HOUSE BILL NO. 261 "An Act relating to loans for the purchase of commercial fishing entry permits; and providing for an effective date." 9:21:04 AM Co-Chair Thomas MOVED to ADOPT proposed committee substitute for HB 261, Work Draft 27-LS0968\B, (Bullard, 3/19/12) as a working document. Co-Chair Stoltze OBJECTED for purpose of discussion. JOE MICHEL, STAFF, CO-CHAIR STOLTZE, reported the changes to the work draft. He noted that three sections (Section 1, Section 4, and Section 5, Paragraph B), were removed from the previous version [CSHB 261(FSH)], of the legislation and nothing was added. The omitted sections removed the provision that reduced the interest on the loan two percent below the prime rate to avoid competition with commercial banks and maintain the focus of the bill. The primary purpose remained increasing the loan limit. The sponsor concurred with the changes. Co-Chair Stoltze WITHDREW the objection. HB 261, Work Draft 27-LS0968\B (Bullard, 3/19/12) was adopted as a working document. 9:25:45 AM Representative Edgmon explained that HB 261 dealt with the Commercial Fishing Revolving Loan Fund Act. The program was implemented in the 1980's and was designed to assist commercial fishers. Over the years, the legislature enacted modifications to the program. The statute contained six sections and HB 261 pertained to Section B, of the act. Section B increased the loan limit from $100,000 to $200,000. The provision allowed economically disadvantaged fishermen to purchase limited entry permits that were rising in value. He expounded that the original bill attempted to do more. The earlier version offered the loan at two percent below the prime rate, which was currently 5.25 percent. After discussions with the Department of Commerce, Community and Economic Development (DCCED), Division of Economic Development, it was decided that interest rates were likely to rise in the future. The interest rate provision was considered too "ambitious." The bill was scaled back to contain only one provision; raising the loan limit. He outlined the eligibility requirements. A commercial fisher must be turned down by conventional lending institutions or CFAB (Commercial Fisheries and Agriculture Bank), proven economically disadvantaged, and participated in commercial fishing for two years. Co-Chair Stoltze wondered how CFAB was performing. He repeatedly heard of fishers and farmers being turned down by CFAB for loans. Representative Edgmon answered that he was uncertain. Representative Edgmon voiced that the projected demand for the loan program was relatively modest; 25 to 50 loans. He expected that the applicants would be younger fishers without other means to purchase a limited entry permit. The opportunity for young fishers to obtain a permit provided multiple benefits. The economic multiplier effect for the small coastal communities where many of the young fishers resided was potent. Co-Chair Stoltze remarked that his district contained a number of commercial fishers. Representative Edgmon spoke to the new zero fiscal note by DCCED. He pointed to an error in the narrative on the second page. The second sentence referenced the interest reduction provision that was not included in the work draft. 9:34:05 AM Representative Guttenberg questioned whether raising the loan limit for young people new to a fishery was burdening them with excessive debt. Representative Edgmon replied that entering the fishing business was more expensive than ever. Limited entry permits and associated fishing costs had skyrocketed. The higher loan availability afforded the opportunity for new young fishers to make a living. Representative Wilson asked how many loans ended in default. Representative Edgmon answered that historically the default rate was very low. The loan portfolio performed "admirably." The principle in the loan fund was approximately $80 million. The program actually returned funds to the Department of Fish and Game (DFG). Co-Chair Stoltze asked whether the loan program was a true revolving fund. Representative Edgmon responded that the program was a true revolving fund. Representative Costello asked what the costs of permits were over the time period of the loan program. Representative Edgmon elaborated that permit prices varied widely over time. Speaking exclusively of salmon permits, prices correlated to the ex-vessel price of salmon. He related that in Bristol Bay in the early 2000's the price of limited entry permits plummeted to $18,000 when salmon prices tumbled. Bristol Bay gillnet permits were now worth $150,000. Permit prices raise and lower dramatically. Representative Costello asked what the average age of a commercial fisher in Alaska was. Representative Edgmon relayed that the age of the average limited entry permit holder was creeping upwards. The average was 50 years of age. 9:39:51 AM Representative Gara asked whether a residency requirement applied to loan applicants. Representative Edgmon replied that the applicant must clearly establish residency for a period of two years preceding the date of the application and participated in commercial fishing for two of the last five years. Representative Gara asked if a lower interest rate could be offered to young applicants that would not cost the state to lose money. Representative Edgmon explained that the current statute authorized an interest rate of two points above prime. There was another provision in statute that allowed a one percent deduction if the loan payments were paid on time for the first year. Co-Chair Stoltze added that the loan was a securitized loan and not a signature loan. Representative Neuman asked if different interest rates were specified in statute. Representative Edgmon responded that the loan rate was specifically tied to the prime rate. Representative Neuman asked whether a board had any authority to determine the interest rate in the revolving loan fund or if the rate was set statutorily. Representative Edgmon restated that the intent of the original bill was to allow the division to deduct 2 percent off of the prime interest rate, which was removed in the current version. The rules were defined in statute and set at two percent above prime. Representative Neuman inquired if different loan rates applied for different fisheries under the program. Representative Edgmon exemplified the passage of HB 20 two years ago. The legislation authorized energy efficiency loans to commercial fishers at 2 percent below the prime interest rate for energy efficient engines, generator sets, etc. 9:45:39 AM WANETTA AYERS, DIVISION DIRECTOR, DIVISION OF ECONOMIC DEVELOPMENT, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, indicated that different interest rates for different purposes existed in statute for the Commercial Fishing Revolving Loan Fund. The senior loan committee within the division cannot consider different interest rates other than the interest rates outlined in statute. Representative Neuman believed that a board was better suited to set the most applicable interest rate that reflected the current conditions of the fishery. Co-Chair Stoltze asked if the loans could be refinanced. Ms. Ayers replied that the interest was fixed for the term of the loan. A re-financing option was available. Co-Chair Thomas referenced the student loan forgiveness program. He wondered why one profession was chosen over another for state loan forgiveness, especially since the commercial fishing fleet was "graying." He asked why $200,000 was chosen as the loan limit when some permits cost $400,000. Representative Edgmon felt that the number addressed the majority of salmon fisheries permit costs in the state. The amount was set to accommodate the most number of fishers. Co-Chair Stoltze reiterated that the loan limit was doubling from $100,000 to $200,000. 9:49:25 AM BRUCE TWOMLEY, CHAIRMEN, COMMERCIAL FISHERMAN LIMITED ENTRY COMMISSION, addressed Representative Guttenberg's concern that the increased loan limit might burden new young fishers with too much debt. He explained that the commission monitored the price of permits from 1980 through 2011. The price of permits reflected the amount that fishers were willing to invest in the fishery and their expected returns. He felt that the best measure was the individual fishermen's willingness to put their own money at risk based on expectations. He reported that Bristol Bay was the largest salmon fishery. Out of the 32 years that the commission tracked permit prices, the average and median price for a Bristol Bay gillnet permit was $100,000 for 16 years. Currently, the price exceeded $100,000. He felt that the $200,000 loan limit was a good estimate. The loan program provided rural fisher's access to credit that otherwise was unobtainable. He was pleased that the legislation was introduced to increase the loan limit for Section B loans since the price of Bristol Bay permits exceeded the limit. He believed that the legislation was a "concrete response" to facilitating the entry of young Alaskans into commercial fishing that was addressed in HCR 18 (Commercial Fisheries Programs.) Co-Chair Stoltze questioned what happened when a limited entry permit dropped in value and the borrower defaulted. Mr. Twomley responded that the loan program had a "tremendous" success rate. In case of a foreclosure the division was required to sell the permit. Procedural protections existed for the fishermen under statute. Very few loans went into foreclosure. The program was very successful. Co-Chair Stoltze questioned whether the fisher had enhanced protection under statute than other debtors had. Mr. Twomley stated that was correct. Co-Chair Thomas recalled bidding online for a repossessed Bristol Bay gillnet permit that was foreclosed on. Vice-chair Fairclough referred to a letter of opposition from CFAB dated January 25, 2012 (copy on file). She asked whether CFAB was still in opposition or if its concerns were addressed. Representative Edgmon replied that the letter addressed an earlier version of the bill opposing the interest rate reduction. He had not heard from CFAB regarding the new version. 9:56:22 AM Representative Gara related that when the state granted a limited entry license the recipient was able to sell it when they stopped fishing. He felt that created an unfair opportunity to make money on a public resource. He asked whether the state changed the rules. Mr. Twomley responded that free transferability still existed. He felt that the transferability was useful to help Alaskans get limited entry permits. If the limited entry permits were reissued to the state the process would be accessible outside of the state. Transferability gave Alaskans a fair chance. Over the years transfers to Alaskan residents grew over non- Alaskans. Representative Gara inquired how the current system keeps more permits in Alaskan communities. Mr. Twomley replied that transferability created the opportunity for Alaskan ownership. The provisions in Article 8 of the Alaska Constitution prohibited the state from directing the distribution of permits. He explained that transferability "created the opportunity" to direct permits to Alaskan communities. He highlighted that the Bristol Bay Economic Development Corporation operated a regional permit brokerage and loan guarantee program. The loan guarantee program influenced where the permits went. Co-Chair Stoltze spoke to the constitutional aspect. The Constitution contained non-exclusive rights to fisheries. A constitutional amendment adopted in 1972 allowed exclusive rights for conservation and economic distress. He thought that although not a mandate, the constitutional amendment allowed amending the limited entry permit statute to include exclusive fishery rights. He asked for clarification. Mr. Twomley reported that when the state tried to direct benefits the efforts were always reversed in the Alaska Supreme Court under the equal protection clause. He exemplified reversals of rural preference for subsistence in times of scarcity or local hire provisions. He concluded that it was highly unlikely that the state Supreme Court would concur with a program that granted resource entitlements to particular communities or individuals. Co-Chair Stoltze countered that the exclusive rights amendment was not a constitutional right but an allowance within the statutory framework. He interpreted the constitutional amendment as, allowing for a deviation from the non-exclusive right but was not a guaranteed exclusive right. Mr. Twomley agreed that an amendment to modify the limited entry statute could be recommended and added that the permit was not a right but a privilege. Co-Chair Thomas concurred that a limited entry permit was a privilege from the state to harvest the resource. He felt that it did not give commercial fishers an inherent right to block other industries from developing resources. The state granted the fishers the privilege to work by making limited entry permits available to purchase. He did not want commercial fishers to limit other Alaskans opportunity to jobs in other industries through protest claiming they have exclusive rights. He added that Alaskan fishers pay 7 percent of gross income in raw fish tax, enhancement tax and a marketing fee. Alaskan fishers generated the revenue to operate the Commercial Fisheries Entry Commission via limited entry permit purchases and vessel licenses fees and even generated surplus funding. Co-Chair Stoltze OPENED public testimony. 10:04:25 AM JERRY MCCUNE, UNITED FISHERMEN OF ALASKA spoke in support of the legislation. He felt the bill provided a good opportunity to support new younger entrants into the fisheries. He identified the three ways to obtain a limited entry permit; CFAB, Division of Economic Development, or a private lending institution. A private lender required collateral. He related that groups like Sea Grant and Bristol Bay Economic Development Corporation educated young fishers on how to repay the loans and helped them with financial planning. New entrants into the fisheries needed to implement a business plan. Commercial fishing was a business and a professional approach was required for success. He furthered that permit prices were dictated by permit availability, previous season's conditions, and fish prices. Permit prices dropped after a bad season as quickly as they rose with good seasons. Representative Joule asked what ages encompassed the "young" demographic. Representative Edgmon thought that the demographic was fisher's in their 20's. Mr. McCune related from his experience in the Copper River fishery that approximately 50 "young" fisher's, 20 to 30 years of age participated in the fishery. Many permits get passed on to family members. The legislation aided new entrants into the fishery who had to purchase the permit. 10:09:39 AM Co-Chair Stoltze CLOSED public testimony. HB 261 was HEARD and HELD in committee for further consideration.