HOUSE BILL NO. 339 An Act authorizing the Alaska Commercial Fishing and Agriculture Bank to make loans relating to tourism and development or exploitation of natural resources. Co-Chair Mulder explained that the legislation would expand the lending authority of the Commercial Fishing and Agriculture Bank (CFAB) and would enable it to make loans to Alaskan small business enterprises involved in natural resource development and tourism. Presently, CFAB makes loans to Alaska residents engaged only in commercial agriculture or fishing. The bank seeks expanded authority to provide financing opportunities to small Alaskan business entrepreneurs who generally have trouble obtaining commercial loans because of their relative small size and lack of financial experience. Co-Chair Mulder noted that currently, CFAB's loan portfolio is very narrow and susceptible to ups and downs of the market. The bill would allow CFAB to make loans to natural resource development and also tourism. Co-Chair Therriault MOVED to adopt the committee substitute, 1-LS1285\I, Utermohle, 4/1/00, as the version of the legislation before the Committee. [Copy on File]. There being NO OBJECTION, it was adopted. ED CRANE, PRESIDENT, COMMERCIAL FISHING AND AGRICULTURAL BANK (CFAB), ANCHORAGE, stated that when the bill was originally drafted, "general" language was used to provide as much flexibility as possible. Some of that language has been found to be unacceptable. Consequently, loan limits were added. Mr. Crane noted that the House Finance Committee substitute changes some of the original language. He outlined changes made to the proposed committee substitute that would make the bill more specific. Mr. Crane explained that the Alaska State Legislature created CFAB in AS 44.81 in 1980. The statute governs CFAB's operation and provided for its accountability to the Legislature and Administration. Because CFAB is incorporated under that statute, it requires legislative approval for any changes in operational authority. Twenty years ago, limited access to commercial financing by resident Alaska commercial seafood harvesters, processors and farmers, stimulated the need for CFAB as a private cooperative. The State of Alaska responded by providing initial capital through the purchase of $32 million dollars of special preferred stock in 1980. CFAB began making monthly payments in 1991 to the State, repurchasing increments of the stock. In September of 1998, the stock repurchase agreement was completed as specified in statute and today CFAB is owned solely by its past and present borrowing members. Mr. Crane continued, in 1986, the Alaska Supreme Court identified CFAB as a private entity. AS 44.81 states that it is not subject to the Alaska Cooperative Corporation Code or the Alaska Banking Code. It pays federal and state corporate income tax, state auditing fees and is subject to legislative audits. In short, CFAB is now a private lender operating within the free enterprise system with limited ties to the State of Alaska. CFAB's auditors, from both the public and private sector, give the bank favorable reviews but consistently note the concentration in agricultural and fishing industry loans resulting in an unusual level of risk exposure and vulnerability to the ups and downs of the industries. Representative Grussendorf asked if the only new ability granted in the proposed legislation was that to loan to tourism. Mr. Crane replied that it would be to either tourism and/or operators in the natural resources. Representative Grussendorf asked if there would be a limit on how each company could borrow. Mr. Crane pointed out that there are no statutory limits on the size of a loan that can be made for fish and agriculture purposes. Representative J. Davies observed that this would be a lending operation chartered by the State. He asked the requirements to become a member of the bank to qualify for borrowing. Mr. Crane explained that CFAB is operated as a cooperative with the customers as owners. "Member" is defined as one of the stockholders of the board. Any Alaska resident who is engaged in commercial fishing or agriculture can become a member by purchasing one share of stock. Representative J. Davies interjected that CFAB is a cooperative lending organization. Co-Chair Therriault reminded member's from where the entity originally came from. The limited entry system had just started and it was important that the State guarantees that Alaskans had access to capital so that they could get the permits and keep them in Alaska's hands. Co-Chair Therriault suggested that the original concerns have been diminished at this time. There is no shortage of loan programs in State government. He did not see the compelling reason to implement the proposed legislation. Mr. Crane commented that it has not been a problem in recent years. He agreed that the same circumstances do not appear to exist in relationship to tourism. The bill is a defensive effort by CFAB. The limited entry system does not have the same concerns as it did 25 years ago. Today, it has greater concerns. Many of the individuals in rural Alaska who were initial recipients of the loan are now reaching an age where they want to retire. Many of them now want to sell their permit. The needs have changed. He believed that there is a need to continue the support for Alaska resident's ability to buy limited entry permits. Co- Chair Therriault agreed that it is important to keep them in Alaskan's hands. He voiced concern with expansion of the operation. Mr. Crane clarified that CFAB must build diversification. Co-Chair Mulder spoke to the State's compelling interest. He commented that CFAB has taken on a new life of economic expansion and opportunity. He noted that there is a lot of frustration among the Alaskan people who are attempting to get the smaller loans. The loans that CFAB is proposing are low-level loans which are not in the best interest of most banks. Co-Chair Mulder pointed out currently, only CFAB can loan on the limited entry permits. He pointed out that there is a compelling reason, as the State interests are at stake. Mr. Crane added that CFAB is acting as an agent for the State. There is no way to limit that privilege to one class of private lender. Co-Chair Mulder pointed out that limited entry and CFAB won the case with the Internal Revenue Service (IRS) to retain control of the permits. To open that up to outside lenders would jeopardize the direction which the State intended to go. Vice Chair Bunde agreed that this is a unique Alaskan program. He asked if there were similar programs like this available through other states. Mr. Crane replied that the only one he was aware of was through a lending institution in Canada. (TAPE CHANGE, HFC 00 - 99, Side 2). Mr. Crane stated that the proposed bill would provide that CFAB continue to be a viable entity. Vice Chair Bunde suggested if it would be more accurate to change CFAB from a "bank" to a "revolving loan fund". Mr. Crane replied that would not be a move that CFAB would make hastily. He noted that CFAB has not yet fully considered all the legal documentation such a transition would require. Vice Chair Bunde commented if supporting the legislation would be "questionable" given the Legislature's commitment to encouraging privatization. Representative Foster inquired if there was a mechanism included in the proposal to cover concerns for bed and breakfast associations. He asked if the board membership would change. Mr. Crane thought that the legislation would address that concern. Currently, the board consists of seven people; two members appointed by the Governor and the other five elected from the membership. In response to Representative Williams, Mr. Crane reiterated the original purpose of CFAB to insure that Alaska resident fishermen had sufficient access to capital to maintain participation in Alaska's fisheries. Representative Williams inquired if the banking community supported CFAB at this time. Mr. Crane replied those entities are "waving their arms" with concern about the legislation. However, at the same time, there are joint ventures happening with the State. Representative Austerman pointed out that there are many commercial fishermen now considering the charter boat tourism industry. SUSAN SPRINGER, (TESTIFIED VIA TELECONFERENCE), HERRING BAY MERCANTILE, TOURIST BUSINESS, SELDOVIA, spoke in support of the legislation and urged Committee support to extend the lending authority of CFAB to include resource development and tourism. She suggested that the legislation was the most important thing that Alaska could do to help small businesses so to have greater access to low interest business loans. The existing loan process needs to be streamlined. She noted that the conventional banking institutions in Alaska are not serving the small business people. Ms. Springer addressed her impressions of CFAB: ? CFAB is well respected for its support of small business development through the Fisheries Business Assistance Program; ? Not many of the state-funded small business assistance programs work as effectively as CFAB; and ? Access to start-up and operating capital is one of the primary challenges facing small Alaskan entrepreneurs trying to establish themselves in business. Ms. Springer pointed out that CFAB serves a "niche" to a specific clientele. It will not pose a threat to the banking institutions. She noted that CFAB shareholders are all Alaskan's and will continue to be Alaskan and that they have Alaska's interest at stake. She emphasized that passage of HB 339 would give entrepreneurs a "shot in the arm". Representative J. Davies MOVED an amendment to Page 4, Line 28, deleting "tourism" and inserting "tourists". Representative Moses commented that if the bill passes, it would allow CFAB the authority to move more into the rural areas to provide loan financing for tourism facilities. He noted at present, CFAB could not finance a loan for a charter boat. He stated that 99% of the financing undertaken in the commercial fishing business is done in the Seattle area. Representative Moses added that the majority of the fishing industry is done in Seattle because Seattle is where most of the head business are located such as processor parent companies. He interjected that definitely will not change with the Wells Fargo Bank take-over. Representative Foster reiterated his concern about the composition of the Board's makeup. Mr. Crane explained that the Board would also be expanded. Currently, the Board functions with an oversight role. The Board takes no part in the loan decisions; it only approves basic policy and standards. CFAB will acquire additional expertise and that the Board is 100% behind the expansion. Co-Chair Mulder MOVED to report CS HB 399 (FIN) out of Committee with individual recommendations and with the accompanying fiscal note. Representative Williams OBJECTED stating that the bill would compete with the private sector. Following further comments, Representative Williams WITHDREW his OBJECTION. There being NO further OBJECTION, it was so ordered. CS HB 399 (FIN) was reported out of Committee with a "do pass" and with a new zero fiscal note by Department of Community & Economic Development dated 4/3/00.