HOUSE BILL NO. 410 "An Act relating to loan participations and development finance projects of the Alaska Industrial Development and Export Authority; and relating to loans from the rural development initiative fund." 1:36:58 PM TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, explained that three of the bill's sections deal with AIDEA and one part deals with an AIDEA fund run by the Division of Investments. He detailed that the changes requested by HB 410 would deal with the first part of implementing the strategic plan, the effectiveness of AIDEA programs, and a new development tool related to the loan program. Section 1. AS 44.88.159(e) is amended to change the method by which AIDEA determines the minimum interest rate to be charged on loan participations that AIDEA finances with AIDEA assets rather than bond proceeds. Current method requires AIDEA to establish a minimum by estimating the true interest cost in AIDEA were to use bond proceeds. The proposed method would allow the minimum to be based on the greater of either the rates achieved by a type of category of financial security in a published nationally recognized market index or the 5-year rate of return on AIDEA's investments. Mr. Leonard detailed that Section 1 would address how the minimum interest rate is set when AIDEA funds loans with internal funds. Currently, AIDEA sets the rate by going to the bond market and asking an expert like Goldman Sachs. When the municipal bond market had problems, AIDEA's rates went from the 6 percent range up to the high 9 percent range; the rates have come down but are still shifting. The agency was considering going to an index so that customers and partners could have a more steady interest rate. Section 2. AS 44.88.159 is amended by adding a new subsection that allows AIDEA to establish in regulation a new program to provide incentive rate rebates to certain loan participations that create jobs, promote rural development or foster other economic development criteria. · Rate rebates are limited to no more than 1% of the interest rate charged to AIDEA's portion of the loan participation. · The balance of loans subject to rebates would be limited to no more than 5 % of the outstanding balance of all loan participations. · The authority may not commit to pay an incentive rebate for more than 5 years. · Allows AIDEA to establish a separate account for this program. Mr. Leonard reported that Section 2 would set up a new tool under the commercial finance program that would allow an incentive rebate program to give incentives to businesses meeting certain criteria. For example, if a criterion was to develop 25 new jobs with the investment, AIDEA would not give the rebate unless the jobs were in fact created. Co-Chair Hawker pointed out that the provision would bring extreme latitude to the agency because the criteria listed are authorized to be established in regulations adopted by AIDEA. Mr. Leonard agreed. He added that AIDEA had considered putting the criteria in statute, but they felt they needed the flexibility to tailor to the areas in which they were trying to incentivize investment. Representative Kelly asked whether the AIDEA board approved regulations. Mr. Leonard responded in the affirmative. He added that the agency was in the process of modernizing the organizational structure so that loans would go to investment committees made of private sector and management before going to the board. 1:42:57 PM Mr. Leonard continued with Section 3: AS 44.88.172(a) is amended to clarify that AIDEA can own or operate a percentage of a project - not the entire project. Mr. Leonard detailed that currently there are two sections in statute; an intent section stipulating that AIDEA can own an interest in a project, and another section stating that AIDEA has to own the project. The request would clarify that AIDEA has the ability to own a portion of a project. He noted that the price tags on economic infrastructures are increasing. For example, a plant could be in the $1 billion to $2 billion range, past AIDEA's capacity; AIDEA could help the project be successful by owning a portion of it. In addition, evaluating the practices of other development finance organizations has revealed that partnering with the private sector shares the risk. Co-Chair Hawker clarified that the intent was not to prohibit the practice of full ownership but to widen the latitude to allow AIDEA to be a component investor in projects. He thought the existing language was not clear, but seemed to preclude ownership of the entire project. Mr. Leonard acknowledged the need for more clarity. Section 4. AS 44.88.610(a) is amended to allow borrowers to have multiple Rural Development Revolving Loan Fund loans and increases the cumulative amount a person may borrow from $100,000 to $150,000 and increases the cumulative amount two or more persons may borrow from $200,000 to $300,000. Mr. Leonard explained that the section addresses a fund that AIDEA financed in the past and the Division of Investments currently operates. The fund is one of the few that AIDEA has under its umbrella that is a direct participation loan program. The authority had searched for ways to utilize the money to get more loans into rural areas. The division suggested changing the limits from $100,000 to $150,000 for one business and from $200,000 to $300,000 for more than two businesses, and then changing the rate from 6 percent to 4 percent (more in line with other programs run by the Division of Investment). He stressed that the change would allow a successful business to have more than one loan as it grows. 1:47:34 PM Co-Chair Hawker clarified that the provision was not changing the rate from 6 percent to 4 percent, but changing the minimum rate. Mr. Leonard agreed. Vice-Chair Thomas referred to page 3, line 23 adressing business located where the population is 5,000 or less and not connected by road or rail. He asked whether Haines would qualify since the connecting road went through another country. GREG WINEGAR, DIRECTOR, ALASKA DIVISION OF INVESTMENTS, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, answered that that the key is being connected by road or rail; it does not matter that the road goes through another country. Vice-Chair Thomas thought the language should be changed. Mr. Winegar offered to work to change the language and acknowledged discussion about the where the lines should be drawn. He thought the upcoming census could make a difference in which communities would qualify. Vice-Chair Thomas recalled other legislation that defined "resident" and wanted clarification. Representative Austerman queried the position of Haines regarding the definition. Vice-Chair Thomas replied that in the past the fact of a foreign country had excluded Haines because a connecting road was defined as one with 24-hour access. 1:51:28 PM Mr. Winegar responded that Haines did qualify under the existing statute. Representative Fairclough referenced the the indeterminate fiscal note with zeroes and asked whether costs were anticipated for the incentive rate rebate. Mr. Leonard responded that overall he did not expect cost increases because of the agency's capacity to increase its portfolio balance on new loans. He pointed out that new loans (even with the 100 basis points reduction) would be more than the opportunity cost of investing internal funds. Representative Fairclough queried the current capacity of the Gas-To-Liquids (GTL) plant. Mr. Leonard replied that current statute allows $400 million over a rolling 12-month period. He noted that the House had passed HB 90, which would take out refunding bonds and result in more capacity. 1:54:07 PM Representative Fairclough referred to a bill exempting AIDEA from procurement code and asked how investment strategies would be affected. Mr. Leonard did not know and offered to get the information. Representative Doogan questioned how loan costs would be affected by Section 1. Mr. Leonard responded that AIDEA was considering several different indexes set through regulation, such as the Federal Home Loan Bank index with 5, 10, 15, and 30-year indexes for cost to funds. In addition, AIDEA has a minimum floor for the five-year annualized rate of return to protect the loan portfolio and the state dividend. The authority uses the index plus operation cost on a normal daily rate; if the rate went below that, they would look at the minimum floor. He emphasized that the legislation would set the minimum and allow AIDEA (based on other factors that could come into play, such as loan risk) to have a higher rate. The index would be the minimum rate and would be set by regulation. He added that the index could be changed if a better index came along. Representative Doogan queried fund costs under the proposed legislation. MARK DAVIS, ECONOMIC DEVELOPMENT OFFICER, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, responded that using the 20-year rate of the Federal Home Loan Bank of Seattle against what AIDEA charges currently would amount to 1.04 percent. Over 20 years, AIDEA is essentially charging a point that it does not need to charge in order to recover the rate of funds. He added that the statute currently requires AIDEA to use a cost of funds tied historically to bonds, which are no longer stable. The agency wants to shift to more a more stable and transparent index. He suggested checking the Federal Home Loan Bank on the Internet to figure out the loan rate; currently Goldman and Sachs calculates the rate. He thought the rates would be lowered over time and be protected against anomalies in the market. The treasury bill is currently at 4.75 for 30 years; 18 months ago it was at minus one, illustrating the instability of the bond market. 1:59:39 PM Representative Doogan turned to Section 2 in the sectional analysis, related to establishing a new program that could create jobs, promote rural development, and "foster other economic development criteria." He asked what fostering criteria meant. Mr. Davis responded that the item is the result of AIDEA's effort over the past two years to work on a strategic economic plan. The plan has been released. The agency studied the criteria used by similar industrial development banks in 44 other states. The statute uses job creation because the preamble stipulates the elimination of unemployment. He noted that most development organizations put an emphasis on distressed areas, and that unemployment in rural Alaska tends to be high. Other criteria could relate to distressed economic zones within cities (such as Anchorage), which would track the current federal practices under the Build America Bonds (BABs) and other types of instruments. Alaska could also look at new technology developments that could spur further job creation. The criteria could be adopted through regulation by the AIDEA board. Representative Doogan pointed to Sections 4 and 5, which he understood as a substantial loosening of loan requirements, both in terms of getting people more money, lower interest rates, and the ability to get more than one loan. He asked why the agency wanted the changes. Mr. Winegar replied that based on public input and internal discussions about lower rates, AIDEA hoped to provide a better rate for businesses, which are creating jobs. The agency would be allowed to create regulations to lower the rate; currently the floor by statute is 6 percent. Other successful programs such as Small Business Development allow rates down to 4 percent. He added that the same holds true for the loan amount. Rates have gone up significantly in the past several years, so the thinking was to provide a higher minimum. Regarding making more than one loan, a business that was successful after getting a small loan ($10,000 to $20,000) would not currently be able to borrow more. The agency thought it made more sense to have the limit based on an amount as opposed to the number of loans. 2:04:13 PM Representative Doogan questioned how the agency will be able to monitor the effect of the changes and what it could do if the changes were not financially viable. Mr. Winegar replied that AIDEA carefully monitors all programs. He emphasized that the changes would not be required, but would provide flexibility. He detailed that the lifetime delinquency rate on the program since origination was 4.3 percent. He assured the committee that the agency could make adjustments as needed through the regulation process as well as through the lending decision process. Representative Kelly wondered why he had not heard about changes related to credit worthiness or about adjusting for risk. Mr. Winegar answered that there would be no difference in evaluation in terms of risk. Co-Chair Hawker queried the 4.3 percent delinquency statistic. He asked how many Rural Development Initiative Fund loans were outstanding at any given time. Mr. Winegar replied that AIDEA currently had 41 loans out totally $4 million and $1.7 million available to lend. Historically, 62 loans totaling $7.2 million have been made through the program since the program started in 2000. 2:07:37 PM Representative Foster directed attention to Section 3 regarding old language about AIDEA owning an entire project. He queried the minimum amount of a project and possible ramifications. Mr. Leonard answered that the issue had been discussed, but a minimum was not considered. He believed using due diligence and project feasibility would result in the percentage of ownership that would maximize the potential of the project. Mr. Davis commented that the section was a clarification. One statute preamble (AS 44.88.010(a)) currently reads "incur debt to own and operate facilities," which has been interpreted to mean that the entire facility has to be owned and operated. On the other hand, AS 44.88.085 states that "to acquire an interest in a project as necessary or appropriate," which seemed to indicate that AIDEA could own an interest in a project and have partners. House Bill 410 would clarify the language to say that owning an interest was the appropriate way to read the statute. Representative Fairclough asked whether AIDEA would be allowed to participate in an in-state gasline project. Mr. Davis replied that the agency could invest in any project with rate of return consistent with statute. He noted that the agency had looked at gas projects in the past and would do so again in the future. CRAIG DAHL, PRESIDENT/CEO, ALASKA PACIFIC BANK and VICE CHAIR, FEDERAL HOME LOAN BANK OF SEATTLE BOARD, testified in support of the legislation on behalf of the institutions as well as the Alaska Bankers Association. He stated that AIDEA had proven over the years to be a pillar of the state's economic development activity. The various participation loan programs have been successful because of a competitive rate structure that helped induce a lot of business loans and project lending, creating many jobs and helping the economy develop. Mr. Dahl described the Alaska Pacific Bank as one of the smallest institutions in the state; however, it currently had over $30 million in loans and has managed to work in concert with the various programs through AIDEA. He believed the same was true for all the state's banks. He felt that AIDEA should be competitive and responsive to the market. He stressed that Alaska has managed to avoid most of the serious impacts from the recession and underlined the importance of the state's economy remaining stable and moving forward. He felt that AIDEA was a critical piece in the success of the state's economy. 2:12:40 PM HB 410 was HEARD and HELD in Committee for further consideration.