HB 238 - TAX OBLIGATION LOAN PROGRAM FOR FISHERS CO-CHAIRMAN HARRIS announced the first and only order of business as House Bill 238, "An Act establishing a federal tax obligation loan program under the commercial fishing loan program." Number 0066 REPRESENTATIVE MARY KAPSNER, Alaska State Legislature, sponsor of HB 238, explained the bill would reinstitute a previously existing program that was widely supported. The program assists fishermen in paying back-taxes to the Internal Revenue Service [IRS], thereby rescuing limited entry permits from their continued threat of seizure. The program was initially created in 1993 in the wake of threats by the IRS to seize permits of fishermen who were found to owe back-taxes. She noted that the program is a revolving loan fund. It draws from the existing fishermen's loan fund. It provides loans of up to $30,000 with a payback interest rate of 10.5 percent. The money goes back into the fund for reissuance to others with back-tax problems. REPRESENTATIVE KAPSNER further noted that the bill isn't just aimed at assisting delinquent tax payers; it assists all fishermen in the state. She cited that, in 1996, the IRS seized a $30,000-permit held by a Kenai fisherman and sold it for only $5,005. That action had the effect of devaluing all commercial fishing permits. She also noted that the IRS is under no obligation to resell a permit to Alaska fishermen due to a commerce clause. REPRESENTATIVE KAPSNER explained that, before sunset in 1997, the program provided 288 loans at a value of $6.06 million to fishermen from every region of the state. In 1997, her predecessor [former-Representative Ivan Ivan] introduced such a bill that made it through the committee process in the House of Representatives, but was held hostage in the Senate Resources Committee for an unrelated reason. REPRESENTATIVE KAPSNER stated, in conclusion, that although tax compliance has dramatically improved among Alaska fishermen since the early part of this last decade, there still exists a need for the program. The IRS still staunchly opposes the state's view that fishing permits cannot be legally seized. And, unfortunately, the number of fishermen with tax delinquencies has climbed since the sunset of the program in 1997. Number 0413 REPRESENTATIVE FRED DYSON asked Representative Kapsner what the payment performance has been of those who have received a loan. REPRESENTATIVE KAPSNER replied, she thinks, it has been very high. She deferred the question to Mr. Greg Winegar of the Department of Community & Economic Development. Number 0479 GREG WINEGAR, Juneau Lending Branch Manager, Division of Investments, Department of Community & Economic Development, came before the committee to answer Representative Dyson's question. He noted that the repayment record runs about 10 percent higher than the rest of the portfolio. They are high-risk loans. He also noted that the delinquency rate runs at 27 percent compared to 17 percent for the rest of the portfolio. A number of them either have "workouts" in place or the division is working with them on extensions. They would still show as delinquent, however, until their paperwork is completed. The division does not expect all of them or very many of them to actually default. Number 0551 REPRESENTATIVE KAPSNER stated, for the record, that this is a one-time-only-loan program. If a fisherman falls behind on his payment with the IRS at another time, that fisherman cannot apply for a loan again. Number 0572 REPRESENTATIVE DYSON asked Mr. Winegar what the state holds for security if there is a default. MR. WINEGAR replied in most cases, if not all cases, it's the limited entry permit. In some cases, there is other collateral, but in most cases it's the permit that is held. REPRESENTATIVE DYSON asked Mr. Winegar whether the Division of Investments or the IRS would get the first "bite" if there was a concurrent default. MR. WINEGAR replied in the event of a concurrent default the division would be first in order to make the loan. In fact, part of the requirements for the program is to file all returns with the IRS. In cases where the balance is larger than what can be handled through the loan, the individual would be subordinated to the division's interest. REPRESENTATIVE DYSON asked Mr. Winegar what the delinquency rate was when the program was in effect. MR. WINEGAR replied the delinquency rate was low in the early years because it was just getting started. The delinquency rate is at its highest now. REPRESENTATIVE DYSON asked Mr. Winegar, What percentage of the value of the permit will the division loan? MR. WINEGAR replied the maximum allowed by statute is 90 percent. The division, typically, does not loan higher than 80 to 85 percent, however. REPRESENTATIVE DYSON asked Mr. Winegar whether the percentage is addressed in law or regulation. MR. WINEGAR replied the maximum is addressed in statute - 90 percent. But policy dictates that the division loan less than that in most cases. He reiterated the division typically loans to 85 percent, at the most. Number 0795 CO-CHAIRMAN HARRIS asked Mr. Winegar to explain how the fishermen's loan fund came about. Since it revolves, is it somewhat similar to the agricultural revolving loan fund? MR. WINEGAR replied the program was created in 1972 to help Alaskans maintain control of the fisheries in the state. He cited a series of appropriations, approximately $60 million, were made to the program up until FY [fiscal year] 1985. The fund has not received any general fund monies since that time. It has been completely revolving and, in fact, has paid back all of the $60 million to the general fund. The division typically loans approximately $15 million a year. There is a sufficient cash flow in the fund to handle those loans, and to pay for the operation of the program. It essentially has been self-sufficient since 1985. Number 0894 REPRESENTATIVE BILL HUDSON asked Mr. Winegar whether the program is similar to CFAB [Commercial Fisheries and Agricultural Bank]. MR. WINEGAR replied CFAB is a separate program; it is not part of a state agency. He explained that it is a fisherman's co-op owned by fishermen. REPRESENTATIVE HUDSON asked Mr. Winegar what the approximate balance is of the fishermen's loan fund. MR. WINEGAR replied the portfolio is around $90 million, which revolves and depends on the amount loaned and repaid. He reiterated the division, typically, has around $15 million available a year. REPRESENTATIVE HUDSON asked Representative Kapsner whether she has any idea how much of the portfolio would be drawn upon. REPRESENTATIVE KAPSNER replied she doesn't know the exact amount; she does know that the applicants have to be current on their IRS obligation and there has to be a threat of seizure. In other words, they can't be in a "major" default. REPRESENTATIVE HUDSON remarked that he likes the bill. He was a cosponsor when former-Representative Ivan Ivan introduced the same bill a few years ago. He hates to see the IRS seize permits and sell them at a lesser value. He asked Mr. Bruce C. Twomley of the Department of Fish & Game whether the IRS has been successful in actually taking possession of any permits. Number 1065 BRUCE C. TWOMLEY, Chairman/Commissioner, Commercial Fisheries Entry Commission, Department of Fish & Game, came before the committee to answer Representative Hudson's question. He noted that there have been sales of limited entry permits for various reasons, but those sales have not been completed and the permits have not been transferred to date. Number 1105 CO-CHAIRMAN HARRIS asked Mr. Twomley to state the position of the Commercial Fisheries Entry Commission on the bill. MR. TWOMLEY replied the commission supports the bill and the comments of the sponsor. He noted that in 1997 the bill passed the House of Representatives by a margin of 34 to 4. MR. TWOMLEY further stated that, like a lot of small businessmen who don't have withholdings, it's very easy to slip into trouble with the IRS. That, coupled with uncontrollable factors such as run failures and market failures, make fishermen more vulnerable. Yet other small businessmen do not face the risk of losing their livelihood when faced with an IRS enforcement. He also noted that the limited entry permit is a big target for enforcement because it is easy to identify and evaluate, and for many it is the only item of cash-value that they hold. Furthermore, as practitioners in the field have testified to in the past, the program makes a difference, otherwise many are left without hope and are confused and frightened by notices from the IRS. The program makes all the difference, he said, in having these individuals come forward and achieving voluntary compliance. Number 1271 REPRESENTATIVE DYSON stated, given the volatile nature of the state's fisheries, a loan for 90 percent is perhaps unwise from the position of the institution making the loan. He is thinking about changing that number to 75 or 80 percent. He asked Mr. Twomley why that would be a bad idea. MR. TWOMLEY replied the loan program is a principal means by which Alaskans get their limit entry permit, and a special element of the program was designed for rural Alaskans who often have difficulty getting credit from other sources. If there is a lead line to the problems that some of the fisheries have fallen into, it's that some of the permits, that were previously more expensive, have come within reach and reducing the percentage would cutoff opportunities. REPRESENTATIVE DYSON stated 90 percent may make sense for buying a permit, but he's not sure that figure makes sense for tax obligations or repairs to a vessel. He asked Mr. Twomley to clarify whether the 90-percent limit is for all categories in the loan program. MR. TWOMLEY deferred the question to Mr. Winegar. [THE RECORD REFLECTS THAT MR. WINEGAR'S TESTIMONY IS INTERMITTENTLY AUDIBLE.] MR. WINEGAR replied 90 percent is the maximum. He reiterated that the division typically loans less than that for certain types of applications. He cited a loan for gear and vessel repairs as examples. REPRESENTATIVE DYSON asked Mr. Winegar whether it's correct to say that the division loans less than 90 percent for tax obligations. MR. WINEGAR replied that is correct in most cases. He noted that there might have been some loans that were fairly close to 90 percent. REPRESENTATIVE DYSON asked Mr. Winegar whether he can assume that the division is professional, mature and wise enough so that the law doesn't need to be changed in order to protect them from making "dumb" loans. MR. WINEGAR replied he doesn't know how to answer that question. Number 1511 REPRESENTATIVE HAL SMALLEY applauded Representative Kapsner for bringing this type of legislation forward. It's good for Alaska, the industry, and it protects the value of the permits. He is well aware of what can happen to the value of a permit, especially in the Cook Inlet area. He asked Representative Kapsner whether an applicant who had a loan in the past would be treated as a new customer since the program sunset. REPRESENTATIVE KAPSNER deferred the question to Mr. Winegar. MR. WINEGAR replied according to Section 2, of the bill,...(indisc. -- paper shuffling). REPRESENTATIVE KAPSNER stated she would accept a friendly amendment to stipulate the preclusion of an individual from applying again for a loan. REPRESENTATIVE SMALLEY asked Representative Kapsner whether she knows how many fishermen in her area who previously qualified may want to qualify now. REPRESENTATIVE KAPSNER replied she doesn't have any numbers from her area. Number 1596 REPRESENTATIVE JIM WHITAKER asked Representative Kapsner whether there is a reason to preclude an individual who has successfully secured a loan and paid it off from securing a loan again. REPRESENTATIVE KAPSNER replied she would want to include as many as possible, given the $15 million available. She said, "You don't go back for seconds when some people haven't had their first try yet." She reiterated that she is open to amendments to ensure that everybody gets what they need. REPRESENTATIVE WHITAKER asked Mr. Winegar whether the demand is greater than $15 million at this specific time. He further asked whether he anticipates a point when the fund would be depleted. MR. WINEGAR replied he suspects that the demand would be less now than during the previous life of the program. The problem is not as big as it was back then, and $15 million should be able to cover the loan amounts. He further noted that when the program was first initiated there was some concern by various representatives that fishermen would come back year after year, which is probably where the one-time clause came from. Number 1735 REPRESENTATIVE WHITAKER stated if a loan program is successfully making loans at a rate of 10.5 percent, which is a fairly favorable lending rate today, he doesn't see a reason why not to allow a fisherman to secure a loan more than once. MR. WINEGAR replied, from his standpoint, he would not have a problem... REPRESENTATIVE KAPSNER stated, to Representative Whitaker, when the bill was initially introduced there was concern that every year or every couple of years the same fishermen would come back asking for help. She said, "We want our applicants to make sure that they know that this is a one-time deal; that they can only get bailed-out once." Number 1794 CO-CHAIRMAN HARRIS stated there's a one-time provision for tax obligation, but a fisherman could come back multiple times for boat upgrades, for example. He asked Representative Kapsner whether his statement is correct. REPRESENTATIVE KAPSNER replied that statement is correct. CO-CHAIRMAN HARRIS stated, according to his understanding, when this program was first initiated the fishing community said it would not "go after it" again, which is why there was a sunset provision. He asked Representative Kapsner whether she is familiar with those terms. He then asked whether she suspects there might be some problems with legislators indicating that the fishing community is going against what they said in the past. REPRESENTATIVE KAPSNER replied she wasn't a legislator when this program was born. She cannot speak to promises made when it came about. She does know, however, that the program has strong support in the fishing community. She noted that other fishing co-ops and enterprises have tax obligation loan programs. She cited the Norton Sound Economic Development Corporation, a CDQ [Community Development Quota] organization, has a similar program, except it is not accessible to anyone outside of its region. She wants to provide something similar to that on a statewide level. CO-CHAIRMAN HARRIS wondered whether Representative Hudson can speak to the history of the bill. REPRESENTATIVE HUDSON replied he can't remember, but he's sure the documentation is filed somewhere. According to his recollection, the IRS was moving in on the permits and flooding the market. The state was concerned that would increase the value of a permit for some and decrease the value for others. The program was set up with a sunset provision, similar to a lot of other new programs. He said, If the program is working, and people are being served, and they have the funding, you know, in the program to make the loans, it's a, you know, it's a reasonable thing to at least consider legislatively reimposing it. Number 1950 REPRESENTATIVE DYSON made a motion to move HB 238 out of committee with individual recommendations. There being no objection, it was so ordered. REPRESENTATIVE HUDSON made a motion to rescind his motion in order to take public testimony. There being no objection, it was so ordered. Number 2019 JERRY LIBOFF, testified via teleconference from Dillingham, as a tax preparer and commercial fisherman. He has lived in the area for 35 years. He prepares approximately 300 income taxes for individuals throughout the villages. He has also helped a number of people complete their tax obligation loan. The program has worked wonders for getting people back online and saving their permit for their family and for the community. He noted that everybody he has helped has kept current in repaying the state. He called it a win-win situation all the way around in that the permits have remained in the hands of Alaskans and that the program doesn't really cost the state any money. He complimented the committee members for moving the bill forward. Number 2093 TERRY HOEFFERLE, Representative, Bristol Bay Native Association, testified via teleconference from Dillingham. He expressed his appreciation for the consideration given to the bill. It will continue to do wonders, he said, in trying to help keep limited entry fishing permits in Bristol Bay and other fishing communities around the state. CO-CHAIRMAN HARRIS closed the meeting to public testimony after inquiring whether or not anybody else from Dillingham or Bethel would like to testify. Number 2179 REPRESENTATIVE DYSON made a motion to move HB 238 out of committee with individual recommendations and attached zero fiscal note. There being no objection, HB 238 so moved from the House Special Committee on Fisheries.