HOUSE BILL NO. 373 "An Act relating to return of contributed capital, or payment of a dividend, to the state by the Alaska Student Loan Corporation; and providing for an effective date." DIANE BARRANS, EXECUTIVE DIRECTOR, POSTSECONDARY EDUCATION COMMISSION, DEPARTMENT OF EDUCATION testified in support of the legislation. She observed that the legislation reflects the growing financial stability of a unique, longstanding and valued Alaskan program "the Alaska Student Loan Program". She read from a prepared statement: As you may already be aware, legislative and administrative changes to the Alaska Student Loan Programs made in recent years have resulted in the Alaska Student Loan Corporation transitioning from an enterprise agency operating with an annual net deficit to one producing an annual net income. This outcome has allowed the ASLC board to identify and prioritize several policy goals. In priority order, these goals are: 1) Continue in a direction of fiscal strength and good credit standing; 2) Continue to reduce the costs of borrowing for AK residents; 3) Continue to reduce the Corporation's equity deficit of $43 million; and 4) Propose a mechanism that, while subordinate to the top three priorities, makes possible a return of contributed capital to the ASLC's original financing source-the State of Alaska. The ASLC is already experiencing success in meeting these goals: in 1999 our improved financial standing was rewarded by a full ratings upgrade to double-A by both Moodys and Standard and Poors; the interest rate on 2000-2001 state student loans has been reduced to 8%, the lowest rate in several years; the interest-free borrowing while student-borrowers are in school remains intact; and, the Corporation's equity deficit has been reduced by almost $7 million over the past two years. In recommending this bill for your approval, our board is seeking a mechanism for the ASLC to fulfill its fourth goal. The bill provides that, in any year that the Corporation has at least a $2 million net income, the board will declare a return of capital payment to the State of between 10% and 35% of that income amount. This approach was developed and endorsed by the Corporation as one that is considered reasonable within the financial community as a conservative method of meeting this goal. The Corporation's senior staff and financial advisors met and discussed the proposal with both rating agencies and bond insurer to avoid any adverse impact to our credit standing or possible related increase in the cost of bond issuance. Their reaction has been positive-under the conditions that this bill would place in law. It is important for me to reference current proposals for the FY200 1 budget year that use ASLC receipts, in both the House and Senate versions of next year's budget, that make passage of this bill an imperative for the Corporation's wellbeing. Approval of this return of capital approach will pre-empt any concerns raised by this year's budget structure. Passage of this bill will insure that the Corporation's capital return payment is made without putting at risk the financial and public policy goals of the Alaska Student Loan Corporation. I have provided a handout that includes a Statement of Projected Revenues and Expenses that projects both current and future, through 2004, payment amounts. Also included are two graphs that illustrate the income trend and its impact on the Corporation's fund Equity Balance over that same time period (copy on file.) In response to a question by Vice Chair Bunde, Mr. Barrans reviewed the establishment of interest rates. When the program was funded through the General Fund there was a statutory interest rate, which was set at 5 percent and later increased to 8 percent. A formula was developed through legislative changes to tie the cost of borrowing to the cost of funds to the Corporation. The calculation has two pieces: a weighted average of the cost of bonds in the prior five years, and cost of the program operations. Vice Chair Bunde observed that the Commission's philosophy was, at one time, that the student loan should be the loan of last resort and that there were lower interest rates available through the federal government. Ms. Barrans responded that the program is a close competitor with the federal student loan program. Subsidized federal loans are still a better deal for students that qualify. The Alaska student loan program is close to the unsubsidized federal student loan and does not require income or asset qualifications. In response to a question by Vice Chair Bunde, Ms. Barrans stated that the best way to reduce the cost of loans to borrowers is to reduce the cost to run the program by: reducing losses, reducing administration costs, and to achieve better rates on bonds. The amount of capital the bill returns to the state does not materially affect the ability to reduce rates in the future. Representative J. Davies questioned if the Corporation had discussed reinstating credit on loans for returning students. The Alaska Student Loan Corporation has not engaged in the discussion. Ms. Barrans clarified that the focus has been on making up the ground that was loss in equity investment. She added that if the full equity were returned that discussions might occur. In response to a question by Representative J. Davies, Ms. Barrans observed that in the House version of the operating budget $1.6 million dollars of Student Loan Corporation receipts are appropriated to offset the cost of WAMI and a new program that would provide that would provided National Guard tuition credit. In the Senate $1.6 million dollars of Student Loan Corporation receipts are appropriated to fund the operation of the university. SHEILA KING, FINANCE OFFICER, ALASKA STUDENT LOAN CORPORATION explained surplus funds that are recycled into new loans. The Corporation must keep a level of collateral to meet their bonds covenants. Representative J. Davies questioned how much is available in the current fiscal year that would be used by the legislature. Ms. Barrans observed that the total appropriation of corporation receipts is $2 million dollars. The Senate worked with the Corporation. She observed that this is slightly less than the 35 percent that the Corporation would have available. Representative G. Davis noted that the transmittal letter from the Governor indicated that some of the earnings would go to the Alaska Scholars Program. Ms. Barrans acknowledged that the Governor recommended the use of funds for the Alaska Scholars Program but pointed out that funds have not been earmarked in a statutory way. The university on the Alaska Scholars Program could spend the funds. Vice Chair Bunde recalled that the University found funding for the first year of the Alaska Scholars Program and would look to the legislature to fund it for the next year. Ms. Barrans voiced strong support for the legislation. She indicated that this has been a joint effort. Representative J. Davies MOVED to report HB 373 out of Committee with the accompanying fiscal note. Vice Chair Bunde OBJECTED for the purpose of discussion. He pointed out that it is a twice-removed tuition hike, but that it is nice that the students support their university. He WITHDREW his OBJECTION. There being NO OBJECTION, it was so ordered. HB 373 was REPORTED out of Committee with "no recommendation" and a zero fiscal note by the Department of Education and Early Development.