Legislature(1993 - 1994)

03/03/1994 08:00 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
  HB 408 - AIDEA EXPORT ASSISTANCE PROGRAM LOANS                               
  CHAIRMAN VEZEY opened discussion on HB 408.                                  
  Number 330                                                                   
  REPRESENTATIVE GREEN, sponsor of HB 408, gave a sponsor                      
  statement.  He said, Chapter 42, SLA 1987, provided for the                  
  Alaska Industrial Development Authority to add an Export                     
  Financing Guarantee program to its' portfolio, and change                    
  the name, at that time, to the Alaska Industrial Development                 
  and Export Authority (AIDEA).  Six years later, AIDEA has                    
  yet to guarantee an export transaction with this program.                    
  REPRESENTATIVE GREEN stated HB 408 is an attempt to make the                 
  export program work.  The problem is that current AIDEA                      
  regulations impose a ceiling on the interest commercial                      
  lenders may charge when participating in this program.  The                  
  lesser of the rate charge, under the promissory note, of one                 
  percent above the U.S. Treasury Note rate, at 3.5 percent,                   
  means commercial banks could charge no more than about 4.5                   
  percent interest on a loan.  This restriction effectively                    
  kills the program because no commercial lender would lend                    
  money at 4.5 percent.                                                        
  REPRESENTATIVE GREEN said, somewhat similar to the export                    
  assistance program, AIDEA also has a business assistance                     
  program.  The interest rate for banks is this program is in                  
  the same statute, however, it is substantially higher                        
  allowing lenders to charge 2.75 percent above the prime                      
  rate.  At the current prime rate of six percent, a                           
  commercial bank could charge as much as 8.75 percent                         
  interest.  The Federal Small Business Administration (SBA)                   
  program also allows this interest to go to 2.75 percent                      
  above the prime rate.                                                        
  REPRESENTATIVE GREEN stated that HB 408 establishes the same                 
  interest rate for the export program, as exists for the                      
  business assistance program.  The export program will become                 
  more attractive to commercial lenders.  He noted the export                  
  assistance program is a loan guarantee, not a state loan.  A                 
  potential exporter could go to a commercial bank, and if                     
  they qualify, get a commercial loan at any time, but if the                  
  exporter seems at all risky, the bank could use this program                 
  to reduce that risk.  AIDEA would assume that risk, because                  
  it has a mechanism to reinsure itself which would reduce its                 
  REPRESENTATIVE GREEN stated managers at AIDEA recognize the                  
  export program is not working and they have begun to work                    
  with banks and the Department of Commerce to fix it.  It is                  
  his opinion that between these statutory changes and some                    
  changes in AIDEA's regulations, banks might be willing to                    
  use this program and that would be an important tool for                     
  small businesses.  REPRESENTATIVE GREEN stated he was                        
  serious about fixing the problems and if it could not be                     
  done in the regulations, he would try to introduce something                 
  to fix it through statute.                                                   
  Number 389                                                                   
  CHAIRMAN VEZEY asked which program under AIDEA is limited to                 
  one percent over the six month treasury note.                                
  REPRESENTATIVE GREEN replied the export program.  He                         
  understood the oddity of trying to help a program by                         
  increasing its ability to charge more interest.  He                          
  clarified the problem to be small export potentials, which                   
  there are many in Alaska, need to be financed.                               
  Number  402                                                                  
  CHAIRMAN VEZEY stated AIDEA is providing the guarantee, not                  
  the loan.                                                                    
  REPRESENTATIVE GREEN agreed.  He gave an example of a man                    
  named Jones, who may not have a good enough idea for a very                  
  restrictive bank, but it may pass the AIDEA test.  AIDEA                     
  would guarantee him.  If Jones were to then go under, he                     
  clarified, AIDEA would not exactly have to pick up the tab,                  
  because AIDEA reinsures itself with a .5 percent charge                      
  which the applicant pays.  If Jones had gotten 8.75 percent,                 
  the loan he would have actually been paying would have been                  
  at 9 percent, therefore, 25.25 percent would be a                            
  reinsurance program that AIDEA would not get stuck with the                  
  bill.  AIDEA acts as an intermediary.                                        
  Number 415                                                                   
  CHAIRMAN VEZEY did not believe the legislature had the                       
  foresight in 1987 to see the short-term interest rates drop                  
  so dramatically below the long-term rates.  He was concerned                 
  that if the number of loan guarantees was increased the                      
  reserves for loan losses would have to be increased,                         
  requiring a fiscal note.                                                     
  REPRESENTATIVE GREEN responded the AIDEA program does not                    
  put up the money, the bank does.  If AIDEA is held as a                      
  default, they would look to their reinsurer to pay the                       
  CHAIRMAN VEZEY asked if AIDEA buys loan insurance.                           
  REPRESENTATIVE GREEN confirmed.                                              
  REPRESENTATIVE G. DAVIS questioned if the insurance was                      
  bought from another state agency.                                            
  Number 437                                                                   
  REPRESENTATIVE GREEN said no, it was more like a "LLoyd's of                 
  London type of thing."                                                       
  Number 438                                                                   
  CHAIRMAN VEZEY thought AIDEA would use their investments to                  
  secure loans.                                                                
  REPRESENTATIVE GREEN said no, that way state capital is not                  
  tied up.                                                                     
  Number 440                                                                   
  CHAIRMAN VEZEY commented that if activity is anticipated to                  
  increase, increased insurance premiums for loan insurance                    
  should be expected.                                                          
  Number 442                                                                   
  REPRESENTATIVE GREEN said an increase in premiums was                        
  possible.  He speculated, if there were a specific number of                 
  loans at a quarter of a percent, and the insurance carriers                  
  felt AIDEA was getting too much exposure, and they wanted to                 
  raise to a half a percent, there would be some loans with a                  
  quarter override and some that are higher interest override.                 
  This would be paid by the borrower.  HB 408 would bring both                 
  the export program and the small business program to equal                   
  CHAIRMAN VEZEY clarified HB 408 would annul the one percent                  
  above the treasury note in code, not in statute.  3 AAC                      
  99.650 would be annulled.                                                    
  CHAIRMAN VEZEY moved to the Anchorage teleconference site.                   
  Number 467                                                                   
  JOHN DELANO, DEPUTY DIRECTOR OF CREDIT, AIDEA, commented and                 
  answered questions on HB 408.  He felt the problems which HB
  408 addresses could be taken care of through regulations.                    
  The interest rate is only established by regulation.  AIDEA                  
  does not have the legislative history or the corporate                       
  memory because those involved in suing the regulations are                   
  no longer with the authority.  There have been attempts by                   
  several staff members of AIDEA to meet with banks, OIT, and                  
  other interested parties to make the export program more                     
  attractive.  AIDEA would not have a problem changing the                     
  interest rate through regulation.                                            
  Number 484                                                                   
  CHAIRMAN VEZEY could not see banks wanting to loan at 4.5                    
  percent, even if they could get money from the Federal                       
  Reserve banks for 2.5 percent.  He believed the low interest                 
  rate had been in effect for at least three years.                            
  MR. DELANO replied, "at least."                                              
  CHAIRMAN VEZEY thought it was a regulatory interest rate and                 
  [we] seem a little a slow to react to the market.                            
  Number 495                                                                   
  MR. DELANO responded the interest rate discussed would be                    
  the interest rate AIDEA would pay off in the event they have                 
  to honor the guarantee, in the event of default by the                       
  borrower.  He clarified the bank can charge any rate they                    
  choose.  The index in 1987 was probably substantially                        
  higher, twice as high as it is currently, when the                           
  regulation was made.                                                         
  Number 505                                                                   
  REPRESENTATIVE GREEN inquired, if that were the case                         
  wouldn't there still be a restriction or difficulty for a                    
  borrower if they went to a bank, and the bank may have                       
  reservations that AIDEA is not supporting them for the full                  
  amount they want to commit their money to.                                   
  Number 510                                                                   
  MR. DELANO stated this scenario was very possible. That's                    
  why AIDEA has absolutely no objection to increasing the rate                 
  to be commensurate with the same rate charged in the                         
  business assistance program, prime plus 2.75.  He felt this                  
  may comfort banks so in the event of default, they may know                  
  the amount of interest they would collect on the defaulted                   
  amount of money.                                                             
  Number 515                                                                   
  CHAIRMAN VEZEY clarified 3 AAC 99.650 sets the interest                      
  rates for the loan guarantee and not the loan.                               
  MR. DELANO confirmed that was correct.                                       
  Number 520                                                                   
  CHAIRMAN VEZEY asked what the response is from the                           
  commercial lending institutions to 3 AAC 99.650.                             
  MR. DELANO replied the concern of banks was they wanted to                   
  know the interest rate AIDEA will pay them in the event the                  
  guarantee would have to be honored.  They felt the interest                  
  rate should be raised.  AIDEA did not have objections to                     
  this.  He stated the underwriting by both the bank and AIDEA                 
  is generally conservative enough that AIDEA does not view a                  
  lot of risk in the guarantees.  The moneys guaranteed are                    
  contingent liabilities of the AIDEA and under the business                   
  assistance program, for example, AIDEA has only had to pay                   
  off one guarantee since the program was instituted.  They                    
  paid off about 25 percent of the total guaranteed amount.                    
  Number  540                                                                  
  REPRESENTATIVE GREEN clarified one loan defaulted under the                  
  business assistance program and asked how many loans had                     
  been granted.                                                                
  Number 543                                                                   
  MR. DELANO answered there are currently 14 or 15 on the                      
  books, however, the total amount of outstanding guarantees                   
  is just short of $1 million.  The export program had not                     
  been utilized because it is similar to the U.S. Small                        
  Business Administration, a federal guarantee, which is more                  
  liberal and banks have used it since the late 1940s.                         
  AIDEA's export program is more attractive than the federal                   
  program for financing inventory and accounts receivable                      
  because of greater limits, $1 million versus $750,000.                       
  Number 553                                                                   
  REPRESENTATIVE GREEN commented there are some 15 loans under                 
  that program and zero under the export program, and asked if                 
  that was because of the difference in the types of people or                 
  businesses that would be involved or because they are more                   
  apt to get loans from banks with a higher guarantee from                     
  Number 560                                                                   
  MR. DELANO responded he thought the export program was                       
  partially not used because AIDEA does not know if the                        
  participant volume exists in this area.  Several people have                 
  come in with interest in this area, but in talking to them,                  
  their needs tend to fit the business assistance program.                     
  Number 575                                                                   
  REPRESENTATIVE GREEN reiterated AIDEA has no objection to                    
  modifying the interest rate in regulation.  He then asked if                 
  [we] could be assured that if HB 400 was not pursued, it                     
  would be done in regulations.                                                
  Number 580                                                                   
  MR. DELANO said yes, AIDEA could do it.                                      
  Number 581                                                                   
  REPRESENTATIVE GREEN suggested HB 408 be pulled off the                      
  table with that assurance.  In an effort to make the change                  
  more proactive, rather than negative, he offered that page                   
  1, line 7, the (b) portion of the existing regulations which                 
  now read, "the authority may not guarantee a loan unless the                 
  authority finds that the guarantee is reasonably necessary,"                 
  should be modified to read, "that the authority may                          
  guarantee a loan if the authority finds that the guarantee                   
  is reasonably necessary."  The thrust would change to more                   
  positive wording.                                                            
  Number 597                                                                   
  REPRESENTATIVE G. DAVIS asked MR. DELANO about the previous                  
  loan being considered under the export authority, that was                   
  later found to fit better under the business assistance                      
  program.  He could not imagine an export loan that would not                 
  fit under the business assistance program and asked if this                  
  was why the export program had not been used.                                
  Number 605                                                                   
  MR. DELANO responded long-term contracts and revolving                       
  credit can fall under business assistance, and he believed                   
  the statutes and regulations were written more with the                      
  intent of specific transactions.  AIDEA felt continuing                      
  relationships are served better under the business                           
  assistance program because guarantees can be issued for one                  
  year, and they can get renewals for four additional years.                   
  Number 626                                                                   
  REPRESENTATIVE GREEN asked if AIDEA can handle the exporters                 
  through regulation and still get loan requests through small                 
  business, is there a need for the export authority.  He                      
  asked if there were people working in this category.                         
  Number 629                                                                   
  MR. DELANO replied no one is specifically working in the                     
  export area, but several AIDEA employees are familiar with                   
  the program and are trying to work with it.  If there was a                  
  request to have a designated employee for the program, one                   
  of three officers who does underwriting for the authority                    
  would be chosen.  He stated the need for the export                          
  authority had been deliberated over and because of its lack                  
  of use and misunderstanding of intent, AIDEA would like to                   
  amend the program to be usable or dispense of it and the                     
  financing will be taken care of under business assistance.                   
  Number 641                                                                   
  REPRESENTATIVE GREEN asked if AIDEA would take care of the                   
  export program in the reasonable future.                                     
  (REPRESENTATIVE OLBERG left the meeting at 8:42 a.m.)                        
  Number 645                                                                   
  MR. DELANO answered AIDEA is prepared to make the regulation                 
  changes and it should not take too long.  They have no                       
  objection to making the changes, however, they are not so                    
  sure it will induce the banks to make presentations to them.                 
  He suggested AIDEA talk to the banks and find out what will                  
  make the export program attractive to them.  Depending upon                  
  the response of the banks, AIDEA could report back the                       
  options of whether the program will be changed or dispensed                  
  Number 661                                                                   
  REPRESENTATIVE GREEN asked if there was currently a director                 
  of AIDEA.                                                                    
  Number 662                                                                   
  MR. DELANO answered the executive director is Riley Snell.                   
  (REPRESENTATIVE OLBERG returned to the meeting at 8:45 a.m.)                 
  Number 663                                                                   
  REPRESENTATIVE GREEN asked if the executive director would                   
  then refocus his attentions to other duties and AIDEA would                  
  not have personnel involved with the export program that                     
  would no longer be needed.                                                   
  Number 664                                                                   
  MR. DELANO responded there would not be unnecessary                          
  personnel and their workload would not be impacted unless                    
  the program was kept.                                                        
  Number 665                                                                   
  REPRESENTATIVE GREEN suggested HB 408 be held until he could                 
  receive further information from AIDEA and he would                          
  readdress the committee at a later date.                                     
  Number 675                                                                   
  CHAIRMAN VEZEY accepted REPRESENTATIVE GREEN's suggestion                    
  and held HB 408 in the House State Affairs Committee for                     
  further study.                                                               
  CHAIRMAN VEZEY called a recess at 8:48 a.m.                                  
  TAPE 94-20, SIDE B                                                           
  Number 000                                                                   

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