02/08/2011 10:15 AM House ECON. DEV., TRADE & TOURISM

          HB 120-AIDEA: NEW MARKETS TAX CREDIT PROGRAM                                                                      
                                                                                                                                
10:59:30 AM                                                                                                                   
                                                                                                                                
CHAIR HERRON announced  that the final order of  business would be                                                              
HOUSE BILL  NO. 120,  "An Act  creating a  new markets  tax credit                                                              
assistance   guarantee  and   loan  program   within  the   Alaska                                                              
Industrial  Development and  Export Authority;  and providing  for                                                              
an effective date."                                                                                                             
                                                                                                                                
10:59:59 AM                                                                                                                   
                                                                                                                                
TED LEONARD, Executive  Director, Alaska Industrial  Development &                                                              
Export  Authority  (AIDEA)  and  Alaska  Energy  Authority  (AEA),                                                              
Department   of  Commerce,   Community   &  Economic   Development                                                              
(DCCED), informed the  committee that in the last  two years AIDEA                                                              
has been  searching for  tools to  use in  the efforts  to promote                                                              
more  economic development  in the  state,  to diversify  Alaska's                                                              
economy, and  to increase investment  in rural areas.   He relayed                                                              
that during discussions  with other economic  development agencies                                                              
it  was  noticed  that  AIDEA does  not  participate  in  an  U.S.                                                              
Department  of  the  Treasury,   Internal  Revenue  Service  (IRS)                                                              
program called  the New Markets  Tax Credit (NMTC) program.   This                                                              
program is  available in  Alaska through  a company called  Alaska                                                              
Growth Capital  (AGC), and he  indicated that more  information on                                                              
AGC  would  be  provided  during later  testimony.    Mr.  Leonard                                                              
stated  that HB  120 is  another tool  AIDEA can  use to  increase                                                              
investments  in areas with  low incomes  and smaller  populations.                                                              
In  addition, the  bill solves  a  problem that  arose last  year.                                                              
Mr.  Leonard  recalled that  last  year  AIDEA was  authorized  to                                                              
issue  American  Recovery  and Reinvestment  Act  (ARRA)  Recovery                                                              
Zone Facility Bonds  (RZFBs), which are a type of  bond that could                                                              
be utilized by  businesses to get tax-exempt financing.   However,                                                              
often projects  in rural  areas such  as Bethel  did not  have the                                                              
initial  cash  flow  to  qualify  for  the  bonds.    Mr.  Leonard                                                              
expressed  AIDEA's belief  that the  program would  help give  tax                                                              
credits, lower  the cost  of debt, and  give "patient  capital" to                                                              
projects  for a period  of seven  years, after  which the  project                                                              
would qualify for conventional financing.                                                                                       
                                                                                                                                
11:03:42 AM                                                                                                                   
                                                                                                                                
MARK  DAVIS,  Economic  Development   Officer,  Alaska  Industrial                                                              
Development  &   Export  Authority   (AIDEA)  and  Alaska   Energy                                                              
Authority  (AEA), Department  of  Commerce,  Community &  Economic                                                              
Development (DCCED),  responded to questions that  were previously                                                              
submitted to AIDEA.     The first question asked  when AIDEA would                                                              
require  an  economic  benefit   analysis  prepared  by  a  person                                                              
acceptable to the  authority.  Mr. Davis said that  as part of the                                                              
analysis of  a NMTC project, AIDEA  would want to ensure  that the                                                              
project  could  pay for  itself,  and  probably would  require  an                                                              
economic benefit  analysis.  In  response to the  second question,                                                              
he  explained  that  AIDEA has  already  determined  which  Alaska                                                              
communities  meet the  criteria and  are eligible  to use  the tax                                                              
credit program.   However,  Mr. Davis  cautioned that  eligibility                                                              
can  be  complicated by  a  2004  amendment  to the  original  IRS                                                              
legislation  regarding "targeted  populations  [that] can  include                                                              
for example,  an Indian  Tribe or  Native Americans,  additionally                                                              
census areas with less than 2,000 people in the census."                                                                        
                                                                                                                                
11:06:00 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  TUCK  referred  to  the IRS  amendment  and  asked                                                              
whether targeted  populations are "and/or" census  areas with less                                                              
than 2,000 people.                                                                                                              
                                                                                                                                
11:06:26 AM                                                                                                                   
                                                                                                                                
MR. DAVIS indicated  "and/or."  He stated the  next question asked                                                              
for  further information  on NMTC  loans  made by  the New  Jersey                                                              
Economic  Development   Authority  (NJEDA).    First,   Mr.  Davis                                                              
confirmed  that NJEDA  is  the only  known  state agency  offering                                                              
NMTC  loans.   Second,  he  noted  that  as AIDEA  surveyed  other                                                              
states,  it  found   that  other  states  are   operating  as  the                                                              
"middleman,"  or  the  community  development  entity  (CDE)  arm,                                                              
which  accepts the  funds from  equity investors  and bank  loans.                                                              
In  Alaska, AGC  is available  to  fill this  role  and he  opined                                                              
AIDEA does  not need to  act as a  CDE.     He referred  to advice                                                              
from Vincent Ravaschiere,  New Markets Capital Company,  New York,                                                              
New York, who  concluded that although there are  equity investors                                                              
available, it is  difficult for NMTC projects to  obtain leveraged                                                              
loans from  private financial institutions,  and the  problem with                                                              
the program  is a  general lack  of available  credit.   Mr. Davis                                                              
reported that  Mr. Ravaschiere  further advised that  guaranteeing                                                              
or   providing  leveraged   loans   should   help  alleviate   the                                                              
"bottleneck."   Thus, AIDEA is proposing  to start the  program by                                                              
providing a  guarantee to the bank  that will increase  the bank's                                                              
interest in  a proposed project.   He pointed  out that  banks are                                                              
restricted to  interest-only loans for  the first seven  years and                                                              
cannot have  a secured interest  in the project.   By guaranteeing                                                              
the loan, AIDEA  will make this type of loan more  attractive to a                                                              
bank.   Essentially,  AIDEA's involvement  will  help the  program                                                              
work  by providing  leveraged  lending  and thereby  reducing  the                                                              
cost of  a project  by about 20-25  percent; allowing  the project                                                              
to pay  only interest  for seven  years; allowing re-financing  at                                                              
the end of seven  years of only a portion of  the project, because                                                              
the  equity provision  is  exhausted  with the  tax  credit.   Mr.                                                              
Davis  stated possible  projects for  NMTCs may  be wind farms  in                                                              
rural  Alaska, or  renovations  of  old buildings.    Furthermore,                                                              
other federal  credits such  as tax  credits for renewable  energy                                                              
projects,  or historical  buildings,  can be  used in  conjunction                                                              
with  the NMTC  program.   He  concluded that  the  program is  10                                                              
years old,  has a good  track record, and  will not  require funds                                                              
from the general fund.                                                                                                          
                                                                                                                                
11:10:54 AM                                                                                                                   
                                                                                                                                
MR.  LEONARD added  that  this program  would  be a  new tool  for                                                              
AIDEA with  the following cap:   The total amount at any  point in                                                              
time that AIDEA  could have outstanding in its  portfolio would be                                                              
$50 million in leveraged loans and leveraged guarantees.                                                                        
                                                                                                                                
11:11:45 AM                                                                                                                   
                                                                                                                                
HUGH  SHORT,  President/Chief  Executive  Officer,  Alaska  Growth                                                              
Capital  (AGC), informed  the committee  his company  is the  only                                                              
state-chartered  Business and  Industrial Development  Corporation                                                              
(BIDCO) in  Alaska.  In addition,  his company can  participate in                                                              
NMTC projects  because it  is an U.S.  Department of  the Treasury                                                              
(DOTRES),  Community  Development  Financial  Institutions  (CDFI)                                                              
Fund certified  organization,  and thereby  is allowed to  compete                                                              
for  NMTCs.   In fact,  during the  past 10  years, Alaska  Growth                                                              
Capital  BIDCO Inc.  has  received $90  million  in NMTCs.     The                                                              
company  is also  the only  CDE  in Alaska,  and coordinates  with                                                              
CDEs across  the country on  projects in  Alaska.  The  company is                                                              
owned by  Arctic Slope  Regional Corporation  (ASRC) and  has used                                                              
public, private,  and federal  sources to  create over  2,000 jobs                                                              
since its inception.                                                                                                            
                                                                                                                                
11:13:47 AM                                                                                                                   
                                                                                                                                
MR. SHORT,  in response  to Representative  Gardner, relayed  that                                                              
the  Business   and  Industry  Development  Corporation   Act  was                                                              
enacted  in the  late  '90s to  allow the  state  to regulate  and                                                              
create lending companies  that are not banks, but  are capitalized                                                              
by  private capital.   Alaska  Growth Capital  was capitalized  by                                                              
ASRC  and by  initial  loans  and grants  from  the  state for  $3                                                              
million.    The BIDCO  designation  is  important  to AGC  and  it                                                              
provides annual  reports to the state  on the number of  jobs that                                                              
are created.  In  addition, AGC is examined by  DCCED, Division of                                                              
Banking and Securities.    The Department of  the Treasury created                                                              
the  CDFI  Fund  under the  Clinton  Administration  to  encourage                                                              
investment into  low-income communities,  whether rural  or urban,                                                              
and it is  a designation that  allows a company access  to federal                                                              
programs including NMTCs, grants, and other programs.                                                                           
                                                                                                                                
11:15:57 AM                                                                                                                   
                                                                                                                                
MR.  SHORT continued  to  explain that  AGC  is actively  involved                                                              
with NMTCs and believes  HB 120 would be a "very  large incentive"                                                              
for  equity investors  across  the country  to  invest in  Alaska.                                                              
The  biggest hurdle  to projects  is the  requirement to  forebear                                                              
seven years after  default and, due to the uncertainty  in today's                                                              
regulatory atmosphere,  many banks are cautious  and conservative.                                                              
Other issues such  as interest-only payments for  seven years, and                                                              
the  indirect lien,  may  be  overcome.     Mr. Short  opined  the                                                              
proposed   legislation   would  allow   AIDEA   to  make   prudent                                                              
investment decisions  and could result  in Alaska becoming  one of                                                              
the most  successful NMTC  states.   Furthermore, enactment  of HB
  will encourage  many projects  in distressed  areas of  rural                                                              
Alaska,  Anchorage,   Fairbanks,  off  the  road   system,  or  in                                                              
Southeast  because it  will add  15-20 percent  of capital  to the                                                              
project  to offset  the  cost of  doing  business,  and allow  the                                                              
entrepreneur  or  the  nonprofit  to  build  infrastructure.    He                                                              
described  two examples:  the fish processing  plant in  Platinum,                                                              
and the purchase  of $18 million in tax credits for  an elder care                                                              
facility in  Kotzebue.  Mr. Short  concluded that HB 120  is a key                                                              
to creating jobs in rural and urban Alaska.                                                                                     
                                                                                                                                
11:21:06 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FOSTER  expressed   his  support  of  federal  tax                                                              
credits programs  but asked  whether there is  risk to  the state.                                                              
He encouraged  partnering  with the Coastal  Village Region  Fund,                                                              
and  agreed with  taking advantage  of  programs targeting  rural,                                                              
economically devastated areas.                                                                                                  
                                                                                                                                
11:22:32 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK also  supported programs for rural  areas.  He                                                              
asked  for  elaboration  on  how  the  proposed  legislation  will                                                              
offset 15-20 percent of capital costs.                                                                                          
                                                                                                                                
11:22:52 AM                                                                                                                   
                                                                                                                                
MR.  SHORT  explained   that  a  tax  credit  allows   for  equity                                                              
investment by a  tax credit investor.  For example,  a $10 million                                                              
project  has  $3.9  million  available  for  a  tax  credit.    An                                                              
investor  could be  U.  S. Bank,  Wells Fargo  Bank,  or New  York                                                              
Community Bank.   The investors  buy at  a discount and  receive a                                                              
10-15  percent  annual  return   over  the  seven-year  compliance                                                              
period.   In  the example,  the  $3.9 million  available might  be                                                              
purchased  for  $2.7  million and  after  subtracting  costs,  the                                                              
remaining equity  is funds available to the  investment, interest-                                                              
only for seven  years, and often at a below-market  interest rate.                                                              
After  seven years,  the  project can  purchase  the debt  without                                                              
paying  back  the  principal.     Therefore,  for  a  $10  million                                                              
project,  the project  receives  about  $1.5-2 million  upfront  -                                                              
which can be purchased  after seven years for a nominal  fee - and                                                              
the  debt is  forgiven.   Mr. Short  concluded there  is a  mutual                                                              
benefit  to all  parties as  the  tax credit  investor receives  a                                                              
return with  little risk, and the  project receives about  a 15-20                                                              
percent return of capital.                                                                                                      
                                                                                                                                
11:26:03 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE TUCK understood  why  projects  would  be  given  a                                                              
seven-year timeframe  before assets are collected,  but noted that                                                              
debt  can also  become a  hurdle.   He  asked Mr.  Leonard or  Mr.                                                              
Davis to explain  how the proposed legislation  "bridges that gap,                                                              
how that we're able to overcome that seven-year hurdle."                                                                        
                                                                                                                                
11:27:10 AM                                                                                                                   
                                                                                                                                
MR. DAVIS acknowledged  that the problem with the  program is that                                                              
two  parts  are  needed  for  a  project:  the  qualified,  equity                                                              
investors  who  are going  to  get the  tax  credit;  a lender  to                                                              
supply  the  rest  of  the  capital,   and  then  refinance  to  a                                                              
conventional  loan.  However,  the lender is  asked to  wait seven                                                              
years and not  foreclose in the  case of default.  House  Bill 120                                                              
allows  AIDEA to  provide a  guarantee  to the  lender during  the                                                              
seven-year  period that  in the  event  of a  default, AIDEA  will                                                              
take the  lender's place and  wait to foreclose  until the  end of                                                              
the compliance  period.  He  said, "This is  just an idea  to free                                                              
it up because right  now, there are no, as I  understand it, there                                                              
are very few leverage lenders willing to operate in Alaska."                                                                    
                                                                                                                                
11:28:58 AM                                                                                                                   
                                                                                                                                
MR. LEONARD  assured  the committee  that AIDEA  has a large  net-                                                              
asset  balance  of approximately  $1  billion  and can  invest  in                                                              
long-term projects.   For example,  AIDEA can extend loans  for 25                                                              
years because  of the  mixture of  its asset  base and  its strong                                                              
portfolio.                                                                                                                      
                                                                                                                                
11:30:00 AM                                                                                                                   
                                                                                                                                
MR. DAVIS  added that  IRS regulations provide  that if  a project                                                              
does  not  continue  for  the  full   seven-year  period,  a  tax-                                                              
recapture applies  to the  investors.  He  opined this  is another                                                              
reason why NMTC projects have succeeded.                                                                                        
                                                                                                                                
11:30:47 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  THOMPSON  noted the  proposed  bill indicates  the                                                              
loans in this program can be for a term not to exceed 10 years.                                                                 
                                                                                                                                
11:31:14 AM                                                                                                                   
                                                                                                                                
MR. DAVIS stated  that the proposed language on  page 3, paragraph                                                              
(4), line 21, of the bill conforms to commercial practices.                                                                     
                                                                                                                                
11:32:39 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FOSTER asked how  Alaskans will  be made  aware of                                                              
the program.                                                                                                                    
                                                                                                                                
11:32:56 AM                                                                                                                   
                                                                                                                                
MR.  DAVIS  envisioned  that  AGC is  a  very  effective  economic                                                              
development  company.   In  addition, AIDEA  will  work with  AGC,                                                              
consultants,  and other NMTC  funds that  have expressed  interest                                                              
in using the allocations available for Alaska.                                                                                  
                                                                                                                                
11:34:03 AM                                                                                                                   
                                                                                                                                
MR. LEONARD  opined that if  the proposed legislation  is enacted,                                                              
AIDEA would partner  with AGC, and would also  utilize other state                                                              
agencies to distribute information throughout the state.                                                                        
                                                                                                                                
11:34:42 AM                                                                                                                   
                                                                                                                                
CHAIR  HERRON  requested   that  the  AIDEA  board   of  directors                                                              
consider  working with  the House  Special  Committee on  Economic                                                              
Development,  International  Trade  and Tourism  to  identify  and                                                              
tour projects during interim.                                                                                                   
                                                                                                                                
[HB 120 was heard and held.]