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." GREG WINEGAR, DIVISION OF INVESTMENTS, DEPARTMENT OF COMMERCE spoke to the bill. The loan program is modeled after a similar program sponsored by the Small Business Administration (SBA) currently available in 46 states. Alaska has yet to develop a comparable loan program as an intermediary lender is currently unidentified. The loans would include up to $35,000 for an individual and $70,000 for two or more residents. The proceeds would be available for working capital, equipment, construction, and improvements. The interest rate would be prime plus one with a floor of six and a ceiling of eight. The maximum term is six years. The submitted fiscal note includes $3.5 million from Alaska Industrial Development and Export Authority (AIDEA) contingent on the passage of HB 411. The fund would be established as a revolving fund. With the initial capitalization, 75 loans are possible in the first year and 100 in the second, with 25 loans per year on an ongoing basis thereafter. 8:28:32 AM Representative Fairclough asked about time constraints for residency requirements listed on Page 3, Line 14-16. Mr. Winegar responded that the requirements span a 12 consecutive month period. Representative Fairclough interpreted the section differently. Mr. Winegar suggested a language change to better communicate the 12 month time period. Vice-Chair Thomas recalled multiple definitions of residency. 8:30:32 AM Representative Doogan believed Representative Fairclough was right. He provided three different definitions of residency. Representative Gara suggested a conceptual amendment imposing the one year period used for the Permanent Fund Dividend (PFD). Representative Fairclough clarified that the bill states that a person may not have declared residency elsewhere. She noted that people migrate to Alaska occasionally seeking business loans. Vice-Chair Thomas stated that the definition of residency at the university is similar to that of the PFD requirement. 8:33:16 AM Representative Doogan commented that the agency must understand the expectation of a clarifying amendment. Mr. Winegar offered to communicate with the agency. Representative Fairclough stressed a time commitment. Representative Kelly requested a list of others concerned with the bill. Mr. Winegar responded that discussions with multiple banks did not result in much concern regarding the lower dollar level. 8:35:48 AM Representative Gara asked about the eight percent cap. Mr. Winegar agreed that the cap could be removed. He explained the goal of maintaining a low interest rate. Representative Gara MOVED Conceptual Amendment 1. Page 3, line 26, delete after per year: "and not more than eight percent per year;" Representative Austerman OBJECTED for discussion. He discussed the establishment of acceptable interest rates for these loans. Mr. Winegar stated that the prime rate is three and one quarter so prime plus one would be four and one quarter with a basement of six. If prime plus one went higher than eight percent, then eight percent would be the cap. Representative Doogan understood that if the prime rate was three and one half or four and one half, a loan is not possible because the number is less than six. Mr. Winegar explained that the language reads prime plus one with a floor of six percent. Representative Doogan understood the intention of the amendment yet was not clear on the purpose. If the prime rate is four and one half plus one, why would the loan be at six percent? Mr. Winegar responded that six was the decision for the floor as risk and cost must be factored in. 8:40:15 AM Representative Austerman continued to object to the amendment. He believed that the reason for the loan was the fostering of economic development. He stated that a higher interest rate makes it more difficult to pay back the loan. He opined that an eight percent cap with a $35 thousand loan allows a wonderful opportunity for the business sector. Representative Kelly believed that the committee discussed the topic in a prior meeting. Mr. Winegar agreed. Representative Kelly stated that he does not support the eight percent cap. The intention of the loans is not to compete with the banks. He understood the floor, as the loans are often offered to those unable to receive traditional bank loans. Representative Foster asked if the cost of capital rises above eight percent, would AIDEA subsidize the loans. Mr. Winegar explained that an opportunity cost would have been lost because the fund is revolving. The money returned is the interest rate for any given time. 8:43:40 AM Representative Gara commented that prime plus one is a favorable interest rate regardless of prime. Mr. Winegar agreed. Representative Fairclough asked if the issued loans are on a fixed versus adjustable rate. Mr. Winegar answered yes. Representative Fairclough advocated in support of the amendment on the floor to eliminate the eight percent ability to draw down. She opined that offering loans substantially below the market value is unfair to the private sector. Representative Doogan understood the range of loans would exist between 6 and 8 percent with the current language in the CS. Mr. Winegar replied yes. He explained that rates are reviewed each quarter and adjusted to create loans on a fixed rate note for the life of the loan. Representative Doogan continued that the amendment would create a rate between six and infinity. He asked if the legislature would make the change to allow the interest rate to float up why is the committee concerned about loans where interest rate floats down. Mr. Winegar responded risk and operating costs. 8:46:53 AM Representative Doogan expressed confusion. He believed that if the interest was lower, the risk was lower. He opined that the risk calculation was backwards. Mr. Winegar agreed that six percent may not be the correct number. Adding one point to three and one quarter percent is a very low interest rate when cost and risk are factored in. Representative Doogan commented that loans for low interest rates lead to eventual balance. Mr. Winegar explained that money is required to operate the program and losses do occur leading to the decision for a moderate interest rate. 8:50:08 AM Representative Austerman delivered an explanation of the necessity of interest rates with state or bank loans. Those loan recipients who make their payments balance those who cannot, allowing for cash flow. Representative Doogan understood that the amendment would allow the state to provide bank luxuries at the low end but not at the high end. Representative Austerman reminded about the revolving loan program. If the operational cost is covered at six percent there is no need to increase. Representative Kelly asked if six percent provided a good rate. Mr. Winegar replied yes. Representative Kelly asked if lowering the percentage would compete with banks. He advocated for six percent and removal of the cap. 8:52:58 AM Vice-Chair Thomas reminded that the interest rate was 23 percent in the 1980s. He was in support of the eight percent cap. Representative Foster stated that his concern was in the state adopting bank like policies. He asked about the interest rate structure with the SBA microloan. Mr. Winegar noted research showing rates at eight percent for SBA in the lower forty eight. Representative Foster asked about a cap in the other loans. Mr. Winegar believed no, but he was unfamiliar with every plan. 8:54:49 AM Representative Gara requested that AIDEA consider the issue and contact the committee with an answer by the end of the day. He stressed that he understood both sides of the argument. Vice-Chair Thomas recalled the time constraints. Representative Fairclough suggested a vote on the amendment. Representative Austerman pointed out that the major banks are not interested in these loans. The objective of the microloan program is to help people who cannot receive traditional bank loans. He stated opposition to the amendment. Representative Kelly asked if interest rates are fifteen percent and the state is loaning at eight percent, what would happen to the value of the corpus. Mr. Winegar responded that the corpus of the fund will continue to grow. Representative Kelly asked if the growth would continue with a differential between inflation of three percent. Mr. Winegar responded that the opportunity cost would be lost. Representative Kelly commented that with inflation of 12 percent, the value of the corpus would decrease by 50 percent. Mr. Winegar added that the fund might earn more without the restriction of eight percent. Representative Kelly wondered if the fund would depreciate in real value. Mr. Winegar agreed that when the situation is compared to the opportunity cost, the fund would depreciate. 8:59:05 AM Representative Fairclough stated support of the amendment because she wanted to prevent the opportunity for citizens to borrow money for reinvestment at a higher rate elsewhere. Vice-Chair Thomas agreed. 9:00:03 AM AT EASE 9:01:08 AM RECONVENED Vice-Chair Thomas restated the amendment. Representative Fairclough commented on the amendment and the discussion that lifting the cap would open up competition with the banking industry so that people would not access the microloan account and place it in another financial institution to receive a larger rate of return. Representative Austerman continued to oppose the amendment because of the plea from small businesses expressing difficulty achieving equipment and inventory loans. A roll call vote was taken on the motion. IN FAVOR: Fairclough, Foster, Gara, Joule, Kelly, Salmon, Doogan OPPOSED: Thomas, Austerman, Stoltze, Hawker The MOTION PASSED (7-4). 9:05:15 AM Representative Fairclough MOVED Conceptual Amendment #2 Page 3, line 17, add after "state," "in the previous 12 months." Representative Gara OBJECTED for discussion. She explained the amendment which would define the time limit established in the bill. Representative Gara WITHDREW his OBJECTION to Conceptual Amendment #2. There being NO OBJECTION, it was so ordered. Representative Doogan MOVED Conceptual Amendment #3. Page 3, line 25 delete after "point" "but interest may not be less than six percent per year" Representative Austerman OBJECTED for discussion. Representative Doogan explained that because the cap was raised with the theory that costs will rise, this amendment would account for the possibility that costs might decrease. He understood that the interest rate created by the amendment would be four and one half percent. The borrowers would receive the same benefit from a lower rate that they might receive as a penalty from higher rates. 9:09:30 AM Representative Fairclough spoke in opposition to the amendment. She mentioned the risk to the revolving loan account as the interest collected must be measured against the risk of potential default. 9:10:34 AM Representative Austerman objected because he felt that six percent protects the risk aspect. Representative Gara stated that protection is offered in charging a prime plus one interest rate. He understood the need for a minimum floor, and the negotiable nature of it. He asked if harm would occur if the minimum floor was five percent. Mr. Winegar responded that the proposed scenario would increase the risk slightly. He pointed out that prime is the amount loaned to banks from other banks. Prime plus one is an attractive rate in terms of risk. 9:12:47 AM AT EASE 9:13:56 AM RECONVENED Representative Doogan restated the Conceptual amendment #3. A roll call vote was taken on the motion. IN FAVOR: Foster, Gara, Doogan, OPPOSED: Joule, Kelly, Salmon, Thomas, Austerman, Fairclough, Hawker, Stoltze The MOTION FAILED (3-8). 9:15:49 AM Co-Chair Hawker MOVED to ADOPT Conceptual Amendment #4. Page 1, lines 5-12, Remove Section 1 Representative Gara OBJECTED for discussion. Co-Chair Hawker explained that the conceptual amendment entails the ability of the drafters to incorporate it into the entire context of the bill. Representative Gara WITHDREW his OBJECTION. There being NO OBJECTION, it was so ordered. Co-Chair Stoltze MOVED to report CS HB 412(FIN) out of Committee with individual recommendations and the accompanying fiscal note. CS HB 412(FIN) was REPORTED out of Committee with no recommendations and with previously published fiscal note: FN1 (CED) 9:17:39 AM AT EASE 9:18:35 AM RECONVENED