03/10/2011 02:00 PM Senate LABOR & COMMERCE

2:21:44 PM                                                                                                                    
          SB  66-AIDEA: NEW MARKETS TAX CREDIT PROGRAM                                                                      
                                                                                                                                
CHAIR EGAN announced SB 66 to be up for consideration.                                                                          
                                                                                                                                
TED  LEONARD, Executive  Director, Alaska  Industrial Development                                                               
and  Export Authority  (AIDEA),  said  SB 66  would  help a  very                                                               
successful federal  program, the New Markets  Tax Credit Program,                                                               
that  is designed  to  use  tax credits  to  spur development  by                                                               
private  investors into  low income  census tracts.  This program                                                               
allows two  types of investors  to invest  in a project;  the two                                                               
components are  a private investor  with capital and  a financial                                                               
institution providing  credit. The program was  designed to allow                                                               
a project seven years to pay  interest only on the capital it has                                                               
gotten -in  essence allowing  the project to  "gain its  legs" in                                                               
order to use conventional financing.                                                                                            
                                                                                                                                
2:23:23 PM                                                                                                                    
MARK  DAVIS,  Economic  Development  Officer,  Alaska  Industrial                                                               
Development  and Export  Authority (AIDEA),  explained that  this                                                               
bill permits  AIDEA to work  with the existing U.S.  Treasury tax                                                               
credit program.  Right now  AIDEA has  a small  guarantee program                                                               
that  does  not  permit  it   to  make  guarantees  of  loans  in                                                               
conjunction with  this federal program.  The essence of SB  66 is                                                               
to amend  AS 44.88.700  to allow AIDEA  to issue  loan guarantees                                                               
and to make, as a last resort,  its own direct loans for the debt                                                               
side of a new market tax credit deal.                                                                                           
                                                                                                                                
The ways  those work essentially  is that investors who  have tax                                                               
liabilities put their own equity  (usually up to 30 percent) into                                                               
the project  in a  rural area  or an area  that has  high poverty                                                               
rates and  then the rest  is borrowed from  a bank. But  the bank                                                               
has to be able  to do two things. First, it  has to take interest                                                               
only payments  for seven years  and then it  has to agree  to not                                                               
foreclose.  Well, recently  with  the credit  crunch, banks  have                                                               
been reluctant  to make those  loans, so the program  has stalled                                                               
in some states, including Alaska.                                                                                               
                                                                                                                                
MR. DAVIS said that through  Alaska Growth Capital, Alaska has an                                                               
allocation of  new market  tax credits, and  has been  in contact                                                               
with other companies that have  those credits. He did an analysis                                                               
and  talked to  companies that  do this  kind of  work, including                                                               
Alaska Growth Capital,  and they recommended that  if AIDEA could                                                               
guarantee the  loan portion of  a deal or  if it could  issue its                                                               
own loans then  it would get the program going.  So, AS 44.88.700                                                               
says  basically  that  AIDEA  could  guarantee  a  bank  loan  in                                                               
conjunction with  a new  market tax credit.  He said  these loans                                                               
have a very  low default rate, and for a  very simple reason. The                                                               
investors who  put their  money directly in  the project  and who                                                               
get the tax credits can only  take so much percentage of a credit                                                               
- up  to 300 percent  - over seven  years. If before  seven years                                                               
has  elapsed the  project has  not cash-flowed,  then the  equity                                                               
investors owe all  their taxes back to the IRS  with interest and                                                               
penalties,  a  "tax capture."  When  these  investors make  their                                                               
analysis of what to invest in,  they are very careful, making the                                                               
defaults very  low. By offering  guarantees, AIDEA could  free up                                                               
the program without a great deal of risk.                                                                                       
                                                                                                                                
AS 44.88.710 provides that a guarantee  does not create a debt or                                                               
liability to the state - so it  would only apply to AIDEA and not                                                               
the state government, he said.                                                                                                  
                                                                                                                                
AS 44.88.715 establishes applicant  qualifications; that is AIDEA                                                               
would reserve the right to guarantee  loans or to make loans only                                                               
to projects  they agree with.  Just because a deal  qualifies for                                                               
new market  tax credits doesn't mean  that they would want  to be                                                               
in it.                                                                                                                          
                                                                                                                                
MR.  DAVIS  said  that  AS 44.88.720  requires  an  applicant  to                                                               
provide  certain information  to  AIDEA, which  would  be set  by                                                               
regulation,  and  an  economic  benefit  analysis.  This  is  not                                                               
required under the federal law for  the tax credits, but AIDEA is                                                               
an  economic development  agency, so  they want  to make  sure if                                                               
they offer  a guarantee or  a loan  that it actually  creates the                                                               
economic benefits they are charged by statute to create.                                                                        
                                                                                                                                
2:26:43 PM                                                                                                                    
He  said  AS 44.88.730  establishes  the  conditions for  a  loan                                                               
guarantee  while section  .740 requires  a financial  institution                                                               
holding  the guarantee  to service  the loan.  That is  to reduce                                                               
AIDEA's  costs; it  means if  they guarantee  the loan,  the bank                                                               
will  still deal  with the  collection and  all the  other costs.                                                               
AIDEA is  just not set up  to do that  and is not trying  to hire                                                               
more employees.                                                                                                                 
                                                                                                                                
MR. DAVIS said  AS 44.88.750 allows AIDEA to  leverage the loans.                                                               
This  means that  AIDEA could  make a  direct loan,  but probably                                                               
they would not do it frequently.  If no bank steps forward and if                                                               
the  new market  tax credit  seems solid  economically and  if it                                                               
would create  a lot of jobs  or if it  was in a rural  area, they                                                               
might sometimes step  forward. But this language  just gives them                                                               
the discretion to do that; it doesn't require them to do so.                                                                    
                                                                                                                                
AS 44.88.760  sets a cap  at $50  million, so this  program won't                                                               
"take over  the agency" and  AIDEA can  continue to do  its other                                                               
programs.                                                                                                                       
                                                                                                                                
MR.  DAVIS  concluded  the  analysis saying  AS  44.88.770  is  a                                                               
housekeeping  provision, which  says  the AIDEA  board can  adopt                                                               
appropriate regulations to implement the program.                                                                               
                                                                                                                                
2:28:14 PM                                                                                                                    
SENATOR  MENARD asked  why  they  decided on  capping  it at  $50                                                               
million and if the IRS gives the "tax capture" a form number.                                                                   
                                                                                                                                
MR. DAVIS answered  that they recommended the  $50 million limit,                                                               
because they can  make that kind of  commitment without affecting                                                               
their  other programs,  their current  reserves being  about $350                                                               
million. He  said new market  tax credits  deals tend to  be very                                                               
large, $20-30  million, and  complicated with  a lot  of parties.                                                               
That means they could probably do  one a year, which is what they                                                               
should be  doing because  it would  take a lot  of work.  The $50                                                               
million was picked to do one or two a year.                                                                                     
                                                                                                                                
The  answer to  her second  question was  there is  no particular                                                               
section  under the  codes;  this  is actually  in  a 51-page  IRS                                                               
circular, which he offered to get a copy of.                                                                                    
                                                                                                                                
A new report put out by  the New Market's Tax Credit Coalition, a                                                               
private  group, points  out that  unlike  most federal  programs,                                                               
using  these  tax credits  costs  the  government an  average  of                                                               
$12,000 per job,  about the lowest of all  job incentive programs                                                               
in the United States.                                                                                                           
                                                                                                                                
SENATOR MENARD asked  if they would consider  lowering the figure                                                               
from $50 million to $30 million.                                                                                                
                                                                                                                                
MR. LEONARD said it should be  at $50 million, and $30 million is                                                               
the absolute lowest it could go and still be a viable program.                                                                  
                                                                                                                                
CHAIR EGAN thanked everyone for their comments and held SB 66.