04/08/2010 09:00 AM Senate FINANCE

SENATE BILL NO. 300                                                                                                           
                                                                                                                                
     "An   Act   relating   to   loan   participations   and                                                                    
     development finance projects of the Alaska Industrial                                                                      
     Development and Export Authority; and relating to                                                                          
     loans from the rural development initiative fund."                                                                         
                                                                                                                                
9:25:02 AM                                                                                                                    
                                                                                                                                
TED   LEONARD,   EXECUTIVE   DIRECTOR,   ALASKA   INDUSTRIAL                                                                    
DEVELOPMENT  AND  EXPORT  AUTHORITY (AIDEA),  DEPARTMENT  OF                                                                    
COMMERCE,  COMMUNITY, &  ECONOMIC  DEVELOPMENT, thanked  the                                                                    
committee for hearing  the bill. He reported  that AIDEA has                                                                    
been going through a strategic  process for the last year to                                                                    
improve and increase its effectiveness  and add new tools to                                                                    
the   organization   that    can   help   promote   economic                                                                    
development. The  changes requested in this  statute are the                                                                    
first  steps  for AIDEA  to  improve  its programs  and  add                                                                    
another assisting tool for economic development.                                                                                
                                                                                                                                
Mr. Leonard reported  that the first section of  the bill is                                                                    
intended  to modernize  the way  that AIDEA  sets rates  for                                                                    
loans that  are funded  through internal  funds. One  of the                                                                    
main  ways  that  AIDEA  promotes  economic  development  is                                                                    
providing Alaska businesses  long-term capital at affordable                                                                    
rates  for commercial  development expansion.  Current rates                                                                    
are  set by  analyzing  the current  market environment.  He                                                                    
related  that the  bond market  has been  unstable over  the                                                                    
last two years, resulting in  a fluctuation of AIDEA's rates                                                                    
between 6  percent and  10 percent.  Banks have  been fairly                                                                    
stable. This  mechanism has  taken AIDEA  out of  the market                                                                    
several  times  when it  should  have  been helping  Alaskan                                                                    
businesses.                                                                                                                     
                                                                                                                                
9:27:39 AM                                                                                                                    
                                                                                                                                
Mr. Leonard  explained that the  second section of  the bill                                                                    
adds an  interest rebate  program, which  would allow  for a                                                                    
rebate  on certain  loan  participations  based on  specific                                                                    
criteria set through regulations.  It would allow businesses                                                                    
that  are investing  in difficult  environments a  chance to                                                                    
have  some relief  on their  cash  flow for  the first  five                                                                    
years.                                                                                                                          
                                                                                                                                
Mr.  Leonard reported  that the  third section  clarifies in                                                                    
statute  that AIDEA  has the  ability to  own a  part of  an                                                                    
infrastructure investment  instead of the  whole. Clarifying                                                                    
the statute  will help  AIDEA in  the development  of larger                                                                    
infrastructure projects such as a port addition.                                                                                
                                                                                                                                
Mr. Leonard  explained that Sections  4 and 5 relate  to the                                                                    
rural  development  initiative  fund and  are  to  encourage                                                                    
better use of the program in rural areas.                                                                                       
                                                                                                                                
9:29:34 AM                                                                                                                    
                                                                                                                                
MARK  DAVIS,   ALASKA  INDUSTRIAL  DEVELOPMENT   AND  EXPORT                                                                    
AUTHORITY  (AIDEA),  DEPARTMENT  OF COMMERCE,  COMMUNITY,  &                                                                    
ECONOMIC DEVELOPMENT,  explained that  the first  section of                                                                    
the  bill would  change  the  way in  which  AIDEA sets  its                                                                    
minimum interest rate under  the commercial finance program,                                                                    
which  in previous  years was  tied to  the bond  market. In                                                                    
2008 the  market changed  and AIDEA's  rates began  to rise,                                                                    
making  it  non-competitive.  The  bill proposes  to  use  a                                                                    
comparable  financial security.  The  minimum  rate for  the                                                                    
program  would  be  set by  looking  at  transparent  public                                                                    
indexes that  track the cost  of money. Those  would include                                                                    
indexes such as  the Federal Home Loan Bank  of Seattle, the                                                                    
Federal Farm  Credit Banks Funding Corporation  Funding Cost                                                                    
Index,  London Interbank  Offered  Rate  (LIBOR), and  Fanny                                                                    
May. He  emphasized that  the bond market  is not  where the                                                                    
state wants to be.                                                                                                              
                                                                                                                                
9:31:55 AM                                                                                                                    
                                                                                                                                
Co-Chair  Stedman requested  a clarification  of terms.  Mr.                                                                    
Davis elaborated  on the definition  of "points";  one point                                                                    
is one percent.  Co-Chair Stedman asked what  LIBOR was. Mr.                                                                    
Davis said  it was  the London  Interbank Offered  Rate, the                                                                    
cost of funds  used by the European  markets. Currently, the                                                                    
yield  on treasury  T  bills is  being  tracked against  the                                                                    
LIBOR to get a feel for  the economy. Mr. Davis continued to                                                                    
say that  the first  section proposes to  allow AIDEA  to be                                                                    
more competitive.  He emphasized  the good qualities  of the                                                                    
program and the numerous commercial loans and jobs funded.                                                                      
                                                                                                                                
9:33:11 AM                                                                                                                    
                                                                                                                                
Mr. Davis explained the second part  of the bill, which is a                                                                    
rebate program under the  same loan participation. Incentive                                                                    
programs  at other  institutions  were examined  and it  was                                                                    
determined  that   incentive  programs  worked   to  further                                                                    
economic  development.   The  bill  proposes   an  up-to-one                                                                    
percent rebate for  the first five years of the  loan with a                                                                    
cap  of 5  percent  of  the portfolio,  which  is very  safe                                                                    
lending. The rebate could be  given if it would create jobs,                                                                    
for  rural   development,  or  to  achieve   other  economic                                                                    
criteria  set forth  in regulation.  Examples  would be  for                                                                    
development  in  distressed areas  or  the  creation of  new                                                                    
technologies or  for alternative  energy. He  predicted that                                                                    
the rebates would bring in new and novel types of lending.                                                                      
                                                                                                                                
Mr. Davis turned  to the third part of the  bill which deals                                                                    
with  the  development  finance program  under  which  AIDEA                                                                    
builds large projects. Currently,  the statutes are at odds.                                                                    
One part, AS  44.88.05, says the authority has  the power to                                                                    
"acquire  an   interest  in  a   project  as   necessary  or                                                                    
appropriate".  Another   part  of   the  same   statute,  AS                                                                    
44.88.010a says  AIDEA can  "incur debt  to own  and operate                                                                    
facilities".  The  decision  had   been  made  by  means  of                                                                    
Department  of Law  interpretations, that  AIDEA could  only                                                                    
own a  complete portion of  a project.  He used the  Red Dog                                                                    
Mine   as   an   example,   where  AIDEA   only   owns   the                                                                    
transportation  system,   but  not  the  mine.   In  current                                                                    
markets,  most  development   corporations  like  AIDEA  are                                                                    
investing  in  percentages  of   projects  and  looking  for                                                                    
private  partnerships.   The  proposal  would   clarify  the                                                                    
statute and allow AIDEA to  acquire an interest and become a                                                                    
partner with other investors and partners.                                                                                      
                                                                                                                                
9:36:12 AM                                                                                                                    
                                                                                                                                
Senator Huggins voiced concern  about the governments owning                                                                    
a part of a project. He  asked how the state would limit its                                                                    
liability  if it  was only  a part  owner. Mr.  Davis opined                                                                    
that legal  documentation would have  to provide  AIDEA with                                                                    
an exit strategy in all cases.                                                                                                  
                                                                                                                                
Senator Thomas asked if  the clarification of participation,                                                                    
ownership,  and  management   of  the  economic  development                                                                    
account was  found on  page 3, lines  10-17. Mr.  Davis said                                                                    
that was correct.                                                                                                               
                                                                                                                                
9:38:03 AM                                                                                                                    
                                                                                                                                
Co-Chair Stedman referred to page  3, lines 25-27, and asked                                                                    
why it  was important that a  person could not get  a second                                                                    
loan  until  a  previous  loan   was  paid  off.  Mr.  Davis                                                                    
suggested Mr. Winegar answer.                                                                                                   
                                                                                                                                
GREG,  WINEGAR, DIRECTOR  OF  INVESTMENT, ALASKA  INDUSTRIAL                                                                    
DEVELOPMENT  AND  EXPORT  AUTHORITY (AIDEA),  DEPARTMENT  OF                                                                    
COMMERCE, COMMUNITY, &  ECONOMIC DEVELOPMENT, explained that                                                                    
AIDEA is attempting  to tie the maximum to  a dollar amount,                                                                    
as opposed  to the number  of loans because  some businesses                                                                    
will take out a small loan  to get started and then may need                                                                    
an additional loan. The current  statute allows for only one                                                                    
loan. The  intention is to  provide the flexibility  to loan                                                                    
up to the full dollar amount.                                                                                                   
                                                                                                                                
9:39:31 AM                                                                                                                    
                                                                                                                                
Senator  Olson asked  why people  in rural  areas could  not                                                                    
spread  the  risk,  as  well as  the  benefits,  under  this                                                                    
program. Mr.  Davis explained that  is the intention  of the                                                                    
section to  allow for more  partnerships and  allow everyone                                                                    
to  have  "skin in  the  game".  Senator Olson  assumed  the                                                                    
transportation system  in the Red  Dog area would  have some                                                                    
input from  the borough or  from the local entity.  He asked                                                                    
if AIDEA  would support that  idea. Mr. Davis said  he would                                                                    
have to  see the amendment first.  If it is a  good business                                                                    
decision, AIDEA would tend to support it.                                                                                       
                                                                                                                                
SB  300  was  heard  and   HELD  in  Committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
9:42:58 AM