HOUSE BILL 196 "An Act relating to the power project fund and to the bulk fuel revolving loan fund; establishing a bulk fuel loan account and making the bulk fuel loan account and the bulk fuel bridge loan account separate accounts in the bulk fuel revolving loan fund; providing for technical assistance to rural borrowers under the bulk fuel bridge loan program; relating to the administration and investment of the bulk fuel revolving loan fund by the division in the Department of Commerce, Community, and Economic Development responsible for community and regional affairs; and providing for an effective date." Representative Edgmon introduced the legislation. He explained that the bill took two bulk fuel loan programs, housed in the Department of Commerce, Community and Economic Development (DCCED) and administered them from one location. The Bulk Fuel Revolving Loan Fund was administered by the Alaska Energy Authority (AEA) and the Bulk Fuel Bridge Loan Program resided in the Division of Community and Regional Affairs. He noted that consolidating the programs administration was a recommendation in the "Governor's Report on Energy" and from AEA. The consolidation made both programs more accessible for the public. Applicants that were turned down for the revolving loan would not have to re-apply for the bridge loan. He questioned the fiscal note by the division. Ms. Ayers reported that the Division of Community and Regional Affairs (DCRA) would perform all of the underwriting, and work directly with the borrowers for the consolidated loan fund. The Division of Economic Development (DED) would provide loan servicing. SCOTT RUBY, DIRECTOR, DIVISION OF COMMUNITY AND REGIONAL AFFAIRS, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), spoke to the new fiscal note (FN CED 3/19/12). He determined that the cost to administer the consolidated programs would increase to $216.6 thousand for FY 2013 and $209.8 thousand in FY 2014. The AEA currently administered the loans at a cost of $53.6 thousand dollars. Presently, within the division an existing employee was servicing the small number of bridge loans without charging the personnel costs to the program. The consolidated loan program increased the workload from administering 12 to approximately 70 loans. The division was not able to perform the additional work without an additional position. The division had an RSA (reimbursable services agreement) with the Division of Economic Development for invoicing and loan accounting. The DED required and extra position to provide more of the services to DCRA with the increase in loans. He noted that the new fiscal note (FN CED 3/20/2012) for DED was funded through inter agency receipts. Vice-chair Fairclough questioned why additional funding was needed considering the work was being consolidated. Representative Edgmon had the same question. He indicated that AEA had a staff position dedicated half-time to service the loans that would transfer to DCRA. He mentioned confusion with the fiscal notes. He was aware of a fiscal note that appropriated a local government specialist at a range 17 to DCRA and an appropriation to DED for an Accounting Tech II. The DCRA contracted out technical services, credit checks, and loan counseling with a third party. The loans primarily helped small communities with populations less than 2000. Vice-chair Fairclough asked if the state was using existing technology such as online grant applications to assist the process. Mr. Ruby answered, "no." He stated that people can download the application online and most return it by fax for review. The bulk fuel bridge loan typically responded to emergency type situations. Recently, two villages applied because less than seven days' worth of fuel was available. The third party contractor was instrumental in helping the communities with a high credit risk apply for and manage the loan. 10:21:03 AM Vice-chair Fairclough remarked that DCRA planned to manage the loans much differently than AEA and still questioned the fiscal notes. Co-Chair Thomas asked if the same clients applied for the loan each year. He felt that the personal services request in the fiscal note was problematic. Vice-chair Fairclough believed that the use of technology via online applications, where information was recalled for future applications could streamline the process. Representative Gara thought that DCRA proposed "the worst example of streamlining." He suggested that the consolidation should transfer to AEA. He recommended that AEA transfer the half time position to DED for a "net zero cost." He argued that streamlining created efficiencies that required fewer personnel. He questioned the need for more personnel. Ms. Ayers responded that the challenge was turning one operating unit into two. The division did not inherit 100 percent cost savings from AEA because only a half time position was dedicated to service its portion of the loans. The division's workload increased from servicing 12 accounts to 70 accounts. She stressed the need for additional staff to simultaneously respond to both loan populations. Time sensitivity was a factor in processing the bridge loans. Often a fuel barge was waiting to deliver fuel. 10:25:41 AM Representative Edgmon responded to Representative Gara's suggestion to transfer the consolidated loan servicing to AEA instead of DCRA. He elaborated that AEA was strongly favored when the idea first came forward. The switch to DCRA was made to utilize DCRA's seven local government specialist offices spread throughout the state. The specialists would work with the third party contractor; Rural Alaska Fuels. The consolidation was intended to streamline the process and improve the services for the community. The process was supposed to be simplified for a community to apply for the bulk fuel revolving loan and if turned down the application would quickly be processed as a bridge loan. He remained perplexed why extra personnel were necessary. He emphasized that he did not receive a "clear response" from the department and that it was not his intent to introduce the bill with extra personnel costs. Representative Costello asked why the choice was made to shift the loan services to DCRA. She mentioned that the budget process was focused on departmental missions. She relayed that DCRA was the only division with a constitutional mandate; Article 10, Section 14, which mandated a report on the status of communities. The mission of AEA was to reduce energy costs in the state. She thought that AEA was the more appropriate division for the loan consolidation. Representative Edgmon commented that one of the reasons that DCRA was chosen over AEA was that AEA was taking on more responsibilities including the Susitna project. The premise was that with the DCRA offices located in rural parts of the state, its capabilities were better suited to assist smaller communities. Representative Costello was informed that communities were filling out an application for the first loan process and had to re-apply for the bridge loan from scratch if turned down. She noted that the board for Alaska Industrial Development and Export Authority, (AIDEA) was the same for AEA, which the commissioner of DCCED was a member. She queried if the problem was ever brought to the board for resolution. Ms. Ayers believed that discussions were held. She reiterated that the loans were time sensitive and required focus and responsiveness to keep the process moving forward. 10:31:43 AM Representative Wilson asked for clarification on the number of loans. She deduced that the increase from 12 to 70 loans was an actual increase of 58, which serviced the same communities every year. Ms. Ayers stated that was correct and added that some communities applied several times a year. Representative Wilson felt that the division could educate the communities to be more proactive and apply for the loans before it was an emergency situation and deal with the communities on a more regular basis. She concurred with the other committee members' call for more efficiency, elimination of repetitive paperwork for the communities, and questioned the need for additional staff. Ms. Ayers hoped that the department would achieve efficiencies through consolidation of the loan program by DCRA working with the borrower on a more regular basis. Mr. Ruby revealed that the department was proactive in getting the communities to apply for loans. The department implemented a plan called "fuel watch." The department contacted every bulk fuel purchaser in rural Alaska to determine the status of payments. He mentioned that 8 to 10 communities each year apply late for various reasons. Currently, there were 49 loans to process and some of the communities had to fly in fuel. Each time a community needed more fuel another loan was necessary. Only one approval process was required, but arrangements for delivery were made, invoices were processed, and repayment schedules developed for each refill. A lot of the staff time was spent working with the communities on cash flow issues. Most of the work within DED was not application oriented but appraising cash flow and developing procedures to repay the loan. Representative Edgmon discussed the larger issues embedded in the situation. Frequent turnover of city administrators and personnel in smaller communities was a problem. The application process was complex and detailed financial statements were necessary. The high cost of fuel created challenging circumstances and cash flow problems. 10:38:27 AM Co-Chair Thomas OPENED public testimony. DEL CONRAD, CEO, RURAL ALASKA FUEL SERVICES (via teleconference) testified strongly in favor of the bill. He reported that during the first six years of the bridge loan program his company managed the program. The program was initially set up as a grant. The funds were given to the contractor under the provision that any unused funds were returned to the state. The company reviewed the application and forwarded a recommendation to the department. After approval from the department the company issued a check to the fuel vendor, issued monthly invoices, and processed collections. The company also interfaced with the communities and would work with them on pricing and collection. He explained that the program was changed to a loan program approximately two years earlier and state involvement increased. He believed from experience that additional staff was unnecessary. He elucidated that much of his work with financially distressed communities involved establishing a budget and pricing. He felt that combining the programs eliminated duplication for both the state and the communities. The focus of DCRA was on sustainable communities and thought that was the appropriate place to administer the loans. The local government specialists were familiar with the communities and understood the issues to better serve economically distressed communities in contrast to AEA that acted as a bank. 10:41:58 AM MEERA KOHLER, PRESIDENT AND CEO, ALASKA VILLAGE ELECTRIC CO-OP (via teleconference), spoke in support of the legislation. She discussed that several years earlier acting as a member of the Alaska Village of Council Presidents had chaired a subcommittee on rural fuel issues. The subcommittee had determined that the communities' credit risk was the largest deterrent for the community to receive timely fuel delivery with better pricing. She revealed that part of the problem was the formidable loan application process. She was in favor of consolidation. She reiterated that AEA was a banking institution. She believed DCRA was a better agency to handle the program. The division developed the inroads and relationships with villages that could enable the villages to become more financially sustainable. She opined that HB 196 represented a move in the right direction. Co-Chair Thomas CLOSED public testimony. HB 196 was HEARD and HELD in committee for further consideration. 10:45:25 AM AT EASE 10:46:33 AM RECONVENED