Legislature(2015 - 2016)BUTROVICH 205
02/10/2015 09:00 AM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB6 | |
| SJR2 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 6 | TELECONFERENCED | |
| *+ | SJR 2 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SJR 2-CONST. AM: G.O. BONDS FOR STUDENT LOANS
9:50:49 AM
CHAIR STOLTZE announced that SJR 2 is the committee's next order
of business.
9:51:29 AM
SENATOR ANNA MACKINNON, Alaska State Legislature, Juneau,
Alaska, SJR 2 sponsor, explained that SJR 2 proposes to amend
Alaska's Constitution, a process that is an extremely serious
issue. She referred to page 30, Article 9, Section 8 in the
Constitution regarding state debt as follows:
No state debt shall be contracted unless authorized by
law for capital improvements or unless authorized by
law for housing loans for veterans and ratified by a
majority of the qualified voters of the state who vote
on the question; Mr. Chairman, what that means is that
we can't right now use the full faith and credit for
student loans, so our corporation goes out into a bond
market and uses a revenue stream to provide
opportunities for Alaskans to borrow.
Currently the state interest rates for student loans
is 6.7 percent and the federal rate is 4.66 percent;
should this be passed into law, the question would go
before voters in the 2016 election and the first time
we can try to reduce student loan debt, or at least
the interest rate we charge, would be in 2018 where we
would offer a bond and the first time a student could
benefit from this is 2019.
CHAIR STOLTZE pointed out that voting does not have to occur
during the general election.
SENATOR MACKINNON answered correct and noted that voting could
occur in a special election.
She declared that SJR 2, should it be passed by the people of
Alaska, would provide an opportunity to reduce student loan debt
through refinancing or lowered interest rates.
9:53:38 AM
KRISTEN PRATT, Staff, Senator MacKinnon, Alaska State
Legislature, Juneau, Alaska, confirmed that Senator MacKinnon
had addressed the resolution's main points.
CHAIR STOLTZE asked to verify that there were similar mechanisms
for veterans' bonds in 1982 and 2002. He inquired if there are
any other bond authorization mechanisms.
SENATOR MACKINNON replied that bonding mechanisms have been for
capital improvements that were originally in the Constitution.
She noted that Chair Stoltze pointed out that the Constitution
was amended in 1982 to include veteran housing. She reiterated
that SJR 2 specifically allows an opening for something that is
not capital. She noted that there has been conversation about
trying to broaden the resolution to give the Legislature the
full power and authority to use the state's Triple-A credit
rating. She summarized that SJR 2 addresses Alaska's students
who are adversely effected by the revenue bond stream and that
the people of Alaska support the change.
CHAIR STOLTZE noted that SJR 2 is a constitutional amendment and
that he intends to have the Department of Revenue address
questions. He asked if there was a time limit or if there was a
substantive change on the veteran's housing bonds authorization
that required the Legislature to do a new constitutional
amendment.
9:54:27 AM
JERRY BURNETT, Deputy Commissioner, Treasury Division, Alaska
Department of Revenue, Juneau, Alaska, explained that the
constitutional amendment in 1982 allowed for veterans' mortgage
bonds and additional veterans' mortgage bonds was authorized in
2002. He stated that he assumed the change in 2002 was strictly
an authorization and not a constitutional change.
CHAIR STOLTZE asked to verify that 2002 was not another
constitutional amendment.
MR. BURNETT answered correct. He remarked that using general
obligation bonds for student loans would have no adverse effect
on the state's credit rating. He noted that student bonds would
not be included in the state's calculation of state supported
debt due to the secured revenue from the student loan program.
He revealed that he sits on the board of the Student Loan
Corporation and the Department of Revenue is familiar with the
bonding issue. He pointed out that due to adverse market
conditions, legislation was passed in 2009 to allow student
loans to be financed directly out of the general fund.
CHAIR STOLTZE asked if the difficulty was linked to federal
laws.
MR. BURNETT answered no. He explained that the change was in
response to the financial crisis where direct student loan
lending was locked-up.
9:58:02 AM
CHAIR STOLTZE recalled that Postsecondary Education prompted the
Legislature to pass some statutory changes on requirements.
MR. BURNETT replied correct. He specified that the changes
improved the program with additional credit standards. He added
that legislation was passed to allow the state to have a letter
of credit to support the Student Loan Program's borrowing and
finance student loans directly from the general fund.
CHAIR STOLTZE noted that enhanced levels of securitization by
the borrower was added.
SENATOR MACKINNON noted that the rating for student credit was
changed where students were required to either use parents'
credit ratings or have parents co-sign for loans.
SENATOR WIELECHOWSKI noted that there are very interesting
provisions in the Constitution's original section about the
state being able to contract debt for the purpose of "Repelling
invasion, suppressing insurrection, and defending the state in
war." He asked what the current student loan rates were and how
much the interest rates could possibly be lowered.
MR. BURNETT answered that Diane Barrans could address questions
regarding interest rates. He stated that borrowing from the
Triple-A rated general obligation debt will result in low
interest rate loans when the current money market is sub-three
percent.
10:00:26 AM
SENATOR HUGGINS asked what the default rates were for veterans'
mortgages and student loans.
MR. BURNETT answered that he was not certain. He explained that
the programs are structured in a way that there's additional
security beyond the borrowing to allow a default rate that does
not directly hit the lending.
SENATOR HUGGINS noted that student loans have some forgiveness
provisions and pointed out that mortgages cannot be forgiven. He
asked what the student loan default rate was.
10:02:06 AM
DIANE BARRANS, Executive Officer/Executive Director, Alaska
Student Loan Corporation (ASLC)/Alaska Commission on
Postsecondary Education (ACPE), Juneau, Alaska, explained that
the current default rate for student loans is 6.6 percent on the
overall portfolio. She conceded that the default rate would
appear high when compared against commercial loans.
She explained that funding for student loan debt is over-
collaterized to ensure that the debt to loan ratio is never one-
to-one. She specified that the loan program always has excess in
order to offset any impacts to the program's ability to pay debt
service or outstanding loans.
She added that there have been no loan forgiveness provisions
for some years. She noted that forgiveness for the Teacher
Education Loan is being phased out due to an inability to fund
the program with debt.
CHAIR STOLTZE asked to verify that there is a medical provider's
loan forgiveness program.
MS. BARRANS answered correct. She explained that there is a
Washington, Wyoming, Alaska, Montana, and Idaho (WWAMI) Graduate
Medical Program where the state directly funds Alaska students'
participation with general funds. She specified that students in
the WWAMI Program have an obligation to work in the state in
order to receive loan forgiveness. Students that fail to comply
with loan requirements have to repay the support the state has
provided.
10:04:17 AM
CHAIR STOLTZE asked to verify that there is a medical provider
forgiveness program that is paid for with general funds rather
than the student loan program.
MS. BARRANS noted that Chair Stoltze was referencing the
Providing Support-for-Service to Health Care Practitioners
(SHARP) Program which the Legislature has funded. She explained
that the SHARP Program pays for a percentage of a student loan
if an individual works in eight different medical specialties
and works in certain underserved areas.
SENATOR WIELECHOWSKI asked what the current student loan
interest rate is and what the percentage will be if SJR 2
passes.
MS. BARRANS answered that the current student loan interest rate
is 6.7 percent. She explained that the ASLC Board annually
approves borrower benefits and noted that individuals attending
school in Alaska receive a 0.50 percent discount, resulting in
an interest rate of 6.2 percent.
She noted that financial advisors have indicated that passing
SJR 2 could result in interest rates being lowered by 1.0 to 1.3
percent.
SENATOR HUGGINS noted that the University of Alaska is looking
at homegrown-teachers that target Alaska's bush-communities and
asked if a loan forgiveness will be instituted to support the
program.
MS. BARRANS answered that supporting homegrown-teachers with a
loan forgiveness program similar to SHARP is a possibility
rather than the Teacher Education Loan that is currently being
phased out. She explained that the SHARP program has
successfully targeted underserved areas where the Teacher
Education Loan resulted in a small percentage actually in the
field teaching where the program ideally targeted them.
10:07:41 AM
SENATOR COGHILL asked how the bonding process would work if SJR
2 passed.
SENATOR MACKINNON answered that the revenue source for the
bonding service will change where a lower interest is attained
through the full faith and credit of the State of Alaska.
MS. BARRANS explained that general obligation bonds addresses
the amount of debt beyond an authorized cap. She specified that
the ASLC Program goes into the market in February or March in
order to coincide with the academic year. She said one of the
advantages of having general obligation authority is the process
will be more expedited because there will not be the kind of
labor intensive work involve with rating agencies that examine
student loan cash flow portfolios.
10:09:57 AM
SENATOR COGHILL asked to verify that general obligation bonding
will smooth out some of the cyclical issues by having a ready-
bondable system.
MS. BARRANS answered yes.
SENATOR COGHILL asked if the definition for postsecondary
education being inserted into the Constitution needs to be
flexible.
MS. BARRANS answered that the use of the funding is controlled
by the Legislature through the student loan statutes that very
explicitly set out what the loans can be used for. She noted
that student loans include vocational training that meets
certain criteria.
10:12:01 AM
SENATOR WIELECHOWSKI asked what the formula is to come up with
the current 6.7 percent interest rate.
MS. BARRANS answered that the fairly complicated formula looks
at the cost of issuance, the cost of debt which ASLC pays, and
the cost of servicing.
SENATOR WIELECHOWSKI noted that the federal interest rates are
much lower, 4.6 percent for 2014-2015. He pointed out that the
state's interest rate for students is over two points higher
than the federal interest rate, a significant difference for the
tens of thousands of dollars that students take on. He asked if
Ms. Barrans had a component breakdown the student interest rate.
MS. BARRANS answered that Congress sets the rate. She explained
that because the federal government is not financing the loans
through the financial markets, the federal government can
essentially choose to subsidize the loans to whatever extent
they choose to and that is a matter of federal policy. She said
an analogy would be if the State of Alaska funded the ASLC
Program with cash and the State of Alaska could set the rate at
whatever rate they chose to.
SENATOR MACKINNON pointed out that most students are referred to
the federal program to access lower interest rates first, the
state's program second, and the private sector third. She noted
that the private sector's interest rates depend on what
educational career the student is pursuing.
MS. BARRANS agreed with Senator MacKinnon. She pointed out that
the Federal Stafford Loan is also available for students, but
the interest rate is 0.50 percent higher than the state's rate
at 7.21 percent. She added that the ASLC Program also makes
students and parents aware of the Family Education Loan as well
as the Supplemental Education Loan. She revealed that when the
instate discount is factored in, the state's loan options are
1.0 percent below the federal rate.
10:15:58 AM
SENATOR HUGGINS asked Ms. Barrans to explain President Obama's
proposal to offer education at community colleges.
MS. BARRANS answered that the proposal is in the President's
budget. She detailed that the proposal comes with "strings"
attached so the entire concept is not free, but the proposal
would reduce cost.
SENATOR HUGGINS asked for an explanation of how the "strings"
attached to the program will affect Alaska's students.
MS. BARRANS answered that she has not done the analysis nor has
she spoken with the University of Alaska.
SENATOR HUGGINS stated that he is not supportive of the
President's concept with the attached "strings." He asked if
Alaska has a community college campus that will meet the
concept's definition.
MS. BARRANS answered yes. She said Prince William Sound
Community College and most other campuses that primarily offer
associates or lower credentials would qualify. She noted that
there are income contingent provisions that are in the
President's proposal where students would not qualify if their
family incomes reach certain levels.
10:18:23 AM
SENATOR MACKINNON noted that she has a son with a student loan
debt in Alaska. She said she did not think that she will be
positively impacted because her son intends to pay off his
student loan debt by 2019.
CHAIR STOLTZE inquired if a student's degree is taken into
account when assessing a student loan.
SENATOR MACKINNON replied that there is an education component
of the student loan program where monthly payments are
calculated based upon a student's career choice.
CHAIR STOLTZE noted that the data provided from the calculation
was strictly informational.
SENATOR MACKINNON replied yes.
SENATOR WIELECHOWSKI asked what the cost breakdown was for the
6.7 percent rate. He asked what the three components are that
make up the percentage.
MS. BARRANS explained that the board annually sets the interest
rate that is derived from the three components.
SENATOR WIELECHOWSKI asked if ASLC is a breakeven operation or
if money is returned to the general fund.
MS. BARRANS answered that there have been dividends that ASLC
has paid to the state. She noted that ASCL has not paid a
dividend to the state since 2009. She explained that ASLC's goal
is to do just enough better than breaking even to keep the
organization in the black.
10:21:26 AM
SENATOR WIELECHOWSKI asked if Ms. Barrans had any sense of how
the state's interest rate compares with other states.
MS. BARRANS answered that the state's interest rates are quite
comparable to other states, but noted that Texas is the
exception with a program that is funded through general
obligation bonds. She pointed out that Texas actually has loans
that range from a 0.0 percent to 5.5 percent.
SENATOR WIELECHOWSKI asked if the Texas model is something
Alaska could replicate.
MS. BARRANS answered that replicating a program similar to Texas
would seem unlikely due to the state's current financial
climate. She explained that Texas has built their large fund
source over a 40 year period. She noted that Texas is seriously
looking at ending their 0.0 interest rate.
SENATOR COGHILL asked what the cost of debt is for ASLC.
MS. BARRANS answered that ACPS actually services the loans for
the ASLC and there are costs associated with servicing. She
revealed that other than servicing, the other costs include the
interest paid on the debt and the onetime cost of issuance for
the bond council rating agency fees.
CHAIR STOLTZE announced that the committee will hear public
testimony.
10:24:29 AM
LANCE STEVENS, President, Juneau Chamber of Commerce, Juneau,
Alaska, Supports SJR 2. He said the Juneau Chamber of Commerce
feels that any opportunity to increase the participation in
continuing education increases the ability to hire and recruit a
qualified workforce. He asserted that driving down student debt
servicing costs increases the opportunity for repayment, lowers
default rates, and sets individuals up for long term success.
SENATOR HUGGINS noted that some states with large industrial
bases have companies that buyout student loans. He asked if
Alaska has programs that buyout student loans.
MR. STEVENS noted that the Juneau Chamber of Commerce offers
class reimbursement within its organization for classes that are
business oriented. He specified that students pay upfront and
reimbursement is based on achieving a certain qualifications. He
said what Senator Huggins referred to is more industry specific.
10:28:04 AM
MIKE COONS, representing himself, Palmer, Alaska, stated that
student loans negatively impact taxpayers and harms students'
and parents' credit ratings. He opined that there needs to be
more encouragement for Alaska's parents to save more money
rather than borrowing. He inquired if the Alaska student loans
can be used at colleges outside of the state. He added that
students who attend colleges outside of Alaska tend not to
return. He noted that the 6.6 percent default rate was
substantial and asked what the specific default rate was for
veterans.
10:32:57 AM
CHAIR STOLTZE noted that he shares a lot of the same personal
values with Mr. Coons about personal responsibility and being
debt free.
He noted that Ms. Barrans had testified in the past that
Alaskans who did not return to the state actually had a higher
repayment rate than students who remained in Alaska.
MS. BARRANS acknowledged that Chair Stoltze was correct.
CHAIR STOLTZE added that the state needs to strive to correct
the default percentage for instate students.
10:34:23 AM
DAVID NEES, representing himself, Anchorage, Alaska, noted that
he is concerned about amending the Constitution to bond for
something that is not real property. He stated that he is
worried that additional programs might be considered to receive
lower interest rates from the state. He asked what the current
default rate was. He pointed out that the current loan program
pays for 90 percent or 100 percent of the ACPE's budget. He
inquired if a lowered loan rate program will ultimately be paid
for from the state's general fund.
10:36:48 AM
MS. BARRANS reiterated that the current student default rate is
6.6 percent on the outstanding portfolio. She pointed out that
the default rate will continue to decline because a higher
credit requirement has been in place for the last several years.
She said the structure from the proposed bill should have no
effect in the way ACPE's activities are funded. She stated that
ACPE does not expect to shift any of its supported cost to the
general fund and costs will continue to be paid from ASLC's
receipts.
10:38:00 AM
CHAIR STOLTZE stated that he suspects the bill will receive more
scrutiny in the Senate Finance Committee.
SENATOR HUGGINS asked if ACPE has wage garnishment authority.
MS. BARRANS answered yes. She said the Legislature has given
ACPE the authority by statute to issue administrative wage
garnishments. She stated that wage garnishment is another tool
that ACPE uses on a regular basis. She added that ACPE also
garnishes Permanent Fund Dividends (PFD). She revealed that ACPE
is third in line for PFD garnishment after child support and
court ordered restitution.
CHAIR STOLTZE announced that seeing no additional requests,
public testimony is closed.
SENATOR WIELECHOWSKI asked after garnishment procedures, what
default percentage is actually not recovered.
MS. BARRANS replied that she can provide write-off information.
She noted that some write-offs occurs due to death or total
disability.
CHAIR STOLTZE asked if the ASLC oversees its default
collections.
MS. BARRANS answered that ACPE does instate collections and a
third party collection agency is used to pursue some instate and
out of state collections.
CHAIR STOLTZE asked what percentage ACPE collects from its
defaulters.
MS. BARRANS answered that 15 percent is considered a good rate
for badly-aged debt.
10:41:59 AM
SENATOR COGHILL moved to report SJR 2, [29-LS0010\W], from
committee with individual recommendations and attached fiscal
note(s).
10:42:19 AM
CHAIR STOLTZE announced that seeing no objection, SJR 2 moved
out of committee.