HOUSE BILL NO. 412 "An Act establishing the Alaska microloan revolving fund; making loans for commercial purposes from the fund; and relating to the fund and loans; and providing for an effective date." 2:13:21 PM GREG WINEGAR, DIRECTOR, ALASKA DIVISION OF INVESTMENTS, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, informed the committee that HB 412 would create a new loan program aimed at helping small Alaskan businesses access critically needed capital to start new businesses and to grow existing ones. He noted that the program is modeled after a similar program operated through the Small Business Administration (SBA) that is available in 46 other states but not in Alaska because of SBA lender criteria that no institution has met. Mr. Winegar detailed that the maximum loan given through the program would be $35,000 for an individual and $70,000 for two or more individuals. There would be a residency requirement. The loan proceeds could be used for a variety of purposes, including working capital, equipment, and construction. The maximum loan term would be 6 years, patterned after the SBA program. The loans must be collateralized and the interest rate would be prime plus 1 percentage point with a floor of 6 percent and a ceiling of 8 percent. In terms of capitalization, the fiscal note includes $3.5 million that would come from AIDEA, contingent on passage of HB 411. Operating expenses at $77,700 would be included to hire a loan officer. He noted that the department worked hard to keep the fiscal note as low as possible. Mr. Winegar continued that the fund would be set up as a revolving fund; all repayments would come back into the fund and new loan requests would come out of it. In addition, the operating expenses would be covered from earnings of the fund, similar to other programs. He reported that the department was projecting about 75 loans in the first year, 100 in the second, and then the fund could maintain about 25 loans per year from the initial capitalization. 2:16:39 PM Co-Chair Hawker queried the prime rate plus one proposed for the program. Mr. Winegar responded that most other programs in the department were based on prime rate so it was used to be consistent. The rate could be geared to another index. Representative Kelly asked why there was a cap if the rate was prime plus. Mr. Winegar answered that the cap was put in to offer protection in case of a high interest rate environment. Representative Kelly registered concerns as the program would be converted from one with a spread to one with a "give-away" element. Co-Chair Hawker asked whether the notes would be six-year fixed-rate notes. Mr. Winegar answered in the affirmative. He noted that other program regulation required quarterly review and adjustment; at the time the loan is given, the rate is fixed for the term of the loan. Co-Chair Hawker asked whether a variable rate program had been considered, which would benefit the consumer in low- rate periods but protect in high-rate ones. Mr. Winegar responded that the agency had considered the option; they thought the fixed rate would be make it easier for a borrower to plan. He acknowledged the fund could be set up as a floating rate. 2:19:39 PM Representative Foster thought the program was good for rural Alaska. He queried plans to communicate about the program in rural areas. Mr. Winegar replied that the program would be handled like other programs, with outreach work, advertisement, and attendance at various conferences. He noted a contract with the Alaska Business Development Center to assist in outreach efforts. He also anticipated using the Small Business Development Center at the University of Alaska. Representative Foster queried examples of collateral sufficient to secure the loan. He wondered the lowest level of collateral acceptable. Mr. Winegar answered that standards would be set through regulation; the language was broad to allow as much flexibility as possible to work with businesses. Deeds of trust on property and inventory would apply. The term of the loan would be geared based on collateral. The provision would provide maximum flexibility to secure the loan in the best way possible; however, the language does not require a certain type of collateral. Representative Austerman commented that research on economic development has confirmed the need for small businesses to have access to funds through reasonable loans. He questioned the fiscal note, related to the flow of funds. He noted that currently the state receives a dividend from AIDEA that goes into the general fund and that funding for the proposed program would come out of AIDEA dividend receipts. He thought the $3.5 million requested should be general funds. He also questioned the $77,700 for the position, which was coming out of AIDEA dividends. He assumed the position would be in the Division of Investments through reimbursable service agreement (RSA) funds from AIDEA. He wanted to fund the position with the general funds through the normal process. 2:23:22 PM Representative Fairclough queried the definition (page 3, lines 15 and 16) of an Alaska resident. She pointed to eligibility language (starting on line 4 and on line 10): "to meet the residency requirements of (a) of this section, the applicant (1) must physically reside in the state and maintain a domicile in the state during the twelve consecutive months before the date of the application for the program, but may not declare or establish residency in another state or receive residency or a benefit based on residency from another state." She asked how the stipulation applied. Mr. Winegar replied that the intent was that residency was maintained over the 12-month period. Representative Fairclough questioned the possibilities of what the language could mean. Co-Chair Hawker agreed that the question was important to consider. Representative Doogan thought that microloans were much smaller. He queried why the agency considered the loan amounts available as microloans. He also asked what kind of loans would be expected. Mr. Winegar responded that the loan amounts and the term "microloan" came from the SBA program, as did the $3.5 million limit. The types of loans expected were for working capital for a small business, to be used for leasehold improvements or equipment. Representative Doogan wondered whether the loans might be too small as expenses were so much higher in rural Alaska. Mr. Winegar answered that there were two other programs for small businesses in rural Alaska, including the Rural Development Revolving Loan Fund, which would offer larger loans for smaller communities. The program proposed in HB 412 would fill a need not filled by the other programs. He emphasized that all areas of the state would qualify for the microloan program, whereas other the programs are for smaller areas. The proposal would fill a gap that SBA covers in most other states. 2:28:51 PM Representative Kelly asked whether the agency had considered funding the program "upstream" of AIDEA. Mr. Winegar answered that the position would initially be paid for out of the dividend and then would come out of revolving fund, along with other expenses. Other funding options had been considered at the Office of Budget and Management (OMB) level; the proposed option was considered the best one. Co-Chair Hawker thought an eligibility requirement in the section on loan limits should be moved to the eligibility section. He pointed to page 3, line 28 about not making a loan to person with a past due child support obligation. He called it the only "moral turpitude" clause in the provision and asked why other groups such as convicted sex offenders or felons were not listed. He asked why child support was targeted. Mr. Winegar replied that the language was modeled on other legislation and that the same language was in all AIDEA programs. He acknowledged the possible need to change the placement of the language. Co-Chair Hawker questioned whether other restrictions might be appropriate. Co-Chair Hawker directed attention to the findings section on page 1, line 9, the declaration "essential for the on- going economic health and well-being of the state and its citizens and families." He asked whether there were families that were not citizens. Mr. Winegar did not know where the language originated. Co-Chair Hawker moved to line 12 in the findings section, "economic growth and self-employment in small business is hampered." He did not recall seeing the word "hampered" elsewhere in statute. Representative Gara wondered whether the business had to be located in the state of Alaska. Mr. Winegar responded that line 17 on page 2 stipulated that loans would be made to eligible applicants to be used for working capital, equipment, and so on "by a business located in the state." 2:33:57 PM Co-Chair Hawker requested clarification of earlier comments about "stiffer compliance requirements" that were not being utilized. He asked how the legislation could justify deviating from the underwriting standards of the SBA. Mr. Winegar responded that there had to be an intermediary lender in order to have a SBA microloan program. Lenders have to meet certain criteria; no one in the state has met the criteria. Co-Chair Hawker asked whether the provision applied only to the microloan program. Mr. Winegar answered in the affirmative. He reported that the agency had talked to SBA about the possibility of the state qualifying as a lender, but states were not eligible. Co-Chair Hawker informed the committee that staff had noted that the test for child support does not show up on credit reports, so the language indicates a way to address the issue. Representative Foster queried whether information about collections should be in the fiscal note. Mr. Winegar replied that collections are done in-house and figured in. He added that the loan officer is also a collection officer and can do collections. Representative Fairclough referred to page 2 of the fiscal note and requested an update on the status of other legislation that would affect the fund. Mr. Winegar replied that there were two bills: HB 411 in the House Resources Committee and SB 301 in the Senate Finance Committee. 2:38:54 PM AT EASE 2:41:02 PM RECONVENED MIKE BURGFORG, EXECUTIVE DIRECTOR, MADE IN MAT-SU ASSOCIATION, MAT-SU (via teleconference), testified in support of the legislation. He reported that his organization represented value-added manufacturers in the Mat-Su. He stated that the organization's 245 members and affiliates strongly support HB 412 because small business will qualify for the first time. Other programs do not support businesses in the area. He spoke to concerns about the money volume. A survey showed that members would be looking for smaller than $35,000 to $70,000 loans. The greatest concern among members was capital for the purchase of raw materials in order to be more competitive in the market. He stressed the importance of the legislation to small businesses in the state. Co-Chair Hawker asked whether the business community represented had difficulty accessing small lines of commercial credit through traditional financing institutions. Mr. Burgforg replied that most of the members queried had difficultly because of the size of their businesses. They could take personal loans, which did not build their businesses. The microloan program would help build business and establish credit, making them more viable and better business partners in the community. Co-Chair Hawker queried underwriting criteria. Mr. Winegar responded that the agency would establish underwriting criteria through the regulatory process. The goal was to leave flexibility so that each business could be considered separately. 2:46:45 PM Co-Chair Hawker summarized that the intent of the program is to be able to accommodate concerns of small businesses such as those represented by the Made in Mat-Su Association. Mr. Winegar agreed. Vice-Chair Thomas pointed to letters of support from the Bristol Bay Economic Development Corporation, Anchorage Development Corporation, and others, including commercial fishermen. HB 412 was HEARD and HELD in Committee for further consideration.