Legislature(2013 - 2014)SENATE FINANCE 532

03/31/2014 09:00 AM Senate FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSSJR 21(2d FIN) Out of Committee
Moved SJR 23 Out of Committee
Moved CSSB 104(FIN) Out of Committee
Moved CSSB 140(FIN) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE JOINT RESOLUTION NO. 23                                                                                                
     Proposing an amendment to the Constitution of the                                                                          
     State of Alaska relating to contracting state debt for                                                                     
     postsecondary student loans.                                                                                               
9:32:44 AM                                                                                                                    
Vice-Chair Fairclough related  that SJR 23 would  add to the                                                                    
constitution the  authorization to issue the  full faith and                                                                    
credit  for student  postsecondary loans.  She related  that                                                                    
Alaska's forefathers  could not  have contemplated  the debt                                                                    
load or  the cost of postsecondary  education that currently                                                                    
existed in  the United States. She  reported that currently,                                                                    
the  Alaska State  Constitution  only allowed  for the  full                                                                    
faith and  credit of the  state for capital  improvements or                                                                    
housing  loans   for  veterans.  She  stated   that  if  the                                                                    
resolution was passed  by a two-thirds majority  by both the                                                                    
House and  the Senate,  the Alaska Student  Loan Corporation                                                                    
would  be able  to utilize  the best  possible financing  to                                                                    
benefit students  who accessed loan services  from the State                                                                    
of Alaska.  She pointed out  that regarding process,  if the                                                                    
resolution passed in the current  session and was put on the                                                                    
2014 ballot,  a loan could  not be issued until  the student                                                                    
loan  corporation made  that recommendation  and brought  it                                                                    
back  to the  legislature; if  the legislature  approved the                                                                    
resolution at this time, it  would be advanced to the people                                                                    
of Alaska  again on. She  believed that the issue  needed to                                                                    
be put  before voters  during the  general election  of 2014                                                                    
because  waiting until  the next  legislative session  would                                                                    
disadvantage  students even  further.  She  stated that  the                                                                    
current student  loan rate for  students who  accessed loans                                                                    
in Alaska  was 7.3 percent  and noted that the  federal rate                                                                    
on  loans was  3.86 percent.  She thought  that if  the full                                                                    
faith and  credit of the State  of Alaska could be  used and                                                                    
the  loans  were  still  repaid,  students  who  took  loans                                                                    
through the  state could  save 1 percent  or greater  in the                                                                    
bond market.                                                                                                                    
9:35:29 AM                                                                                                                    
Co-Chair Meyer OPENED public testimony.                                                                                         
9:36:15 AM                                                                                                                    
ROBERT DOTSON, SELF, CORDOVA  (via teleconference), spoke in                                                                    
support  of the  resolution. He  wondered why  the State  of                                                                    
Alaska found  it necessary  to have  a 7.3  percent interest                                                                    
rate on student  loans when a less than  .5 percent interest                                                                    
passbook saving could  be issued at a bank.  He thought that                                                                    
the high interest rate made  it difficult to pay off student                                                                    
loans. He  stressed that Alaska's  young people  were unable                                                                    
to buy  a home, rent  an apartment,  or buy a  vehicle while                                                                    
also paying student loans.                                                                                                      
Co-Chair Meyer CLOSED public testimony.                                                                                         
9:38:38 AM                                                                                                                    
Co-Chair  Meyer noted  that  a letter  of  support from  the                                                                    
Alaska  Student  Loan  Corporation  was  located  in  member                                                                    
DIANE  BARRANS,  EXECUTIVE  DIRECTOR, ALASKA  COMMISSION  ON                                                                    
POSTSECONDARY EDUCATION,  DEPARTMENT OF EDUCATION  AND EARLY                                                                    
DEVELOPMENT,   EXECUTIVE   OFFICER,  ALASKA   STUDENT   LOAN                                                                    
CORPORATION, replied  in the affirmative. She  said that the                                                                    
corporation  had been  working  with  its financial  advisor                                                                    
over the  last year in  order to  identify way in  which the                                                                    
rates  that Alaska  residents  paid on  the  loans could  be                                                                    
reduced,  as well  as possible  ways to  make the  loan more                                                                    
accessible to Alaska students.                                                                                                  
9:39:51 AM                                                                                                                    
Co-Chair Meyer  requested an explanation of  why the state's                                                                    
interest on student loans was 7.3 percent.                                                                                      
Ms.  Barrans replied  that since  the  establishment of  the                                                                    
Alaska Student  Corporation in 1987,  the way the  loans had                                                                    
been  financed was  that debt  was issued  in the  financial                                                                    
markets  that was  backed by  the assets  of the  loans. She                                                                    
reported that the  markets had taken a  substantial turn for                                                                    
the  worse regarding  the pricing  of the  state's loans  as                                                                    
well as  the underwriting criteria  that was expected  to be                                                                    
applied  to  the loans.  She  related  in the  current  bond                                                                    
market,  the cost  of the  funds alone  for the  state using                                                                    
bonds was around  the high 4 percent low  5 percent, without                                                                    
consideration  of  the  cost of  servicing  the  loans.  She                                                                    
stated that  the underwriting criteria  had been  changed in                                                                    
2009  because  the  rating agencies  and  bond  buyers  were                                                                    
exhibiting increased scrutiny of  the underlying assets. She                                                                    
said that  borrowers currently had to  establish good credit                                                                    
or have a co-signer with established good credit.                                                                               
9:41:45 AM                                                                                                                    
Co-Chair  Meyer  inquired  whether the  default  rate  among                                                                    
students had contributed to the high interest rate.                                                                             
Ms. Barrans replied  that the default rate was  not a factor                                                                    
in the cost of funds. She  explained that the bond was asset                                                                    
backed and  that the  rates had risen  in recent  years. She                                                                    
furthered  that the  default  rate  came into  consideration                                                                    
when the  state was  structuring the bond  deals themselves.                                                                    
She said  that when  examining the amount  of assets  to the                                                                    
bonds  that were  issued, the  higher  the fault  rate in  a                                                                    
portfolio  would  require  an  increase  in  the  amount  of                                                                    
collateral necessary.                                                                                                           
9:43:00 AM                                                                                                                    
Co-Chair Meyer  inquired what type of  collateral was needed                                                                    
and whether the parents were required to co-sign.                                                                               
Ms. Barrans replied  that if the applicant did  not meet the                                                                    
credit test, a co-signer would be necessary.                                                                                    
9:43:21 AM                                                                                                                    
Co-Chair  Meyer  queried  what  the  default  rate  was  for                                                                    
student loans.                                                                                                                  
Ms. Barrans replied that the  last published annual rate was                                                                    
6.4 percent;  the rate had  been lower  in the past  but had                                                                    
risen due to the economic climate on a national level.                                                                          
9:43:52 AM                                                                                                                    
Co-Chair  Meyer  asked how  Alaska's  rate  compared on  the                                                                    
national level.                                                                                                                 
Ms. Barrans  responded that the  rate was average.  She said                                                                    
that  rates varied  as to  whether  or not  a co-signer  was                                                                    
required;   many   alternative  education   loan   providers                                                                    
required a co-signer.                                                                                                           
9:44:32 AM                                                                                                                    
Co-Chair Meyer understood that  the corporation was required                                                                    
to make money off the loan  program and then give a dividend                                                                    
back  to the  state. He  thought  that instead  of giving  a                                                                    
dividend  to  the state  the  rates  for students  could  be                                                                    
Ms.  Barrans replied  that in  2001-2002 there  had been  an                                                                    
expectation that corporations return  funds to the state for                                                                    
other uses.  She said that  the corporation's  statutes were                                                                    
amended to indicate that any  year that there was net income                                                                    
a dividend would be provided back to the state.                                                                                 
9:47:02 AM                                                                                                                    
Co-Chair  Meyer  inquired  whether   the  program  would  be                                                                    
available for out-of-state students.                                                                                            
Ms. Barrans replied in the affirmative.                                                                                         
Co-Chair  Meyer surmised  that  the loans  could  be used  a                                                                    
recruiting tool for the university.                                                                                             
Ms. Barrans agreed.                                                                                                             
9:48:05 AM                                                                                                                    
Co-Chair  Meyer  wondered if  the  program  could result  in                                                                    
additional risk to the state.                                                                                                   
Ms.  Barrans  responded  that  the  objective  would  be  to                                                                    
structure  the loans  and bond  issues in  a way  that would                                                                    
mitigate the risk  to the state. Ultimately,  the bonds were                                                                    
general obligation bonds,  but the Texas model,  used in the                                                                    
development   of  the   proposal,  was   based  on   general                                                                    
obligation  debt and  had  never resulted  in  the State  of                                                                    
Texas making repayments.                                                                                                        
9:49:37 AM                                                                                                                    
Co-Chair  Meyer inquired  //. Ms.  Barrans replied  that the                                                                    
commission  promoted  the  federal  loans if  the  rate  was                                                                    
Co-Chair  Meyer  realled that  some  were  income based  and                                                                    
inquired//. Ms. Barrans responded that//.                                                                                       
9:50:39 AM                                                                                                                    
Co-Chair  Meyer  inquired  if Department  of  Education  and                                                                    
Early  Development required//.  Ms.  Barrans responded  that                                                                    
that it was not a requirement, but that///.//.                                                                                  
9:50:58 AM                                                                                                                    
Co-Chair  Meyer queried  the amount  that the  student could                                                                    
receive from the state versus  the amount they could receive                                                                    
from the federal government.                                                                                                    
Ms. Barrans  said that  the commission  promoted use  of the                                                                    
federal  loans,  provided  it  was a  better  deal  for  the                                                                    
student. She  furthered that  the commission  urged students                                                                    
to view the  loans from the state as  supplemental loan used                                                                    
to fill any  gap in tuition payment. She  explained that the                                                                    
annual maximum  for an undergraduate  student was  $8500 per                                                                    
Co-Chair  Meyer understood  that  the loans  on the  federal                                                                    
level were based  on income but that the  state's loans were                                                                    
Ms. Barrans responded  that the state loans  were not income                                                                    
based.  She  said  that the  federal  subsidy  available  to                                                                    
borrowers  was income  based. She  stated  that the  federal                                                                    
loan was an entitlement, anyone  could borrow it and certain                                                                    
benefits were available based on family income.                                                                                 
Co-Chair  Meyer asked  if the  Free Application  for Federal                                                                    
Student Aid (FAFSA) was required for the state loan.                                                                            
Ms. Barrans  relayed that if  the FAFSA was required  by the                                                                    
school the  student would need  to complete it;  however, it                                                                    
was not a requirement of the student loan program.                                                                              
Co-Chair Meyer  asked the University of  Alaska required the                                                                    
Ms.  Barrans  said that  they  either  required or  strongly                                                                    
encouraged  the FAFSA.  She suggested  that the  online form                                                                    
had  become  easier to  fill  out  and that  completing  the                                                                    
application  would   help  students   access  all   the  aid                                                                    
available to them.                                                                                                              
9:51:49 AM                                                                                                                    
Senator Olson  wonders why a  student would take out  a loan                                                                    
at 7.3 percent interest when  they could receive a loan from                                                                    
another institution at a lesser rate.                                                                                           
Ms. Barrans  thought that if  a student could pay  for their                                                                    
education using only the lower  rate federal loans then they                                                                    
should do so.                                                                                                                   
9:52:41 AM                                                                                                                    
Senator Olson  highlighted the default rate  of 6.4 percent.                                                                    
He  wondered how  the  state would  continue  to manage  the                                                                    
default rate during unstable economic climates.                                                                                 
Ms.  Barrans replied  that the  bond  deals were  structured                                                                    
with  overcollateralization; one  of the  factors the  state                                                                    
considered was what was expected  not to be collected on the                                                                    
loans,  either from  default  or  permanent disability.  She                                                                    
asserted  that  it would  not  be  expected that  the  state                                                                    
would, in any way, subsidize the program.                                                                                       
9:53:31 AM                                                                                                                    
Senator Olson assumed  that there would be  no dividend paid                                                                    
to the state as a result of the program.                                                                                        
Ms.   Barrans  responded   that  it   had  never   been  the                                                                    
corporation's objective to be able  to pay a dividend to the                                                                    
9:54:22 AM                                                                                                                    
Senator  Hoffman wondered  if there  would be  opposition to                                                                    
changing the constitution to include the loans.                                                                                 
Ms. Barrans replied that one  of the benefits was that there                                                                    
did  not seem  to be  any opposition  other than  people not                                                                    
wanting to alter the state constitution.                                                                                        
9:55:27 AM                                                                                                                    
Co-Chair Meyer inquired  if the loans could  be limited only                                                                    
to students enrolled in schools within the state.                                                                               
Ms.  Barrans replied  that it  would be  a policy  call. She                                                                    
thought a  reduction in loan  volume could be  an unexpected                                                                    
consequence. She  said that the  number of  students already                                                                    
receiving loans  was small.  She added  that when  trying to                                                                    
scale a program to achieve  efficiencies in terms of cost of                                                                    
servicing, the smaller the program  is the more expensive is                                                                    
for  those  participating.  If the  size  of  the  borrowing                                                                    
population can  be expanded then  the cost is spread  over a                                                                    
greater number of individuals thereby  reducing the cost for                                                                    
9:56:52 AM                                                                                                                    
Co-Chair Meyer asked the denial rate percentage                                                                                 
Ms. Barrans responded that it was approximately 40 percent.                                                                     
9:57:14 AM                                                                                                                    
Vice-Chair  Fairclough noted  that  allowing the  percentage                                                                    
rates  to  drop would  allow  for  the possibility  for  the                                                                    
commission to reduce the required credit score.                                                                                 
Ms. Barrans replied that the  credit criteria could probably                                                                    
be  moderated. She  stated  that one  of  the advantages  to                                                                    
having  a  general  obligation back  bond  was  that  rating                                                                    
agencies looked to the credit  of the state that was backing                                                                    
the bond. She  did not think that the  credit criteria could                                                                    
be eliminated, but it could  be moderated to be more readily                                                                    
available to students.                                                                                                          
9:58:43 AM                                                                                                                    
Vice-Chair  Fairclough believed  that  the resolution  would                                                                    
benefit the  people of Alaska  and the state's  student loan                                                                    
9:59:42 AM                                                                                                                    
Co-Chair Kelly MOVED to REPORT  SJR 23 out of committee with                                                                    
individual  recommendations  and   the  accompanying  fiscal                                                                    
notes. There being NO OBJECTION, it was so ordered.                                                                             
SJR  23 was  REPORTED  out  of committee  with  a "do  pass"                                                                    
recommendation and  with a new  fiscal impact note  from the                                                                    
Office of  the Governor  and a new  fiscal impact  note from                                                                    
the Legislature.                                                                                                                
10:00:05 AM                                                                                                                   
AT EASE                                                                                                                         
10:03:08 AM                                                                                                                   

Document Name Date/Time Subjects
2014 03 08_UA support of SJR23 and SB195.pdf SFIN 3/31/2014 9:00:00 AM
SB 195
Fiscal Note SJR23-LEG-SESS-03-07-14.pdf SFIN 3/31/2014 9:00:00 AM
SJR 23
SJR 23 Fiscal Note.pdf SFIN 3/31/2014 9:00:00 AM
SJR 23
SJR 23 Sectional Analysis.pdf SFIN 3/31/2014 9:00:00 AM
SJR 23
SJR 23 Sponsor Statement.pdf SFIN 3/31/2014 9:00:00 AM
SJR 23
SJR23supportLttrBarrans.pdf SFIN 3/31/2014 9:00:00 AM
SJR 23
SJR21 Kawerak Testimony.msg SFIN 3/31/2014 9:00:00 AM
SJR 21
SJR21 Testimony in Support HJR 33 Larry Wood.doc SFIN 3/31/2014 9:00:00 AM
SJR 21
SJR21 opposition - Otte.msg SFIN 3/31/2014 9:00:00 AM
SJR 21
SJR21 support - Jones.msg SFIN 3/31/2014 9:00:00 AM
SJR 21
SJR21 support - Torrison.msg SFIN 3/31/2014 9:00:00 AM
SJR 21
SJR21 support - Zobel.msg SFIN 3/31/2014 9:00:00 AM
SJR 21