04/12/2010 08:00 AM House FINANCE

HOUSE BILL NO. 412                                                                                                            
                                                                                                                                
     "An  Act establishing  the  Alaska microloan  revolving                                                                    
     fund;  making loans  for commercial  purposes from  the                                                                    
     fund;  and   relating  to  the  fund   and  loans;  and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
GREG  WINEGAR,   DIVISION  OF  INVESTMENTS,   DEPARTMENT  OF                                                                    
COMMERCE  spoke to  the bill.  The loan  program is  modeled                                                                    
after  a similar  program sponsored  by  the Small  Business                                                                    
Administration  (SBA)  currently  available  in  46  states.                                                                    
Alaska has  yet to develop  a comparable loan program  as an                                                                    
intermediary  lender is  currently  unidentified. The  loans                                                                    
would include  up to $35,000  for an individual  and $70,000                                                                    
for two or  more residents. The proceeds  would be available                                                                    
for   working   capital,    equipment,   construction,   and                                                                    
improvements.  The interest  rate  would be  prime plus  one                                                                    
with a  floor of  six and  a ceiling  of eight.  The maximum                                                                    
term is six  years. The submitted fiscal  note includes $3.5                                                                    
million  from  Alaska   Industrial  Development  and  Export                                                                    
Authority (AIDEA) contingent  on the passage of  HB 411. The                                                                    
fund  would be  established as  a revolving  fund. With  the                                                                    
initial capitalization,  75 loans are possible  in the first                                                                    
year and  100 in the  second, with 25  loans per year  on an                                                                    
ongoing basis thereafter.                                                                                                       
                                                                                                                                
8:28:32 AM                                                                                                                    
                                                                                                                                
Representative Fairclough  asked about time  constraints for                                                                    
residency  requirements listed  on Page  3, Line  14-16. Mr.                                                                    
Winegar   responded  that   the  requirements   span  a   12                                                                    
consecutive   month    period.   Representative   Fairclough                                                                    
interpreted the  section differently. Mr.  Winegar suggested                                                                    
a language  change to better  communicate the 12  month time                                                                    
period.                                                                                                                         
                                                                                                                                
Vice-Chair   Thomas   recalled   multiple   definitions   of                                                                    
residency.                                                                                                                      
                                                                                                                                
8:30:32 AM                                                                                                                    
                                                                                                                                
Representative  Doogan  believed  Representative  Fairclough                                                                    
was  right.  He  provided  three  different  definitions  of                                                                    
residency.                                                                                                                      
                                                                                                                                
Representative   Gara  suggested   a  conceptual   amendment                                                                    
imposing the  one year  period used  for the  Permanent Fund                                                                    
Dividend (PFD).                                                                                                                 
                                                                                                                                
Representative  Fairclough clarified  that  the bill  states                                                                    
that  a person  may not  have declared  residency elsewhere.                                                                    
She  noted  that  people   migrate  to  Alaska  occasionally                                                                    
seeking business loans.                                                                                                         
                                                                                                                                
Vice-Chair Thomas  stated that  the definition  of residency                                                                    
at  the   university  is   similar  to   that  of   the  PFD                                                                    
requirement.                                                                                                                    
                                                                                                                                
8:33:16 AM                                                                                                                    
                                                                                                                                
Representative  Doogan   commented  that  the   agency  must                                                                    
understand the  expectation of  a clarifying  amendment. Mr.                                                                    
Winegar offered to communicate with the agency.                                                                                 
                                                                                                                                
Representative Fairclough stressed a time commitment.                                                                           
                                                                                                                                
Representative Kelly  requested a  list of  others concerned                                                                    
with the  bill. Mr. Winegar responded  that discussions with                                                                    
multiple banks did not result  in much concern regarding the                                                                    
lower dollar level.                                                                                                             
                                                                                                                                
8:35:48 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked about the eight  percent cap. Mr.                                                                    
Winegar agreed that  the cap could be  removed. He explained                                                                    
the goal of maintaining a low interest rate.                                                                                    
                                                                                                                                
Representative Gara MOVED Conceptual Amendment 1.                                                                               
                                                                                                                                
          Page 3, line 26, delete after per year:                                                                               
                                                                                                                                
          "and not more than eight percent per year;"                                                                           
                                                                                                                                
Representative   Austerman  OBJECTED   for  discussion.   He                                                                    
discussed  the establishment  of  acceptable interest  rates                                                                    
for these loans.                                                                                                                
                                                                                                                                
Mr.  Winegar stated  that the  prime rate  is three  and one                                                                    
quarter  so prime  plus one  would be  four and  one quarter                                                                    
with a basement  of six. If prime plus one  went higher than                                                                    
eight percent, then eight percent would be the cap.                                                                             
                                                                                                                                
Representative Doogan understood that  if the prime rate was                                                                    
three  and one  half or  four and  one half,  a loan  is not                                                                    
possible because the number is less than six.                                                                                   
                                                                                                                                
Mr.  Winegar explained  that the  language reads  prime plus                                                                    
one with a floor of six percent.                                                                                                
                                                                                                                                
Representative  Doogan  understood   the  intention  of  the                                                                    
amendment yet  was not  clear on the  purpose. If  the prime                                                                    
rate is  four and one half  plus one, why would  the loan be                                                                    
at  six percent?   Mr.  Winegar responded  that six  was the                                                                    
decision for  the floor  as risk and  cost must  be factored                                                                    
in.                                                                                                                             
                                                                                                                                
8:40:15 AM                                                                                                                    
                                                                                                                                
Representative   Austerman  continued   to  object   to  the                                                                    
amendment. He believed that the  reason for the loan was the                                                                    
fostering of  economic development. He stated  that a higher                                                                    
interest rate makes it more  difficult to pay back the loan.                                                                    
He  opined that  an eight  percent cap  with a  $35 thousand                                                                    
loan  allows  a  wonderful   opportunity  for  the  business                                                                    
sector.                                                                                                                         
                                                                                                                                
Representative Kelly  believed that the  committee discussed                                                                    
the topic in a prior meeting. Mr. Winegar agreed.                                                                               
                                                                                                                                
Representative  Kelly stated  that he  does not  support the                                                                    
eight  percent cap.  The intention  of the  loans is  not to                                                                    
compete  with the  banks. He  understood the  floor, as  the                                                                    
loans  are   often  offered  to  those   unable  to  receive                                                                    
traditional bank loans.                                                                                                         
                                                                                                                                
Representative  Foster asked  if the  cost of  capital rises                                                                    
above eight  percent, would AIDEA  subsidize the  loans. Mr.                                                                    
Winegar explained  that an opportunity cost  would have been                                                                    
lost because  the fund is  revolving. The money  returned is                                                                    
the interest rate for any given time.                                                                                           
                                                                                                                                
8:43:40 AM                                                                                                                    
                                                                                                                                
Representative  Gara  commented that  prime  plus  one is  a                                                                    
favorable  interest rate  regardless of  prime. Mr.  Winegar                                                                    
agreed.                                                                                                                         
                                                                                                                                
Representative Fairclough  asked if the issued  loans are on                                                                    
a fixed versus adjustable rate. Mr. Winegar answered yes.                                                                       
                                                                                                                                
Representative  Fairclough  advocated   in  support  of  the                                                                    
amendment  on  the  floor to  eliminate  the  eight  percent                                                                    
ability  to  draw  down.  She  opined  that  offering  loans                                                                    
substantially  below  the  market  value is  unfair  to  the                                                                    
private sector.                                                                                                                 
                                                                                                                                
Representative Doogan  understood the  range of  loans would                                                                    
exist between 6  and 8 percent with the  current language in                                                                    
the CS.  Mr. Winegar  replied yes.  He explained  that rates                                                                    
are reviewed each quarter and  adjusted to create loans on a                                                                    
fixed rate note for the life of the loan.                                                                                       
                                                                                                                                
Representative  Doogan continued  that  the amendment  would                                                                    
create  a rate  between six  and infinity.  He asked  if the                                                                    
legislature  would make  the change  to  allow the  interest                                                                    
rate to float up why  is the committee concerned about loans                                                                    
where interest rate floats down.  Mr. Winegar responded risk                                                                    
and operating costs.                                                                                                            
                                                                                                                                
8:46:53 AM                                                                                                                    
                                                                                                                                
Representative Doogan expressed  confusion. He believed that                                                                    
if the  interest was  lower, the risk  was lower.  He opined                                                                    
that the risk calculation was backwards.                                                                                        
                                                                                                                                
Mr. Winegar agreed  that six percent may not  be the correct                                                                    
number. Adding  one point to  three and one  quarter percent                                                                    
is a very low interest rate  when cost and risk are factored                                                                    
in.                                                                                                                             
                                                                                                                                
Representative Doogan commented that  loans for low interest                                                                    
rates lead  to eventual balance. Mr.  Winegar explained that                                                                    
money  is required  to  operate the  program  and losses  do                                                                    
occur leading to the decision for a moderate interest rate.                                                                     
                                                                                                                                
8:50:08 AM                                                                                                                    
                                                                                                                                
Representative  Austerman delivered  an  explanation of  the                                                                    
necessity of interest rates with  state or bank loans. Those                                                                    
loan recipients  who make their  payments balance  those who                                                                    
cannot, allowing for cash flow.                                                                                                 
                                                                                                                                
Representative  Doogan understood  that the  amendment would                                                                    
allow the state to provide bank  luxuries at the low end but                                                                    
not at the high end.                                                                                                            
                                                                                                                                
Representative Austerman  reminded about the  revolving loan                                                                    
program. If the  operational cost is covered  at six percent                                                                    
there is no need to increase.                                                                                                   
                                                                                                                                
Representative Kelly  asked if  six percent provided  a good                                                                    
rate. Mr. Winegar replied yes.                                                                                                  
                                                                                                                                
Representative Kelly asked if  lowering the percentage would                                                                    
compete  with  banks.  He  advocated  for  six  percent  and                                                                    
removal of the cap.                                                                                                             
                                                                                                                                
8:52:58 AM                                                                                                                    
                                                                                                                                
Vice-Chair  Thomas reminded  that the  interest rate  was 23                                                                    
percent  in  the 1980s.  He  was  in  support of  the  eight                                                                    
percent cap.                                                                                                                    
                                                                                                                                
Representative  Foster stated  that his  concern was  in the                                                                    
state  adopting  bank  like policies.  He  asked  about  the                                                                    
interest rate structure with the  SBA microloan. Mr. Winegar                                                                    
noted research  showing rates  at eight  percent for  SBA in                                                                    
the lower forty eight.                                                                                                          
                                                                                                                                
Representative Foster asked about a  cap in the other loans.                                                                    
Mr. Winegar  believed no, but  he was unfamiliar  with every                                                                    
plan.                                                                                                                           
                                                                                                                                
8:54:49 AM                                                                                                                    
                                                                                                                                
Representative Gara requested that  AIDEA consider the issue                                                                    
and contact the  committee with an answer by the  end of the                                                                    
day.  He  stressed that  he  understood  both sides  of  the                                                                    
argument.                                                                                                                       
                                                                                                                                
Vice-Chair Thomas recalled the time constraints.                                                                                
                                                                                                                                
Representative   Fairclough   suggested   a  vote   on   the                                                                    
amendment.                                                                                                                      
                                                                                                                                
Representative Austerman  pointed out  that the  major banks                                                                    
are  not interested  in these  loans. The  objective of  the                                                                    
microloan  program  is to  help  people  who cannot  receive                                                                    
traditional  bank   loans.  He  stated  opposition   to  the                                                                    
amendment.                                                                                                                      
                                                                                                                                
Representative  Kelly asked  if interest  rates are  fifteen                                                                    
percent  and the  state is  loaning at  eight percent,  what                                                                    
would  happen  to  the  value of  the  corpus.  Mr.  Winegar                                                                    
responded  that the  corpus  of the  fund  will continue  to                                                                    
grow.                                                                                                                           
                                                                                                                                
Representative  Kelly asked  if  the  growth would  continue                                                                    
with a differential between inflation  of three percent. Mr.                                                                    
Winegar responded that the opportunity cost would be lost.                                                                      
                                                                                                                                
Representative  Kelly commented  that with  inflation of  12                                                                    
percent,  the  value of  the  corpus  would decrease  by  50                                                                    
percent.                                                                                                                        
                                                                                                                                
Mr. Winegar added that the  fund might earn more without the                                                                    
restriction of eight percent.                                                                                                   
                                                                                                                                
Representative Kelly  wondered if the fund  would depreciate                                                                    
in real  value. Mr. Winegar  agreed that when  the situation                                                                    
is  compared  to  the  opportunity   cost,  the  fund  would                                                                    
depreciate.                                                                                                                     
                                                                                                                                
8:59:05 AM                                                                                                                    
                                                                                                                                
Representative  Fairclough stated  support of  the amendment                                                                    
because she  wanted to prevent the  opportunity for citizens                                                                    
to  borrow   money  for  reinvestment   at  a   higher  rate                                                                    
elsewhere. Vice-Chair Thomas agreed.                                                                                            
                                                                                                                                
9:00:03 AM          AT EASE                                                                                                   
9:01:08 AM          RECONVENED                                                                                                
                                                                                                                                
Vice-Chair Thomas restated the amendment.                                                                                       
                                                                                                                                
Representative  Fairclough commented  on  the amendment  and                                                                    
the  discussion   that  lifting   the  cap  would   open  up                                                                    
competition with  the banking industry so  that people would                                                                    
not access  the microloan  account and  place it  in another                                                                    
financial institution to receive a larger rate of return.                                                                       
                                                                                                                                
Representative Austerman  continued to oppose  the amendment                                                                    
because  of  the  plea   from  small  businesses  expressing                                                                    
difficulty achieving equipment and inventory loans.                                                                             
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR: Fairclough,  Foster, Gara,  Joule, Kelly,  Salmon,                                                                    
Doogan                                                                                                                          
                                                                                                                                
OPPOSED: Thomas, Austerman, Stoltze, Hawker                                                                                     
                                                                                                                                
The MOTION PASSED (7-4).                                                                                                        
                                                                                                                                
9:05:15 AM                                                                                                                    
                                                                                                                                
Representative Fairclough MOVED Conceptual Amendment #2                                                                         
                                                                                                                                
          Page 3, line 17, add after "state,"                                                                                   
                                                                                                                                
          "in the previous 12 months."                                                                                          
                                                                                                                                
Representative Gara OBJECTED for discussion.                                                                                    
                                                                                                                                
She  explained the  amendment which  would  define the  time                                                                    
limit established in the bill.                                                                                                  
                                                                                                                                
Representative  Gara WITHDREW  his  OBJECTION to  Conceptual                                                                    
Amendment #2. There being NO OBJECTION, it was so ordered.                                                                      
                                                                                                                                
Representative Doogan MOVED Conceptual Amendment #3.                                                                            
                                                                                                                                
          Page 3, line 25 delete after "point"                                                                                  
                                                                                                                                
          "but interest may not be less than six percent                                                                        
          per year"                                                                                                             
                                                                                                                                
Representative Austerman OBJECTED for discussion.                                                                               
                                                                                                                                
Representative  Doogan explained  that because  the cap  was                                                                    
raised with the theory that  costs will rise, this amendment                                                                    
would  account   for  the   possibility  that   costs  might                                                                    
decrease. He  understood that the  interest rate  created by                                                                    
the  amendment  would be  four  and  one half  percent.  The                                                                    
borrowers would receive  the same benefit from  a lower rate                                                                    
that they might receive as a penalty from higher rates.                                                                         
                                                                                                                                
9:09:30 AM                                                                                                                    
                                                                                                                                
Representative  Fairclough   spoke  in  opposition   to  the                                                                    
amendment.  She mentioned  the risk  to  the revolving  loan                                                                    
account as  the interest collected must  be measured against                                                                    
the risk of potential default.                                                                                                  
                                                                                                                                
9:10:34 AM                                                                                                                    
                                                                                                                                
Representative Austerman  objected because he felt  that six                                                                    
percent protects the risk aspect.                                                                                               
                                                                                                                                
Representative  Gara stated  that protection  is offered  in                                                                    
charging a prime  plus one interest rate.  He understood the                                                                    
need for a  minimum floor, and the negotiable  nature of it.                                                                    
He asked if  harm would occur if the minimum  floor was five                                                                    
percent.                                                                                                                        
                                                                                                                                
Mr.  Winegar  responded  that the  proposed  scenario  would                                                                    
increase the  risk slightly.  He pointed  out that  prime is                                                                    
the amount loaned to banks  from other banks. Prime plus one                                                                    
is an attractive rate in terms of risk.                                                                                         
                                                                                                                                
9:12:47 AM     AT EASE                                                                                                        
9:13:56 AM     RECONVENED                                                                                                     
                                                                                                                                
Representative Doogan restated the Conceptual amendment #3.                                                                     
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR: Foster, Gara, Doogan,                                                                                                 
OPPOSED:  Joule,    Kelly,   Salmon,    Thomas,   Austerman,                                                                    
Fairclough, Hawker, Stoltze                                                                                                     
                                                                                                                                
The MOTION FAILED (3-8).                                                                                                        
                                                                                                                                
9:15:49 AM                                                                                                                    
                                                                                                                                
Co-Chair Hawker MOVED to ADOPT Conceptual Amendment #4.                                                                         
                                                                                                                                
          Page 1, lines 5-12, Remove Section 1                                                                                  
                                                                                                                                
Representative  Gara   OBJECTED  for   discussion.  Co-Chair                                                                    
Hawker explained  that the conceptual amendment  entails the                                                                    
ability of  the drafters to  incorporate it into  the entire                                                                    
context of the bill.                                                                                                            
                                                                                                                                
Representative Gara  WITHDREW his OBJECTION. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
                                                                                                                                
Co-Chair  Stoltze MOVED  to  report CS  HB  412(FIN) out  of                                                                    
Committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
                                                                                                                                
CS  HB  412(FIN)  was  REPORTED out  of  Committee  with  no                                                                    
recommendations and with previously     published     fiscal                                                                    
note: FN1 (CED)                                                                                                                 
                                                                                                                                
9:17:39 AM     AT EASE                                                                                                        
9:18:35 AM     RECONVENED