HB 177-COMMERCIAL FISHING LOANS  10:04:40 AM CHAIR SEATON announced that the first order of business would be HOUSE BILL NO. 177, "An Act relating to interest rates on loans from the commercial fishing revolving loan fund and the community quota entity revolving loan fund; and providing for an effective date." 10:05:57 AM REPRESENTATIVE BRYCE EDGMON, Alaska State Legislature, used a slide presentation to refresh the committee's understanding of the bill, which had been held in committee over the interim. 10:06:44 AM REPRESENTATIVE FEIGE moved to adopt the proposed committee substitute (CS) for HB 177, labeled 28-LS0607\O, Bullard, 3/26/13, as the working draft. Without objection, Version O was before the committee. 10:07:10 AM REPRESENTATIVE EDGMON projected slide 1 and explained that HB 177 restores the ability for the Department of Commerce, Community, and Economic Development (DCCED), Division of Economic Development, to offer incentivizing interest rates for loan programs within the Commercial Fishing Revolving Loan Fund (CFRLF), a measure altered in 2010 with the passage of HB 20. The bill will allow fisherman, working in a volatile industry, the ability to procure loans for the purpose of upgrading vessels and gear to enhance product quality and repower vessels with fuel efficient propulsion and generator class engines. He explained that these types of loans can be difficult to secure and are often denied by commercial lending agencies. The purpose of HB 177 is to provide low-cost loans as encouragement for Alaskan fishermen to improve the efficiency and profitability of their businesses. He emphasized that many of these businesses are small "mom and pop" operations, existing throughout all of Alaska. Access to a state-run loan program providing favorable interest rates and terms is important support for Alaskans whose livelihoods are dependent on a fluctuating fishing industry. He said the bill stipulates that such loans be offered at 2 percent below the prime rate, with a floor of 3 percent. Additionally, a technical fix ensures that income earned on investments of the Community Quota Entity (CQE) Revolving Loan Fund, revolves back into the fund, as opposed to the CFRLF, as a whole. 10:10:09 AM REPRESENTATIVE EDGMON pointed out that the revolving loan program is comprised of six sections, labeled A through F, as detailed on the second slide. He explained that Sections A and B are primarily pertinent to HB 177, addressing the crux of the CFRLF. Aspects of the sections are tailored to specifically assist fishermen starting up in the industry, with limited access to funding sources, as well as to provide support for the established producers who may have other loan options. He stated that Section B allows loans up to $200,000 for entry permits, or a maximum of $100,000 for vessel purchase and gear upgrades including product quality improvement and engine fuel efficiency. An established fisherman whose business has progressed and acquired an appropriate credit history, could be eligible for the Section A options of loans up to $300,000 for entry permits or vessel and gear upgrades specific to product quality improvement and engine fuel efficiency. He briefly noted that the remaining sections address a variety of loans, and underscored that they are not in play with regards to HB 177. The sponsor emphasized the residency requirements indicated on slide 4, paraphrasing the language, which read [original punctuation provided]: Section A Must have been a state resident for a continuous period of two years immediately preceding date of application. Must have possessed a commercial fishing license or permit for the year preceding the loan application and for any two years of the past five years. Also, must have participated in those fisheries during those periods. Must not be past due on any child support obligations. Section B Must have been a state resident for a continuous period of two years immediately preceding date of application. Must be ineligible for financing through a commercial bank or through the Commercial Fishing and Agriculture Bank (CFAB). Must lack employment opportunities other than commercial fishing in area of residence, or must be economically dependent on commercial fishing as a livelihood and as a traditional way of life. Must not be past due on any child support obligations. 10:12:34 AM REPRESENTATIVE EDGMON referred to slide five to compare the current prime interest rates with what would be allowed under HB 177. He explained that the revolving loan program has been in operation since the 1970s and is considered integral to supporting Alaskan fishermen. Characterized as an extremely successfully program, it has also incentivized generational continuance/ownership in the fishing fleet. 10:15:14 AM TIM CLARK, Staff, Representative Bryce Edgmon, Alaska State Legislature, continued with the slide presentation, paraphrasing from slide 6, titled "Technical Fix: The Community Quota Entity Revolving Loan Fund," which read [original punctuation provided]: Section 6 of HB 177 establishes that income earned on investments of the Community Quota Entity Revolving Loan Fund rolls back into the fund - a feature that is absent in current statute. This section also allows monies in the fund to be used for administering the CQE loan program (in the same way that CFRLF earnings are used to pay for its programs' administrative costs). MR. CLARK emphasized that the administrative costs associated with the CFRLF have been, and continue to be, entirely satisfied through the recovery and income activity of this very successful, self-sustaining program. 10:16:45 AM REPRESENTATIVE GATTIS asked where earned income generated by the fund has been deposited, if it is not being returned and incorporated back into the program. REPRESENTATIVE EDGMON responded that, in past years, not only have all administrative costs been covered but the success of the program has allowed contributions of overflow income to be deposited to the state's general fund. He deferred to the department for an update on current practices. REPRESENTATIVE EDGMON pointed out that the department requested introduction of this bill and the legislation is fully supported by the agency. 10:18:26 AM REPRESENTATIVE FEIGE asked if the program is restricted to Alaskans residents. REPRESENTATIVE EDGMON said yes, and he stressed that it carries a two-year residency requirement prior to making application. 10:19:08 AM SENATOR OLSON asked about the fiscal note. MR. CLARK answered that there is a fiscal note, which reflects reduced income to the fund due to the lower interest rates that would go into effect. However, he emphasized, the fund is more than solvent and producing profits since 1985, requiring no state appropriation. 10:20:51 AM REPRESENTATIVE EDGMON offered that it would be important to understand the impact of the bill on commercial lending agencies and whether there is an unfair undermining of the private sector by allowing the state to offer low interest loans. However, as pointed out, commercial agencies are not eager to make high risk loans, which is the nature of the volatile fishing industry. He cited the difficulty of obtaining private sector fishing industry loans in contrast to the productive history of the state-funded program. REPRESENTATIVE FEIGE noted the state loan prerequisite for the applicant to be turned down by a commercial lender. Expressing concern for the process, he said it could be possible for someone to solicit a denial letter from a bank in order to qualify for the state program. He noted his support for the intent of HB 177 and the need to also support the banking industry. He asked about applicants gaming the system and if there needs to be amendments or regulations to ensure the state does not issue loans obtained through devious actions. REPRESENTATIVE EDGMON said that there are no specific examples of anyone entering the state system via underhanded means, and he offered an anecdotal story to typify how fishermen in his district have utilized the program. Further, he said that loans from the fund average $46,000, providing a term savings of $6,000, which may represent a significant make-or-break amount to a small business fisherman. REPRESENTATIVE FEIGE agreed that not all applicants are looking for an easy means to enter the program, and he suggested that the banking industry may bring forward specific testimony to reflect that side of the issue, and validate such concerns. 10:27:18 AM CHAIR SEATON said DCCED would explain how the specifics of the application process are handled and noted that a number of young fishermen, without a loan history or sufficient assets to satisfy commercial lenders, are particularly served by the state loan program. REPRESENTATIVE EDGMON added that any business activity in Alaska has a higher cost than in the contiguous United States, and he underscored the need for the state to offer incentives to small business owners. REPRESENTATIVE GATTIS offered her personal experience with a similar state program, the Agricultural Revolving Loan Fund (ARLF) and said it can be difficult to qualify. She testified that small businesses, including fisherman and farmers, typically have difficulty obtaining commercial loans. 10:31:32 AM JOSEPH JACOBSON, Director, Division of Economic Development, Department of Commerce, Community, and Economic Development, said Alaska's global quality improvement marketing effort has required fisherman to upgrade equipment and practices to keep pace. Maximizing product value is essential, he underscored. He then addressed Representative Feige's concern for a turndown statement and said that private sector lending institutions are contacted to verify the validity of a CFRLF applicant's claim of loan denial. 10:34:32 AM JIM ANDERSEN, Lending/Collection Manager, Financing Section, Division of Economic Development, DCCED, assured the committee that due diligence is given to every applicant that presents a turndown letter; legitimacy is verified and loan denials are substantiated. In follow-up, he indicated that the verification process is required by statute, included in department regulation, and followed as standard policy. 10:36:25 AM REPRESENTATIVE KREISS-TOMKINS asked how frequently fraud is attempted among applicants and whether it is a common practice to solicit denial letters from banks in order to qualify for a state-funded loan. MR. ANDERSEN responded that lenders have reportedly been solicited for denial letters. He pointed out, however, that if the applicant meets the commercial terms, the private institution has the first opportunity to provide the loan. 10:37:57 AM REPRESENTATIVE JOHNSON opined that the CFRLF is treated differently than the CQE, and he asked for an explanation, specifically that there is no floor for the community quota fund but there is for the revolving loans. MR. ANDERSEN explained that the CQE fund is subject to the same statutes as govern the CFRLF and does have the same structural parameters: a ceiling no higher than 10.5 percent and a floor which is currently prime interest rate plus 1 percent and cost of funds. REPRESENTATIVE JOHNSON noted that the cost of funds to the state seems to disappear in HB 177. MR. ANDERSEN responded that the cost of funds aspect is handled differently between the CFRLF and the CQE. An alternate loan structure is in place in the CFRLF to allow for the incentive program. For further clarification, he explained how two years ago, changes to the program removed the 3 percent floor requirement [HB 20, 26th Alaska State Legislature], replacing it with cost of funds language, and HB 177 reinstates the 3 percent floor. CHAIR SEATON recalled that 3 percent was determined as the base requirement to cover the department's administrative costs. 10:41:44 AM REPRESENTATIVE JOHNSON asked for assurance that HB 177 will not jeopardize the funds future through lack of appropriate cost recovery. He reminded members that solvency came up in previous bill versions and cautioned that it is an important point. CHAIR SEATON indicated that the requirement to recoup the prime lending rate plus two percent, with a floor of three percent, provides the appropriate safe guard for the program. REPRESENTATIVE JOHNSON asked what has changed in the program that compels the department to request this bill be brought for consideration. MR. JACOBSON answered that the bill provides additional incentives. MR. ANDERSEN added that the bill reinstalls the interest rate structure responsible for the historic monetary success and solvency of the program while restoring the incentive aspects as well. 10:50:32 AM REPRESENTATIVE FEIGE expressed concern that the principle of the fund be maintained and grown, and he stated support for the legislation, noting that the default rate is minimal and administrative costs appear to be in line for continued success. 10:52:45 AM REPRESENTATIVE JOHNSON stated support for the repowering of the program and said he had no questions regarding the financial quality of the fund. He noted the importance for state loan programs to be considered equally and said the solvency of one entity should not jeopardize another. Some programs may represent a means for communities to recoup waning economies, and caution should be taken regarding the possibility for regional disparities, he finished. 10:55:17 AM CHAIR SEATON said that the quota program refers to the federal quotas on halibut and black cod, versus the state fishing vessel permits for individual purchase. These are two separate issues, and he acknowledged the distinction for the committee. MR. JACOBSON interjected that HB 177 requires accrued interest be returned to the fund, thus strengthening the program; functionally there is no change from a borrowers standpoint. To a follow-up question, he said that gains remain in the fund. 10:57:40 AM REPRESENTATIVE GATTIS requested a graph be generated to illustrate fund activity over the last ten years and a similar one projecting expected outcomes with and without the proposed change. MR. ANDERSEN said there is no concern for loss of revenue or fund solvency, rather the bill is intended to reinstall the program incentives that were altered two years ago. REPRESENTATIVE GATTIS maintained her interest in a visual illustration of the fund. 10:59:32 AM REPRESENTATIVE OLSON requested that a representative from CFAB be available at a subsequent meeting. CHAIR SEATON closed public testimony and announced HB 177 held over.