MINUTES SENATE FINANCE COMMITTEE May 4, 1996 10:45 a.m. TAPES SFC-96, #109, Sides 1 (000-500) CALL TO ORDER Senator Rick Halford, Co-chairman, convened the meeting at approximately 10:45 a.m. PRESENT In addition to Co-chairmen Halford and Frank, Senators Phillips, Rieger, Sharp, and Zharoff were present. Senator Donley arrived as the meeting was in progress. ALSO ATTENDING: Laurie Otto, Deputy Attorney General, Criminal Division, Dept. of Law; Ed Crane, Chief Executive Officer, Commercial Fishing and Agriculture Bank; Juanita Hensley, Chief, Driver Services, Dept. of Public Safety; Diane Shriner, Division of Elections, Office of the Lt. Governor; Julie Tauriainen, aide to Representative Gary Davis; Patti Swenson, aide to Representative Bunde; Richard Vitale, aide to Representative Parnell; and aides to committee members and other members of the legislature. SUMMARY INFORMATION HB 284 - ALASKA COMMERCIAL FISHING AND AGRICULTURE BANK Continued discussion was had with Ed Crane. Amendments 4, 5, and 6 were discussed, and Amendment No. 6 was adopted. SCS CSHB 284 (Fin) was then REPORTED OUT of committee with zero fiscal notes from the Dept. of Fish and Game and Dept. of Revenue (Treasury). CS FOR HOUSE BILL NO. 284(FIN) An Act relating to the Alaska Commercial Fishing and Agriculture Bank. Co-chairman Halford directed that CSHB 284 (Fin) be brought on for discussion. Senator Zharoff noted that the committee had previously worked through three amendments and was considering Amendment No. 4, which would add new sections to Section 20 (Limitations on the Pledge of Permits) at Page 11, line 15. The proposed additions were originally included in the bill but removed in the course of House consideration. The Senator spoke to need for greater flexibility allowing commercial fishermen holding permits to collateralize loans for other purposes. Proposed subsection (5) would allow the borrower to collateralize the permit if a majority of his or her income is derived from fishing. A medical emergency was used as an example of need to use the permit as collateral for something unrelated to fishing. Subsection (6) would allow a fisherman to borrow moneys for enhancement of productivity or diversification of commercial fishing activities. Senator Zharoff spoke to benefits of greater variety in seafood industries which increase marketing and provide possibilities for value-added resources. Subsection (7) relates to payment of obligations. Senator Zharoff used taxes, divorce, child support, and other litigation as examples of need for flexibility. The Senator then MOVED for adoption of Amendment No. 4. Co- chairman Frank OBJECTED. He voiced his understanding that the purpose of CFAB (Commercial Fishing and Agriculture Bank) is to finance fishing/agricultural endeavors. He acknowledged situations in which fishermen might need "other financing for other purposes" but expressed his belief that the focus of CFAB should be limited to the industry rather than serving other credit needs of fishermen. He suggested that expanding the focus might, over time, lead to degradation of the quality of the loan portfolio. Co-chairman Halford asked how much is presently outstanding and secured by permits. ED CRANE, Chief Executive Officer, Commercial Fishing and Agriculture Bank, estimated $25 to $26 million (approximately 80 percent of outstanding loans). He clarified that a portion of the loans are secured by both permits and vessel mortgages. A much larger percentage is secured by permits only. Some loans are secured by vessels, only, or other collateral. Co-chairman Halford explained that his concern stems from the fact that if the federal government should take over fishery management and restrictions on entry do not apply to rural residents, there would be major adjustments in permit values. Senator Rieger noted that the permit is the major asset for some fishermen. That is what is available to borrow against much as other individuals borrow against their homes. He suggested that the quality of the loan (rather than what the proceeds will be used for) should be the focus. In response to a question from Senator Phillips, Mr. Crane advised that permits in most fisheries have market values. Under existing statutes, CFAB has the right to acquire a permit when a loan defaults and to sell the permit. The bank is mandated to make considerable effort to sell the permit to a resident. A permit is much like any other form of collateral. Mr. Crane acknowledged that certain permits in certain fisheries, at the present time, are not as attractive as they were two or three years ago. Mr. Crane cited as particularly troubling the extent and the manner in which the Internal Revenue Services has attempted to apply a "scorched earth" policy in rural Alaska. It has the opportunity and right to seize permits quickly and easily. The state has spent considerable amounts in attempts to resist that and bring rationality to the IRS process. The IRS can levy a tax lien, seize a permit, and attempt to sell the permit within 30 days. However, the IRS has not yet acquired the legal right to sell the permit. That issue is now under litigation. When a borrower from CFAB defaults, the bank must go through a considerable process in demonstrating default that has existed over a considerable period of time. The foreclosure process then takes a minimum of 120 days. After acquiring the permit, there is typically a minimum of 60 days before it can be sold. In the course of further discussion with Senator Phillips, Mr. Crane advised that the bank has suffered losses on not only permit loans but other kinds of loans where the bank foreclosed and subsequently disposed of the collateral. He acknowledged that if, at the time of sale, the permit is equal to or more than what is owed, the bank is essentially reimbursed for what was loaned. If the permit value at foreclosure and sale is more than the amount of the remaining loan, the excess goes back to the borrower. If it is worth less, the bank has the legal right to pursue the borrower for the deficiency. The foregoing is generally true of all loans and not unique to the proposed paragraphs in Amendment No. 4. Co-chairman Halford said that exposure rests in the fact that (to close the fishery or preclude extension of federal authority over the fishery) a state could change the value of the permit and might diminish it to nothing. Foreign action in the Japanese market to reduce the value of the product by a substantial amount also impacts the value of the permit. The bank portfolio is thus exposed to an extensive schedule of permit values that "go up and down with the market." The bank traditionally loans a percentage of a value which is based on a state-created entity. The combined total of permit values is "over $1 billion." That is totally paper-created by the state. The state could, theoretically, repeal the entire system, and that value would disappear. Mr. Crane remarked that CFAB was created to serve the financial needs of resident fishermen. Subsections within Amendment No 4 reflect means by which the bank can be more useful to fishermen. He acknowledged that CFAB is "subject to severe damage by systemic failure." However, the bank has been built to a sufficiently strong capital position to withstand two or three "bad" fishery years. Mr. Crane concurred in prior comments by Senator Rieger. For many fishermen, a limited entry permit is a major part of both the operational and family financial base. The bank also finances agriculture. A typical family farmer can use any asset he owns to meet any family need. That is true of most types of businesses. Mr. Crane next testified to House action on the bill. Senator Zharoff noted an attempt to repeal limited entry soon after it was enacted. That attempt failed. Both the state and federal government appear to be moving in the opposite direction with recent limited entry in halibut and sable fish industries. The present limited entry system, in terms of participants, would likely carry over under a federal take over. Co-chairman Halford voiced his belief that the value of permits would be substantially diluted by rural residents who could fish (under other provisions, in commercial quantities) under current federal case law relating to customary and traditional trade. Senator Zharoff voiced his understanding that CFAB would not be loaning the full value of the permit. Mr. Crane explained that loans are based on the projected cash flow of the fishing operation as well as the general financial condition of the fisherman. It is not uncommon for the bank to lend a borrower 100 percent of the purchase price of a permit. On the other hand, there are many applicants to whom the bank will not lend at all. Mr. Crane voiced his belief that what are generally viewed as permit values are misleading and distortions. What has happened to permits has done economic damage to both individuals and the state. The legislature has always had the ability to influence that in a favorable way. The system has allowed permits to be viewed as investment vehicles rather as tickets to fish. It is totally inappropriate for CFAB or any other lender to be basing loans on published values. Co-chairman Halford asked if any piece of proposed Amendment No. 4 would allow only for CFAB loans in defense of immediate IRS attack. He voiced his belief that fishermen were being treated differently than other classes of businesses and borrowers. To extend the list of things for which they may borrow (from an entity that is not available to anyone else) poses problems. However, use of CFAB to recapture permits for Alaskans is supportable. Senator Zharoff advised that subsection (7) would apply to that purpose. Co-chairman Halford inquired concerning alternative wording so that the subparagraph would cover only IRS problems. Mr. Crane asked that the committee also consider covering divorce situations. Co-chairman Halford questioned why a fisherman should have access to CFAB to pay off an estranged spouse when other Alaska business people and residents do not enjoy that access. The public purpose here is not to treat classes of Alaskans differently based on occupation and their financial options but to keep permits in Alaska. Mr. Crane reiterated that individuals and businessmen can access local banks and obtain loans on personal or business collateral when financial needs arise. Fishermen do not have access to local banks for permit-based loans. Fishermen commit a substantial amount of their financial base to acquisition of a permit. They often do not have the real estate or personal property accumulated by others. CFAB was founded to meet needs that cannot or will not be met by other institutions. Co-chairman Halford reiterated that he would support an amendment that deals only with loss of the permit to IRS. Further discussion followed regarding IRS attempts to take permits. Co-chairman Halford noted that the state has always held that permits are not property and are not transferrable. Senator Zharoff called for a vote on Amendment No. 4. The motion failed on a hand vote of less than four votes. Senator Zharoff then MOVED for adoption of Amendment No. 5 which he explained would consist of subparagraph (7) from failed Amendment No. 4. Discussion followed regarding the process used by the IRS when attempting to take a limited entry permit. Senator Zharoff subsequently withdrew Amendment No. 5. Co-chairman Halford advised that he would have no objection to a reworded subsection (7) that states: (7) the payment of obligations whose status places the permit of a borrower in jeopardy of sale on execution of judgment. That would satisfy the public purpose of keeping permits in Alaska and make loans upon permits more tolerable. Senator Randy Phillips requested a brief recess. RECESS - 11:20 A.M. RECONVENE - 11:30 A.M. Upon reconvening, Co-chairman Halford restated the above rewording of subsection (7) and advised that it would cover any execution or judgment. He then noted current limitations on execution of judgment in civil matters. That is part of the dispute with the IRS. Senator Zharoff MOVED for adoption of the foregoing rewording of subsection (7) as Amendment No. 6. No objection having been raised, Amendment No. 6 was ADOPTED. Senator Sharp noted that subsection (6) appears to protect the value of the license and asked if discussion of the proposed change had occurred. (Review of language at Page 11 of CSHB 284 (Fin) indicated that subsection (3) would cover the same type of costs.) Senator Zharoff MOVED for passage of SCS CSHB 284 (Fin) with individual recommendations. No objection having been raised, SCS CSHB 285 (Fin)was REPORTED OUT of committee with zero fiscal notes from the Dept. of Fish and Game and Dept. of Revenue (Treasury). Co-chairman Halford and Senator Zharoff signed the committee report with a "do pass" recommendation. Senators Phillips, Rieger, and Sharp signed "no recommendation." ADJOURNMENT The meeting was recessed for floor session attendance at approximately 11:45 a.m.