Legislature(2009 - 2010)BARNES 124
03/15/2010 03:15 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB376 | |
| HB410 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 376 | TELECONFERENCED | |
| *+ | HB 410 | TELECONFERENCED | |
HB 410-AIDEA LOANS
3:36:12 PM
CHAIR OLSON announced that the final order of business would be
HOUSE BILL NO. 410, "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."
3:36:19 PM
TED LEONARD, Executive Director, explained that this bill would
make changes to the Alaska Industrial Development and Export
Authority (AIDEA) loan participation and loan development
programs. The AIDEA is requesting the changes. He explained
that the Division of Investments administers the Rural
Development Investment Fund. He offered that AIDEA has been
conducting a strategic plan in the past year to improve its
effectiveness. These changes are the first steps to implement
the plan. In doing so, AIDEA hopes to protect the rate of
return; the dividend. He anticipated that the changes should
increase the dividend. He provided a section-by-section
analysis of the bill. Section 1 is intended to modernize the
program.
3:38:28 PM
MR. LEONARD related that Section 2 adds an interest rate rebate
program AIDEA's commercial finance division lending programs to
help incentivize businesses to invest in areas that are
economically distressed, such as rural areas or that meet other
economic criteria set in regulation.
3:38:53 PM
MR. LEONARD pointed out that Section 3 would add an important
provision to clarify that AIDEA can own a percentage of a
project and not have to own the full project. He related that
AIDEA's purpose states that it can own an interest in the
project. However, the statutes that pertain to finances,
specifies that AIDEA will own "a" project. Thus, weaknesses in
statute exist and AIDEA would like to have this language amended
to comport with AIDEA's purpose statement.
3:39:33 PM
MR. LEONARD stated that Sections 4 and 5 relate to the Rural
Development Initiative Fund funded by AIDEA, which is on AIDEA's
balance sheet, but is administered by the Division of
Investments, Department of Commerce, Community, & Economic
Development. He explained that Mr. Davis is charged with
reviewing the effectiveness of AIDEA's programs.
3:40:26 PM
MARK DAVIS, Economic Development Officer, Alaska Industrial
Development & Export Authority (AIDEA), stated that HB 410 does
three things. First, it would amend the method by which AIDEA
determines minimum interest rates for the Commercial Finance
Program. He related that AIDEA works with financial
institutions to make loans and participation with private
borrowers. The bank and AIDEA negotiate how much AIDEA will
invest in the project, up to 90 percent. Currently, the method
AIDEA uses to set the interest rate is based on the bond market
and per its statute, the cost of funds. Over time, that has
been interpreted to mean the cost that AIDEA would incur if it
"floated a brand new bond to fund the money it would need to
lend." Over time, what AIDEA has been doing is lending its own
money, which has the effect of a revolving loan fund. Thus,
AIDEA would like to change the system, and particularly now due
to anomalies in the bond market. In May 2009, the bond market
essentially disappeared and is slowly recovering. However, at
one point AIDEA's minimum loan participation rate rose to 9.64
percent, while the average lending rate was 5.48 percent. He
said, "That's large spread, even today the spread is 1.33."
Thus, AIDEA would like to tie the cost of funds to a money
market index so the bill would allow AIDEA to use a national
index to set the rate rather than having Goldman Sachs calculate
the artificial cost of a bond. AIDEA could use a nationally
recognized index such as the federal Home Loan Bank of Seattle,
Treasury Bills, or Federal Farm Credit Banks Funding Corporation
funding cost index. He said he thought the rates will go down,
which would make the program more competitive. Additionally,
the program would be more transparent since currently AIDEA must
calculate the interest rate monthly, the cost of administering
the loan, and publishes a rate. He said that if an index is
used a bank or potential borrower could go to the index and see
essentially what AIDEA would charge. It would also set AIDEA's
rate to the money market rather than the bond market. He
remarked that the bond market has a disconnection between how
bonds are being sold and the cost of funds.
3:43:42 PM
REPRESENTATIVE NEUMAN asked for clarification on the differences
between money markets and the bond market.
MR. DAVIS explained that the bond market is what investors are
willing to pay for certain bond issuances. The two major types
are municipal tax free bonds and private bonds, which are
taxable. Traditionally, these bonds were the basis of most
portfolios. Other private bonds could be done by private
distribution or public auction. What has happened is the
municipal bond market has essentially disappeared. Although it
is slowly coming back the market is not robust. The American
Recovery and Reinvestment Act of 2009 (ARRA), the Congress has
enacted eight new forms of bonds, which do not yet have a steady
market. Thus, more private placement bonds exist, but the
interest rates on these bonds are hard to track. People are
trying to find safe havens and the extreme of that was raised in
November 2008, when the Treasury Bills went negative. Those
bonds sold in less than a week since people would rather lose
one dollar than ten to twelve percent of their investment in the
market. The market is still unstable, he remarked. He
commented that the relationship between the bond market and the
stock market is usually an inverse relationship, but the
correlations are not longer holding true.
3:45:21 PM
MR. DAVIS suggested that AIDEA could track its rates and become
more competitive with these changes. Since 2002, AIDEA's Loan
Participation Program has created 4,720 jobs and 2,900
construction jobs. Currently, its portfolio is at $376 million,
with $24 million in pending applications. This is used largely
for commercial real estate so this program helps Alaska's
economy. He characterized the process as a fairly complicated
mechanism but offered that it would adjust the rates.
3:46:07 PM
REPRESENTATIVE BUCH asked whether AIDEA has done this
previously.
MR. DAVIS responded that under the old system, Goldman Sachs
adjusted its rate every 30 days. Since 1987, the market has
gone up and down. Traditionally the bond market was low and it
worked well. One reason for this change is the change in the
bond market. In further response to Representative Buch, he
explained that the bill has built in flexibility. Since AIDEA
is considering a nationally published index, AIDEA could choose
an index that helps the program. Next, he explained the
Incentive Rebate Program in the Loan Participation Program.
Currently, no matter what the project does, the borrower
receives the same rate. The proposed change would offer up to a
one percent rebate for the first five years of the loan in cases
in which the project met certain criteria, such as if the
project would lead to jobs, development in rural areas, or based
on other economic development criteria. This would encourage
people to bring in projects that met the criteria. He offered
that by regulation, AIDEA could set up criteria such as
development stressed areas, which would mirror the federal
Rehabilitation Loans, such as for alternative energy. This
measure would allow AIDEA to offer rebates in cases in which the
loans met certain economic development criteria and would move
the Loan Participation Program more toward economic development,
which is part of AIDEA's strategic plan.
3:48:28 PM
REPRESENTATIVE NEUMAN asked what types of economic development
projects AIDEA might participate in for this program.
MR. DAVIS pointed out that AIDEA is currently monitoring a
series of projects such as possible plant or energy issues. He
remarked that he will meet with consultants for the U.S.
Department of Energy to discuss the federal guarantee loan
program. He noted that AIDEA is seeking to be qualified as a
development finance organization for up to $6 billion in federal
guaranteed loans to develop alternative energy in the state.
3:49:37 PM
MR. DAVIS moved to the Development Finance Program. This is the
program in which AIDEA owns an entire project, such as the
Skagway Ore Terminal. Currently, AIDEA cannot parse out a piece
of the project, but must own the entire project. Thus, AIDEA
must calculate what it can own and allow another investor to buy
a segment. "This is awkward," he said. He referred to AS
44.88.010(a), which allows AIDEA to incur debt to own and
operate facilities. However, AS 44.88.080 (5) conflicts with
this relating that the authority can acquire an interest in a
project as necessary and appropriate, which appears to refer to
a portion of a project. This bill would clarify and specify
that AIDEA can own a portion of a project. He explained that
this change would allow AIDEA to be a partner with another firm,
which would make it easier to invest and obtain partners. If
the authority has a partner, it also enhances the chance the
project will succeed and would reduce risk. Currently if a
connected project fails, it is difficult for AIDEA to succeed.
He restated that this would allow AIDEA to partner with
investors and leverage funds, allowing the private market or
federal government to fund a portion of the project.
3:52:00 PM
REPRESENTATIVE NEUMAN referred to on page 3, to lines 23-24, he
pointed out the language allows AIDEA to make loans, but is
limited to areas not connected by road or rail to Anchorage or
Fairbanks. He asked for clarification.
3:52:55 PM
CATHY JEANS, Systems Branch Manager, Division of Investments
(DOI), Department of Commerce, Community, & Economic Development
(DCCED), explained that the Division of Investments (DOI)
administers a number of state loan programs including the Rural
Development Initiative Program. This program was established in
2000, to encourage rural businesses, which is similar to a
program that was administered for many years by the former
Department of Community and Regional Affairs. The DOI
administers the program for AIDEA, which consists of about 40
loans totaling $4.1 million. The program is a revolving loan
fund, which means all repayments and earnings are retained in
the fund, and all operating expenses are paid from the fund.
The RDIP currently has $1.5 million to lend. The proposed
changes came about from public input and internal discussions.
This bill would remove the restriction that a borrower can have
no more than one loan and increases the dollar amount of
proposed loans from $100,000 to $150,000 per person, and from
$200,000 to $300,000 for two or more persons. Section 5 reduces
the minimum rate of interest from six percent to four percent.
The DOI supports the changes because the division believes it
will increase the utilization of the program, which creates more
jobs, and benefits the economic conditions in rural communities.
The DOI submitted a zero fiscal note.
3:55:18 PM
REPRESENTATIVE NEUMAN offered his belief that the purpose of the
changes is to expand the ability to provide smaller loans and
more diversified loans to Alaskans. He asked whether more
opportunities would be provided to Alaskans if the restriction
on page 3, lines 22-25, that limit it to rural communities was
removed.
MS. JEANS agreed that it may provide more loans, but this fund
is a smaller "pot of money" and is targeted to assist
communities of 5,000 or fewer, not connected to the road or rail
system in Anchorage or Fairbanks. Thus, this is intended to
create more jobs for eligible rural communities.
3:56:48 PM
CHAIR OLSON offered that the program is aimed at the communities
that do not have access to loan facilities or commercial banks.
MS. JEANS suggested that applicants may have access to banks,
but the goal is assist in creating long-term employment in rural
areas.
REPRESENTATIVE NEUMAN offered that people in communities like
Cantwell, which is a remote area, also have difficulty in
starting businesses. He said he thinks the state should do all
it can for as many Alaskans. He expressed concern about
equality in the bill in its current form.
MS. JEANS responded that the program limit to rural areas is
current statutory language.
CHAIR OLSON pointed out that the only change to the program in
HB 410 is to increase the amount of the loans.
3:59:30 PM
MS. JEANS noted that this language originally came from a
program contained in the DCRA. She related that it has been "on
the books" for quite awhile.
3:59:55 PM
MR. LEONARD mentioned the program language is current statutory
language for the program. He recalled that another bill will be
before the committee that relates to microloans, which will
target loans for small businesses across the state. If this
bill were to be changed and expanded to the Railbelt, that AIDEA
would need to contemplate how to capitalize the fund, he stated.
He offered his belief that AIDEA is restricted to fund the
program, although he did not have the details on the program
funding. He surmised that if the program were expanded that it
would be used up in a couple of months. He expressed interest
in considering ways to provide working capital for businesses
across the state.
4:02:11 PM
REPRESENTATIVE NEUMAN remarked that he wants to reach more
Alaskans. He recalled criticism he has heard about AIDEA's
inability to reach out to small businesses. He said he wanted
to ensure that certain people do not get left out and to take
care of all Alaskans equally.
4:03:30 PM
REPRESENTATIVE NEUMAN expressed concern about the rural
preference in HB 410.
CHAIR OLSON remarked that the bill has a good chance of passage
with a zero fiscal note.
MR. LEONARD commented that AIDEA has faced many challenges in
its efforts to assist businesses. He related that AIDEA's
programs typically partner with banks and result in loan
participation. He explained that AIDEA is working to find ways
to offer direct loans and has been with the Division of
Investments to find ways to provide loans for working capital to
small businesses.
CHAIR OLSON related that it is possible to have AIDEA come in
and discuss the issue of encouraging small businesses and how to
provide loans to assist them.
4:05:47 PM
CHAIR OLSON, after first determining no one else wished to
testify, closed public testimony on HB 410.
REPRESENTATIVE NEUMAN remarked that this is an opportunity for
AIDEA to expand its program. He characterized HB 410 as a good
bill
4:06:40 PM
REPRESENTATIVE NEUMAN moved to report HB 410 out of committee
with individual recommendations and the accompanying fiscal
notes. There being no objection, HB 410 was reported from the
House Labor and Commerce Standing Committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Mar 15 Packet Info.pdf |
HL&C 3/15/2010 3:15:00 PM |
|
| HB376 ver R.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB376 Sponsor Statement ver R.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB376 Supporting Documents - BPPAE Audit Summary.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB376 Supporting Documents BPPAE Legislative Audit.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB376 Supporting Documents - BPPAE info.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB376 Supporting Documents Letter Phillip Baker 3-10-10.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |
| HB410 Fiscal Note-CED-AIDEA-3-1-10.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB410 Sectional Analysis.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB410 ver A.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB410 Fiscal Note-DOTPF-3-1-022610-N.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB410 Fiscal Note-REV-1-022610-N.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB410 Letter ABA 3-08-10.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 410 |
| HB376 Fiscal Note-CED-CBPL-3-12-10.pdf |
HL&C 3/15/2010 3:15:00 PM |
HB 376 |