Legislature(2009 - 2010)
04/08/2009 04:35 PM Senate FIN
| Audio | Topic |
|---|---|
| Start | |
| HB172 | |
| SB10 | |
| SB75 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 172
"An Act relating to an investment in the education
loan fund; relating to authority for the commissioner
of revenue to enter into a bond purchase agreement and
letter of credit with the Alaska Student Loan
Corporation; and providing for an effective date."
4:36:36 PM
DIANE BARRANS, EXECUTIVE DIRECTOR, POSTSECONDARY EDUCATION
COMMISSION, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT,
explained that the legislation allows the Alaska Student
Loan Corporation (ASLC) to partner with the Department of
Revenue to provide interim financing for the purpose of
originating student loans. As a result of the continuing
disruption of the capital markets, ASLC has been unable to
issue student loan backed bonds to finance new student
loans. Internal liquidity was used to finance $95 million
in new originated loans for 2008 - 2009, but these funds
will be exhausted by the 2009-2010 loan year. House Bill
172 allows the commissioner of the Department of Revenue to
invest directly in student loans with an investment cap of
$100 million. The ASLC would have to repay the obligation
in no more than five years.
Ms. Barrans said that this legislation would also authorize
the commissioner to provide a liquidity facility or letter
of credit. Under current market conditions, the cost to
acquire a letter of credit or liquidity facility in order
to issue variable rate bonds is so high that ASLC would be
unable to make student loans available on an economic basis
under existing statute. The liquidity facility or letter of
credit would act as a standby bond purchase agreement that
would allow ASLC to issue bonds that would be attractive to
investors.
4:40:42 PM
Ms. Barrans noted that the department has suspended
applications for the 2009-2010 academic year. The
suspension will continue until the loan financing situation
is resolved.
JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY,
DEPARTMENT OF REVENUE, explained that the Alaska Student
Loan Corporation had come to the department over a year ago
for assistance in securing funding and liquidity for the
loan program. Mr. Burnett furthered that discussions ensued
with the Office of Management and Budget and all options
were carefully considered. A direct appropriation from the
General Fund, specifically the GeFONSI pool (General Fund
and Other Non-segregated Investments) up to $100 million
was concluded to be the workable solution. He elaborated
that the plan would use GeFONSI funds to directly invest in
the Corporation's loan fund and create a liquidity facility
to back the loans. The GeFONSI pool has a current balance
of $7.2 billion and in the last 14 years has never dropped
below $600 million. The department is confident the pool
could support the $206 million provided for in the
legislation as illiquid investments. He stated that the
department would charge the corporation interest at market
rates on the loan, and still earn the 15 basis point fee on
the credit facility, which would allow it to continue to
invest in other securities.
4:43:26 PM
Co-Chair Stedman asked if Power Cost Equalization (PCE)
funds were included in the GeFONSI fund. Mr. Burnett
replied that the PCE endowment is not in the fund, however
some PCE funds are in the baseline group.
Co-Chair Stedman asked for clarification regarding the
baseline group. Mr. Burnett responded that the baseline
group contains funds that retain a relatively stable
balance over time, such as the Oil & Hazardous Substance
Response Account. The GeFONSI fund also contains
approximately 100 other funds, including the general fund,
the statutory budget reserve and the capital income
account.
Co-Chair Stedman requested additional backup and detailed
information regarding the composition of the GeFONSI Fund.
Mr. Burnett replied that he would obtain and distribute the
information. He added that GeFONSI is currently comprised
of $2.4 billion unrestricted general funds and $4.8 billion
of other encumbered funds. He emphasized that GeFONSI is a
pooled investment fund. Co-Chair Stedman inquired if the
$2.4 billion fund contained the Constitutional Budget
Reserve (CBR) and the Statutory Budget Reserve (SBR). Mr.
Burnett replied that only the SBR is included in the $4.8
billion pool of other funds. Co-Chair Stedman remarked that
the committee has concerns regarding liquidity of the
funds.
4:46:29 PM
Co-Chair Hoffman asked what the returns on the funds
amounted to over the last year. Mr. Burnett replied that he
did not have that information with him but would make it
available to the committee. Co-Chair Hoffman requested that
Mr. Burnett estimate the amount. Mr. Burnett reported that
the returns were positive; mostly short term, fixed income
investments.
Co-Chair Stedman reiterated his questions regarding PCE
funds. Mr. Burnett clarified that PCE was removed from
GeFONSI and a separate PCE endowment was created in 2005.
4:47:36 PM
Co-Chair Hoffman asked for details concerning the
guidelines and schedule ASLC has to repay the loan funds.
Mr. Burnett replied that the details of repayment had not
been negotiated. The funds will be backed by student loans
and the intent is to have the corporation refinance the
loans as soon as capital markets allow.
Co-Chair Hoffman noted the breakdown of student loans; 60
percent in state and 40 percent out of state. He asked if
the same ratio is expected if the plan is approved. Ms.
Barrans remarked that she did not expect the composition of
borrowers or borrowing behavior to change due to the
funding source. She suggested that there may be an increase
in the percentage of loans for attendance in Alaska
primarily due to the impact the current economic crisis has
on families.
Co-Chair Hoffman asked if a preference were given to
students who remain in Alaska. Ms. Barrans reported that
there is no preference to students to access the loans but
a preferred interest rate of one-half percent is granted to
students who return to or attend in Alaska.
4:50:26 PM
Co-Chair Stedman wondered what the number of student loans
is anticipated to be issued by next June. Ms. Barrans
estimated 12,000 loans would be issued at a total loan
volume of $85 - $95 million. Co-Chair Stedman asked if $100
million will be sufficient. Ms. Barrans expounded that the
corporation believes this approach is significant enough to
avoid another appropriation request next year. She stated
that if the market disruption continues and the corporation
could not successfully issue bonds in the interim that this
proposal, allowing for the internal receipt of funds,
potentially provides enough funds through the 2010-2011
cycle. She believes ASLC will be able to issue debt within
the next six months via variable rate demand bonds.
Co-Chair Stedman cited the Department of Revenue's fiscal
note (DOR 4) analysis and asked for an explanation of what
fiduciary duties apply and how that will earn a return to
the state. Mr. Burnett explained that the bill requires
that the bridge loan to the corporation be backed by
student loans. Therefore, the department will enter into a
contractual agreement with ASLC that states the terms of
repayment of the principle with interest. The loan to the
corporation will be over collateralized with respect to the
default rate on student loans and an origination fee will
be charged.
Co-Chair Stedman asked how internal policies and procedures
will be addressed. Mr. Burnett stated that new policies
will be created to be consistent with the fiduciary
requirements of the legislation. He explained that current
policies would not allow for the investment concentration
in one asset [student loans] that the bill establishes.
4:53:52 PM
Co-Chair Stedman requested the schedule of outstanding
student loans. Ms. Barrans replied that as of December 31,
2007 the balance of outstanding alternative student loans
was $561 million with $81 million of student loans in
default. She explained that she could provide a report
containing additional characteristic information and a
summary of the status of the outstanding student loans.
Co-Chair Hoffman requested the information include a
breakdown between in-state and out-of-state students. Co-
Chair Hoffman asked what other states provide state loans
that allow students to attend out-of-state institutions.
Ms. Barrans replied that all other state's alternative loan
programs allow portability. Co-Chair Hoffman wondered if
they were similar to the ASLC program. Ms. Barrans stated
that they are all similar in many respects. She exemplified
New York State's loan program that contains a fund to
guarantee those loans against default as an example that
while some elements of other states programs might be
different they all allow portability.
4:57:54 PM
Co-Chair Stedman cited the April 7th letter from ASLC (Copy
on File) to the committee. He asked for clarification of
the information submitted to the committee specifically to
the requested sum of $100 million for approximately 12,000
loans and what amount will be issued within the next year.
Ms. Barrans replied that it would be over a period of one
to two years depending on loan volume. She guessed that the
volume will drop slightly due to the tightened credit
standards being implemented. She expected the amount to
total close to $85 million next year. Co-Chair Steadman
requested the discussion focus on the issues as they relate
to a one year period.
Co-Chair Stedman asked Mr. Burnett to explain if the
economic crisis credit seize up as it relates to the Alaska
housing issue earlier this year causes exposure for the
state and if it still has an effect on current credit
conditions. Mr. Burnett responded that except for the
period of last September through December there has not
been a serious liquidity issue that cannot be met by
existing credit providers such as Alaska Housing Finance
Corporation. He stated that DOR is not considered a credit
provider.
Co-Chair Stedman queried the corporation for other ideas,
solutions, and options rather than soliciting for state
funds.
4:59:59 PM
Ms. Barrans answered that the corporation along with their
financial advisor had studied solutions other states
employed to solve this problem. She said that each case
required some financial support from their state. She
reiterated that the dilemma is that the capital markets the
student loan entities would be accessing, without
dependence on their state are no longer available at an
affordable cost. The other option discussed was for the
state to finance the program with a direct appropriation
from the general fund for a period of time. The option was
rejected because the ASLC program was initially created to
avoid dependence on the use of state general funds and the
variability of those funds from one year to the next. Ms.
Barrans stressed that this market disruption is
unprecedented. Co-Chair Stedman surmised that there are not
a lot of alternative solutions available.
Senator Huggins asked for the interest rates on in-state
and out-of-state loans. Ms. Barrans answered that the
interest rates are 6.8 percent for in-state and 7.3 percent
for out-of-state alternative loans. She added that the
loans offered through the federally guaranteed Stafford
loan program present the lowest risks to the corporation
and can be offered at interest rates of 6 percent or below.
Senator Huggins asked what the interest rates will be in
2010-2011. Ms. Barrans expected rates to remain in the same
range. She said there was a statutory cap of 8.25 percent.
5:04:08 PM
Co-Chair Hoffman requested the amount that the corporation
was able to sell the bonds for and at what interest rates
over the previous five years. Ms. Barrans replied she would
provide the information.
Co-Chair Stedman asked if this bill was the only option
available to fund higher education in Alaska.
LEE DONNER, MANAGING DIRECTOR, FIRST SOUTHWEST COMPANY,
CONSULTANT, STUDENT LOAN CORPORATION, DEPARTMENT OF
EDUCATION AND EARLY DEVELOPMENT (via teleconference),
explained that the provisions of the legislation is to
provide interim financing and a stand-by bond purchase
agreement or letter of credit. He stated that if this
strategy works the corporation should be able to access
capital markets and raise capital in the open markets,
within the next six months to finance the FFELP (Federal
Family Education Loan Program) and fixed rate alternative
loans. The combined financing of both types of loans would
allow the corporation to repay the interim financing. He
agreed with Ms. Barrans that other states options to the
loan crisis all involved direct intervention, albeit
different approaches. Other plans vary in costs to the
state ranging from direct appropriation, to risk of general
obligation coverage on the debt, to plans similar to
Alaska's with the little associated risk. He exemplified
the state of Texas direct involvement to grant the state's
general obligation to the bondholders. The debt becomes a
general obligation of the state of Texas. In contrast,
Alaska's plan has no cost to the state, if the bond
purchase agreement or letter of credit is adequately rated
as anticipated, and has the potential of generating
revenue. He noted that in the event that the state has to
purchase the bonds there is an applicable interest rate
that the bonds bear to the state during the length of time
the state owns the bonds.
5:08:51 PM
Co-Chair Stedman referred to the historic balance of the
GeFONSI account indicated on the graph provided in the DOR
handout (copy on file) and asked what the minimum balance
was since 1996. Mr. Burnett replied that the minimum
balance was $600 million. Co-Chair Stedman asked when the
$100 million tied up as liquidity would be a risk to the
state especially if there are repeated requests for
additional appropriations. Mr. Burnett stated that he was
comfortable with an amount well below $600 million. Co-
Chair Stedman recapped that the department is comfortable
with the $100 million request but repeated appropriations
are not advisable. Mr. Burnett agreed that this amount
would cause concern after two years.
Ms. Barrans reminded the committee that $100 million is a
maximum cap, not per annum request. She explained that the
$100 million could be expended over a period of more than
one year. She added that the corporation does not expect to
request additional funds.
5:11:52 PM
Co-Chair Hoffman asked if the economy continues to falter
would the department return to the legislature and request
additional loan guarantees. Mr. Burnett replied that if the
markets continue to fail over a two year period the student
loan corporation will need to consider more extreme
measures such as termination of the program. He emphasized
that the state could not continue to loan under those
circumstances.
CSHB 172(FIN) was HEARD and HELD in Committee for further
consideration.
5:14:00 PM AT EASE
5:17:14 PM RECONVENED
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