provision for the success of the loan program moving forward. However, while HB 121 was being drafted the department worked with the Commercial Fishing and Agriculture Bank (C-FAB) and the banking community to be very careful not to compete with the private sector. The department would like to see this bill pass. 2:01:37 PM The committee took an at-ease from 2:01 p.m. to 2:05 p.m. 2:05:49 PM REPRESENTATIVE MUNOZ said she likes HB 121 because it addresses the funding problems that certain industries in Alaska have. She understood that the first years for a new shellfish grower are very cost intensive and it takes seven to eight years before any income is derived. She asked whether the loans that are specifically for mariculture farmers would take that into account. MR. THAYER replied that it does and a borrower may defer the interest for up to six years, subject to an arrangement with the Division of Economic Development loan officer. This was addressed by the prior committee, the House Special Committee on Fisheries, he noted. 2:07:05 PM REPRESENTATIVE MUNOZ inquired whether the $169,000 in operating costs during the first years would come from the general fund or the revolving loan fund. MR. THAYER responded that those costs would be funded through the fund itself. In further response, he confirmed that interest payback/revenue generation would occur in 2012, the first year of operation, and in 2013. 2:08:21 PM REPRESENTATIVE MUNOZ moved to report CSHB 121(FSH) out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 121(FSH) was reported from the House Resources Standing Committee.