HOUSE FINANCE COMMITTEE April 24, 1995 1:30 P.M. TAPE HFC 95-96, Side 1, #000 - end. TAPE HFC 95-96, Side 2, #000 - end. TAPE HFC 95-97, Side 1, #000 - end. CALL TO ORDER Co-Chair Mark Hanley called the House Finance Committee meeting to order at 1:45 P.M. PRESENT Co-Chair Hanley Representative Martin Co-Chair Foster Representative Mulder Representative Brown Representative Navarre Representative Grussendorf Representative Parnell Representative Kelly Representative Therriault Representative Kohring ALSO PRESENT Bonnie Smith, People Count, Soldotna; Jennifer Deitz, Travel Academy, Anchorage; Marie Becker, Fairbanks; Tom Williams, Staff, Senator Frank; John Bitney, Staff, Representative Martin; Cynthia Parker, Executive Director, Anchorage Neighborhood Housing Projects; Jan, Sieberts, National Bank of Alaska; Joe McCormick, Executive Director, Postsecondary Education Commission, Department of Education; Wendy Redman, Vice President, University of Alaska. SUMMARY HB 78 An Act relating to the maximum amount of assistance that may be granted under the adult public assistance program and the program of aid to families with dependent children; proposing a special demonstration project within the program of aid to families with dependent children and directing the Department of Health and Social Services to seek waivers from the federal government to implement the project. HB 78 was rescheduled. HB 257 An Act relating to student loan programs, interstate compacts for postsecondary education, and fees for review of postsecondary education 1 institutions; and providing for an effective date. CSHB 257 (FIN) was reported out of Committee with a "do pass" recommendation and with two zero fiscal notes by the Department of Education, one dated 3/22/95. SB 92 An Act requiring that, in addition to its operating budget, all activities of the Alaska Housing Finance Corporation are subject to the Executive Budget Act. SB 92 was assigned to a subcommittee consisting of Representative Martin as Chair and Representatives Kohring and Navarre. SENATE BILL NO. 92 "An Act requiring that, in addition to its operating budget, all activities of the Alaska Housing Finance Corporation are subject to the Executive Budget Act." JOHN BITNEY, STAFF, REPRESENTATIVE MARTIN testified on behalf of HB 92. He explained that the legislation was sponsored at the unanimous request of the Legislative Budget and Audit Committee. He explained that the legislation attempts to bring all the activities of the Alaska Housing Finance Corporation (AHFC) under the review procedures of the Executive Budget Act. He observed that the Committee was concerned that the Corporation had undertaken a fairly substantial program with the use of arbitrage funds. Loans were made with arbitrage funds at a 5 percent interest rate. He noted that the legislation was amended in the House State Affairs Committee. The State Affairs Committee placed three items in the bill on page 2, lines 8 - 16, that would be exempted from the review procedures. He explained that financing through the sale of bonds, multi-family loans and projects not to exceed 10 million dollars, and any loan program for which a subsidy is not required would be exempt from review procedures under the Executive Budget Act. He stressed that the intent is to craft language to be added to what is provided for the Corporation in the front section of the operating budget. He explained that AHFC functions approved in the front section of the budget receive open- ended authorization. He stressed that the front section language would be expanded to give the Corporation open- ended authority for the programs which are being brought under the review procedures of the legislature. In response to a question by Representative Brown, Mr. Bitney explained that the legislation varies from the status quo by listing the three exemptions that are not covered by 2 the Executive Budget Act instead of listing the specific areas in which the review of the Executive Budget Act applies. He noted that loan programs and use of arbitrage funds to set up programs and bonding authority were previously exempted. The legislation would require the Corporation to seek approval for grants, any arbitrage program and any subsidized project or program that exceeds 10 million dollars. TOM WILLIAMS, STAFF, SENATOR FRANK asserted that the House State Affairs Committee Substitute for SB 92 may make Alaska Housing Finance Corporation less subject to the Executive Budget Act than it is under current statute. He referred to section (B), page 2, line 12 regarding multi-family loans. He stated that Senator Frank would prefer that the previous version be adopted. CYNTHIA PARKER, EXECUTIVE DIRECTOR, ANCHORAGE NEIGHBORHOOD HOUSING SERVICES testified in support of HCS CSSB 92 (STA). She expressed concern that if all of AHFC's activities were brought under the Executive Budget Act that AHFC could not take advantage of quick changing financial market activities. She discussed the bond issuance capacity of AHFC. She referred to (B) on page 2, line 12. She noted that most multi-family housing projects in Alaska involve subsidy layering from the federal government. She stressed that the complexity of the projects could require up to five different funding sources to make a project work. JAN SIEBERTS, NATIONAL BANK OF ALASKA (NBA) stressed that NBA has been a good partner in supplying financing for housing in the State. He testified in support of HCS CSSB 92 (STA). He expressed concern that AHFC be given flexibility to accomplish complex financing needed for senior and low income housing projects. He reviewed a senior citizen project in Fairbanks. He observed that the project includes federal grants, the use of arbitrage funds, federal tax credits, and other forms of assistance. He stressed that AIDEA has a $10.0 million dollar loan authority. He suggested that AHFC be also given a $10.0 million dollar level of authority. In response to a question by Representative Parnell, Ms. Parker stated that she interpreted page 2, line 12 as a $10.0 million dollar cap on the project not AHFC's portion of the financing. Representative Martin stated that the problem came to the attention of the Legislative Budget and Audit Committee when the 5 percent arbitrage program was initiated. He stressed that the Legislative Budget and Audit Committee is charged with the financial well being of the State. He emphasized 3 the responsibility of the Legislative Budget and Audit Committee to oversee the welfare of the State. Representative Kohring stated that the State will not be encumbered on the part of the Legislation given the strong financial status of AHFC. In response to a question by Representative Kohring, Ms. Parker noted that the addition of "programs" on page 2, line 12 after "loans" would be advisable. She explained that the intent during the drafting was that there be a $10.0 million dollar cap. Legislative oversight would remain under the Executive Budget Act. She suggested that "multi-family" loans may be too restricted. She discussed projects that would be affected by the insertion of "multi-family". Representative Kohring questioned if language should be inserted to clarify that the $10.0 million dollar cap refers to AFHC's participation as opposed to the entire project. Ms. Parker stated that the language suggested by Representative Kohring would be consistent with AIDEA's authority. In response to a question by Representative Mulder, Ms. Parker stated that $10.0 million dollars would equate to a 82 unit building. She noted that "multi-family" units would primarily be low income or special needs units. She explained that tax credits are sometimes allocated to projects to reduce debt. Representative Parnell questioned the intent by the House State Affairs Committee in providing a $10.0 million dollar cap. He asked how often AHFC reaches $10.0 million dollars in contribution for low income projects. She noted that other funding sources are usually involved. She noted that AHFC contributed $4.5 million dollars of a $11.0 million dollar multi-family project in Anchorage. She stressed that some Anchorage projects under AHFC's for profit equity extraction and refinancing could require a $10.0 million dollar involvement by AHFC. She conceded that $10.0 million dollars is a upper limit that is would be reached for multi- family loans and programs. Representative Martin emphasized the importance of AHFC's influence. He stressed the need for legislative oversight. Mr. Sieberts asserted that the legislation substantially brings AHFC under control of abuses previously discussed. He emphasized that the legislation is a compromise that allows AHFC to continue to do business without jeopardizing projects. He asserted that government is involved in all housing loans. 4 Representative Therriault pointed out that AIDEA provides funding for larger projects such as port facilities. He expressed concern with allowing the $10.0 million dollar contribution to refer to only AHFC's portion of a multi- family project. Representative Kohring stressed that AHFC steps in to provide loans when other governmental housing loans are not available. He stated that the entire banking and mortgage lending industry is concerned about the restrictions that the legislation poses. Representative Navarre questioned what portion of AHFC's activity would be available through other markets. Ms. Parker stressed that changing interest rates and market activities effect the availability of secondary market sources. She pointed out that rural areas were disadvantaged until the merger. She stressed that AHFC is able to make rural loans at competitive rates. (Tape Change, HFC 95-96, Side 2) Ms. Parker emphasized that AHFC is the primary lender for multi-family loans. She noted that outside capital may be available for some larger multi-family projects. Mr. Siebert added that NBA services approximately $2.1 billion dollars in loans. He noted that $900.0 million of these loans represent AHFC loans. He stressed that AHFC is probably the only source of money in rural Alaska. He pointed out that mortgage companies take the top third of the market. He noted that conduit marketing representatives are not interested in the Alaska market place. He stressed that HUD projects can take up to a year to arrange lending. He emphasized that AHFC has a rural housing program that works well for up to 12 units. Representative Navarre asked how much of AHFC's rural lending could be displaced with other sources. He asserted that the State has driven up the housing economy by providing financing to the lower two-thirds of the market. He suggested that the financial security of AHFC could be at risk with another down turn in the economy. He stressed that most of the risk falls on AHFC. He stated that the government absorbs most of the loses. Ms. Parker stated that the distortion in the market occurred as a result of single family loans when interest rates were high. She stressed that the issue is AHFC's ability to access normal capital markets in a market driven economy without subsidy. She stated that there is not as high a 5 foreclosure risk in rural Alaska since there is no where for residents to go. Mr. Siebert stressed that the rural portfolio has the lowest default and delinquency rates. He asserted that the rural portfolio carried the rest of Alaska during the last recession. He maintained that the reason that the National Bank of Alaska survived the recession was because the nucleus of its power was in Southeast Alaska. He estimated that it would be difficult to displace rural AHFC loans to other sources. He stressed that AHFC's mortgage standing has aged and is in a better position to withstand another downturn. Representative Brown clarified that the Alaska Railroad is not under the Executive Budget Act. She noted that the merger is three years old. She noted that she introduced the original legislation to make the merger. She emphasized that the level of oversight was discussed in detail. She stressed that there is still a shortage of affordable housing. She noted that up to 25 percent of the housing available is not energy efficient. She spoke in support of HCS CSSB 92 (STA). Co-Chair Hanley noted that SB 92 would be assigned to a subcommittee consisting of Representative Martin as Chair and Representatives Kohring and Navarre. Representative Martin questioned whether the rural portfolio is carrying the rest of Alaska's housing market. He stressed that homes are over priced. Mr. Siebert clarified that the delinquency rates and the portfolio served by the National Bank of Alaska for AHFC in rural Alaska out performs urban centers. SB 92 was assigned to a subcommittee consisting of Representative Martin as Chair and Representatives Kohring and Navarre. HOUSE BILL NO. 257 "An Act relating to student loan programs, interstate compacts for postsecondary education, and fees for review of postsecondary education institutions; and providing for an effective date." DR. JOE L. MCCORMICK, EXECUTIVE DIRECTOR, ALASKA COMMISSION ON POSTSECONDARY EDUCATION testified in support of HB 257. He asserted that the legislation will achieve three broad objectives: It will improve customer service, strengthen the financial stability and independence of the Alaska 6 Student Loan Program and improve overall program administration. Mr. McCormick elaborated on the objectives: * FIRST OBJECTIVE: IMPROVE CUSTOMER SERVICE Section 1: Section 1(1) raises graduate limits from $6,500 to $9,500 thousand dollars. Section 1(2) raises undergraduate loan limits from $5,500 to $8,500 thousand dollars. Section 1(3) would allow $5,500 thousand dollars for a full-time student attending a career education program of nine months or more. Section 1(4) would allow $3,000 thousand dollars for a full-time and $1.0 thousand dollars for a half-time student attending a career education program of less than nine months. Mr. McCormick noted that tuition at the University of Alaska has increased 250 percent since 1984. He pointed out that loan limits have not been raised since 1981. Section 3: Increases consumer protection by giving the Alaska Commission on Postsecondary Education the ability to insure the financial and administrative capability of schools using Alaska Student Loan Program funds. In addition, section 3 requires that Alaska Student Loan Program funds be used only for attending career education programs that are operating on a fiscally sound basis, have been in operation for two years before the borrower attends, have submitted an executed program participation agreement; or for attending colleges or universities that have operated for two years prior to the borrowers attendance and is accredited by a national or regional accreditation association. Section 4: Provides greater flexibility to both the borrower and the Commission by setting the maximum amount that can be borrowed at a dollar amount rather than on number of loan years. Section 6: Amends the terms of repayment. Extends the period of repayment from 10 to 15 years. Decreases the grace period from 12 to 6 months. Sets the monthly payment minimum at $50 dollars a month. Section 12: Extends the period before a loan goes into default from 120 to 180 days. This gives the borrower more of an opportunity to resolve short- term financial difficulties and avoid going into 7 default. Sections 16, 21, 27: These sections allow family members to borrow on behalf of a student at the same time a student borrows on his own behalf. This is meant to address the rising costs of education. The combined loans cannot exceed the cost of attendance. Mr. McCormick observed that the Family Education Loan Program (FEL) differs from the Alaska Student Loan Program in that the borrower must begin repayment after the loan is disbursed. He maintained that the rate of default on these loans is almost nonexistent. Loan maximums are the same for both the FEL and Alaska Student Loan programs. Section 26: Allows the Commission to establish fees for the review of institutions requesting approval for participation in the Alaska Student Loan Program. * SECOND OBJECTIVE: INCREASE THE FINANCIAL VIABILITY OF THE ALASKA STUDENT LOAN PROGRAM Section 5: Eliminates interest-free deferment periods. By eliminating the interest free grace period. The cost to a student with a loan of $5,000 thousand dollars at 8% interest will be approximately $450 hundred dollars. This could be paid off during the deferment period or added to the loan principle. Section 14: Allows the Alaska Commission on Postsecondary Education to set origination fees by regulation. The origination fee is currently at one percent. Under this legislation, the fee could not exceed five percent. This fee will cover loan losses due to death, disability, default, and bankruptcy. Section 18: Gives delinquent student loans priority, behind child support enforcement, for wage garnishment. * THIRD OBJECTIVE: IMPROVE OVERALL PROGRAM ADMINISTRATION Sections 8, 15, 20, 24, and 27 contain technical changes which decrease administrative costs and reduce duplication such as: Elimination of costly and unnecessary mailings to borrowers; requiring illegally obtained loans be paid on demand; and 8 removing arbitrary caps on loan volume. Mr. McCormick concluded that the goal is to ensure that the Alaska Student Loan Program is financially viable so that future generations of Alaskans can be assured access to postsecondary education opportunities. He maintained that passage of this legislation will go a long way toward achieving this important objective. In response to a question by Co-Chair Hanley, Mr. McCormick stated that the Commission could not issue bonds within three years if the loan servicing problems are not addressed. The Commission issues between $40.0 and $50.0 million dollars a year in bonds. Representative Brown questioned if the Fund would be self sustaining with the passage of HB 257. Mr. McCormick stated that the legislation alone would not make the program 100% whole. He noted that students do not pay interest on the loans while they are attending school. He stated that until interest is charged on the period students are in school the program will not be financially sound. Representative Brown asked the effect of the legislation on the typical borrower. Mr. McCormick noted that 70% of the loans pertain to students at the University of Alaska. Those students would have an undergraduate loan limit of $8.5 thousand dollars and a graduate limit of $9.5 thousand dollars. The current loan limit is $5.5 thousand dollars. He estimated a 10 to 20 percent increase in loan volume. The bond issue would have to be increased to cover the demand. Representative Brown noted concern regarding page 2, item 4, line 3 regarding the limit on career education programs to $3.0 thousand dollars for a full time student. Mr. McCormick stressed that the $3.0 thousand dollar limit was the result of staff recommendations. He noted the that the default rate for programs for less than 9 months range from 24 to 56 percent. He stated that the average cost is $4.8 thousand dollars. He emphasized the high risk of vocational education programs. Representative Brown maintained that there is a public interest in making it possible for people to obtain vocational education. She pointed out that university students are being treated differently. Mr. McCormick stated that the University of Alaska has budgets ranging from $9.0 to $18.0 thousand dollars a year. He pointed out that a $8.5 thousand dollar loan does not finance an entire year. He added that university students attend an entire academic year, while vocational programs may be as short as 9 20 weeks. Representative Brown noted that the accompanying fiscal note is zero. Mr. McCormick stated that costs will be absorbed in the capital and operating budget requests. In response to a question by Representative Brown, Mr. McCormick explained that page 10 of the legislation attempts to bring the WITCHIE participation up to date. The new language asks the Commission in cooperation with the Department of Labor and Department of Commerce and Economic Development to prioritize programs. He noted that funding for WITCHIE has been reduced. He added that this will be the second year without funding for new students. (Tape Change, HFC 95-97, Side 1) Representative Grussendorf referred to section 4 on page 3. Mr. McCormick noted that students attend school on an intermittent basis. He stressed the difficulty of tracking years in attendance. He stated that it is easier to track the amount lent. Representative Grussendorf noted that the default period is being extended by 60 days. Mr. McCormick stressed that another 60 days is helpful in settling accounts. He stated that the addition allows students additional time to make arrangements for payments. Representative Martin spoke in support of the legislation. He expressed concern that academic progress be required. Mr. McCormick stated that students must demonstrate academic progress. JENNIFER DEITZ, TRAVEL ACADEMY, ANCHORAGE testified via the teleconference network. She provided members with a letter stating her position, dated April 24, 1995 (Attachment 1). She testified in support of HB 257. She expressed concern with the provision of limiting eligibility for students participating in educational programs of less than nine months. She urged that section 1(4) be revised. Section 1(4) would allow $3,000 thousand dollars for a full-time and $1.0 thousand dollars for a half-time student attending a career education program of less than nine months. BONNIE SMITH, PEOPLE COUNT, ANCHORAGE testified via the teleconference network. She spoke in opposition to section 1(4), page 2. MARIE BECKER, FAIRBANKS testified via the teleconference network. She expressed concern with section 1(4). She stressed that proprietary schools help persons that would 10 not otherwise attend a university. Representative Mulder asked the statute of limitation on debt collection. Mr. McCormick stated that there is no statute of limitation in regards to debt collection. He emphasized that the federal limit for short term programs is $4.2 thousand dollars. The federal limit for programs of less than six months is $2,375 thousand dollars. In response to a question by Representative Mulder, Ms. Deitz noted that the average tuition at the Travel Academy is $3.6 thousand dollars for a 10 to 20 week program. She added that there is a federal grant aid program that is not available to Alaskan students. Mr. McCormick noted that under current law a program can be as short as 6 weeks and receive the full $5.5 thousand dollars. He stressed that the average cost is $4.8 thousand dollars. Representative Navarre noted that students that attend proprietary schools are higher risks by their nature. He emphasized that there have been a number of students of proprietary schools that have made successful transitions from a welfare lifestyle. Ms. Becker gave examples of students that have been successful in obtaining jobs after attending People Count. Representative Brown referred to section 18, regarding attachments of permanent fund dividends. Mr. McCormick explained that the legislation would place the Commission as second in line behind child support attachments. He noted that the entire dividend can be attached. In response to a question by Representative Brown, Mr. McCormick clarified that interest will accrue during a borrower's deferment. He expressed support for allowing the interest to be paid during the deferment payment. He stressed that a deferment of six years for military service is too long. Representative noted that the legislation requires a person to be 100 percent disabled. Mr. McCormick stated that the legislation acknowledges that there are abuses in the program. He noted that a person that is 50 percent disabled is typically able to earn income. Representative Brown expressed concern that someone who is 90 percent disabled and unable to work would loose their permanent fund dividend. Mr. McCormick clarified that such a person could receive a hardship deferment. He stated that the portion of loans affected would be minimal. He noted that the only 11 time a permanent fund dividend is garnished is if the borrower is in default. The right to defer a loan due to disability is given up when the loan goes into default. Hardship cases that have not defaulted would receive their dividends. WENDY REDMAN, VICE PRESIDENT, UNIVERSITY OF ALASKA spoke in support of HB 257. She stated that the University of Alaska offers shorter certificated programs. She noted that the University does support the reduction level of short term programs. She noted that the only way the Masters of Social Work Program will be instituted is to double the cost of graduate tuition. She stressed that graduate programs are becoming market driven. Representative Navarre MOVED to delete "$3.0" and insert "$4.5" and delete "1.0" and insert "1.5" on page 2, line 2. He spoke in support of increasing the limit on loans for short term programs. Representative Mulder OBJECTED. He stressed that some of the programs do not result in jobs that can support the repayment of the loan. Representative Navarre suggested that language be added that would allow up to $4.5 thousand dollars but not more than 90 percent of the program cost. Mr. McCormick stated that the administrative cost of the program would be increased by allowing up to 90 percent of the program cost. He stressed that the risk should be limited based on the high default rates of short term programs. A roll call vote was taken on the MOTION. IN FAVOR: Brown, Grussendorf, Navarre, Hanley OPPOSED: Kelly, Kohring, Martin, Mulder, Therriault Representatives Foster and Parnell were absent for the vote. The MOTION FAILED (4-5). Representative Navarre MOVED to delete "$3.0" and insert "$4.0" and delete "1.0" and insert "1.5" on page 2, line 2. There being NO OBJECTION, it was so ordered. Representative Brown noted that hardship cases can be extended for up to five years in increments of no longer than 12 months each. Mr. McCormick stated that some hardship loans due to disability are written off. Representative Martin MOVED to report CSHB 2357 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. 12 Representative Brown suggested that the Commission revise its fiscal note to reflect the cost of the legislation. She stressed that the fate of the capital request is uncertain. (Tape Change, HFC 95-97, Side 2) Mr. McCormick clarified that the revenue derived from the Fund would be used to run the Commission. Representative Brown summarized that the funding source is not the General Fund. There being NO OBJECTION, CSHB 257 was moved from Committee. CSHB 257 (FIN) was reported out of Committee with a "do pass" recommendation and with two zero fiscal notes by the Department of Education, one dated 3/22/95. ADJOURNMENT The meeting adjourned at 4:05 p.m. 13