SB 204-LOANS TO COMMUNITY QUOTA ENTITIES/PERMITS  3:43:12 PM CHAIR OLSON announced the consideration of SB 204, which relates to loans to community quota entities (CQE). 3:43:25 PM DAVID SCOTT, Staff, Senator Donald Olson, Alaska State Legislature and Aide, CRA Committee, said that SB 204 modifies the Community Quota Entity (CQE) program by establishing an independent revolving loan fund modeled within the existing Alaska Commercial Fishing Revolving Loan Fund. It provides better terms for the CQEs to purchase independent fishing quotas (IFQ). He provided the following sectional analysis: Section 1 amends AS 16.10.320(a) to conform to other changes in the bill, specifically Section 3. Section 2 provides that principal and interest payments or any money chargeable to principal or interest that is collected through liquidation by foreclosure would go back into the revolving loan fund created in the bill. Section 3 adds a new subsection (l) to AS 16.10.320. It establishes that CQEs may use the loan terms spelled out in the bill to purchase 50,000 pounds of quota share. The loan may not exceed 95 percent of the appraised value of the collateral and the maximum term is 25 years, except for extensions under AS 16.10.310(a)(1)(E). The loan may not exceed $1 million and interest payments may be deferred for up to 10 years. Section 4 amends the Commercial Fishing Revolving Loan Fund statute, AS 16.10.340, to include the CQE revolving loan fund. Section 5 is a conforming language change. Section 6 adds a new section to AS 16.10 that creates the revolving loan fund. Section 7 amends AS 16.10.350(a) to state that the commissioner of commerce will be the administrator of the fund. Section 8 is the effective date, which is July 1, 2012. 3:46:54 PM SENATOR ELLIS joined the committee. CHAIR OLSON asked if the commissioner of commerce had the authority to oversee this type of loan. MR. SCOTT responded that the commissioner of commerce already oversees the Commercial Fishing Revolving Loan Fund. CHAIR OLSON asked how CQEs are related to IFQs. MR. SCOTT said CQE stands for community quota entity and IFQ stands for individual fishing quota. The North Pacific Fisheries Management Council qualified 42 Gulf of Alaska communities to form nonprofit CQE organizations in order to purchase 50,000 pounds of IFQ shares. He deferred further explanation to Mr. Fields. CHAIR OLSON asked if a CQE could exist without IFQs. MR. SCOTT responded that there would be no point in forming a CQE if the organization didn't move forward to buy quota shares. 3:49:38 PM DUNCAN FIELDS, Fisheries Consultant, stated that he was speaking on behalf of the rural communities for which he works, particularly Old Harbor and Ouzinkie on Kodiak Island and the Gulf of Alaska Coastal Community Coalition, which represents the 42 communities that have qualified as Community Quota Entity (CQE) communities. He was not representing the views of the North Pacific Fisheries Management Council (NPFMC), although he was a member. He noted that the NPFMC had recognized three more communities as CQE qualified so there would be 45 CQE communities once the federal regulations were finalized. MR. FIELDS said SB 204 is a loan bill to create economic opportunities and jobs in rural CQE communities. About 15 years ago, the NPFMC realized that fishing permits and IFQs were leaving rural communities and fishing opportunities were lost when these were sold. When community leaders looked at how to reverse that downward spiral, they struck on the concept of a community quota entity. Unlike the Bering Sea Community Development Quota (CDQ) program, these entities would purchase the quota in the marketplace. The community would hold the quota in trust and lease it to individuals in the community. The North Pacific Fisheries Management Council developed this construct and imposed limitations as to the type of quota that could be purchased, the amount of quota that could be purchased, the way the quota could be fished. In 2004, the NPFMC authorized forty-two Gulf Coast communities to purchase halibut and sablefish IFQ shares. Only two communities have bought quota, primarily because they lacked access to capital. The state initially qualified the CQEs for the Commercial Fisheries Revolving Loan Fund, but the terms of the loan, particularly the 20 percent down payment, were a barrier. Representative Austerman suggested modifications and introduced HB 141, the companion bill to SB 204. 3:55:58 PM MR. FIELDS explained that SB 204 establishes a separate loan fund for CQE communities. The down payment is 5 percent as opposed to the previous 20 percent. The loan term is extended from 20 years to 25 years and interest payments may be suspended [for up to 10 years]. The bill also provides that the communities would pay interest at rates similar to those in the revolving loan fund. He opined that this would provide some communities an opportunity to access IFQs that they couldn't otherwise access. As communities have success, other communities will likely follow and access these loan funds. The $45 million fiscal note would provide a maximum of $1 million to each of the approximately 45 qualified communities. 3:57:50 PM CHAIR OLSON commented on the number of limited entry fishing permits that are held by non-residents, and asked why anyone would be interested in selling such a valuable asset to a CQE. MR. FIELDS differentiated the halibut and sablefish IFQs from the State of Alaska limited entry permits. The halibut and sablefish IFQs are more fluid in terms of market exchange than limited entry permits. The people who sell the IFQs tend to make different economic decisions than folks that are selling a limited entry permit. A limited entry permit gives an individual a right to participate in the fishery, whereas an IFQ gives an amount of product, pounds of fish. Sometimes people will sell a portion of their IFQs to expand their business and others will sell all their IFQs because they're getting out of the fishery. He said that one reason for forming the community quota entities was to address the problem of limited entry permits leaving rural communities. Should there be a mechanism for rural communities to hold limited entry permits, he opined that the CQE would be the ideal entity to facilitate that mechanism. He relayed that these CQEs have also received two other types of fishery access opportunities from the National Marine Fisheries Service through the NPFMC. One is halibut charter permits. The 21 CQE communities in Southeast Alaska have each received up to five halibut charter permits. The community can lease those permits to an individual who must either start or end the fishing trip in the community. Gulf of Alaska CQE communities have seven permits. Gulf of Alaska communities have a third fisheries access opportunity called a groundfish limited license permit (LLP). These are essentially federal limited entry permits for use by the CQE in that community. CHAIR OLSON asked how it happened that two CQE communities were financially successful. MR. FIELDS said they were both unique circumstances. The community of Ouzinkie was able to access IFQs through the fortuitous sale of trees that were donated by the local Native corporation. Old Harbor accessed quota share primarily through a five-year loan. He said that CQE needed to locate another funding source within 18 months or sell its IFQ shares. 4:03:09 PM CHAIR OLSON asked if there were loan default plans. MR. FIELDS cautioned that he was not a banking expert, but his understanding was that the payments would be made annually and the loans would be secured by the halibut quota. In the event of a default, the community would sell the IFQ shares and the proceeds would go to the State of Alaska. CHAIR OLSON asked what the interest rate would be. MR. FIELDS said the interest would be prime rate plus two percentage points, but not more than 10.5 percent. CHAIR OLSON asked what other lending institutions thought of this program. MR. FIELDS said the banks they work with recognize that loans of this type would not be allowed in their portfolios; in this role the state can promote rural economic development. Some bankers have suggested that if this program is successful, it may help individuals build their personal portfolios and increase the likelihood of qualifying for personal loans. CHAIR OLSON asked if more IFQs might be available in the future. MR. FIELDS responded that there was a national effort to move the federal fisheries towards rationalized fisheries or an individual transferable quota (ITQ) program. He offered his belief that in the near future all the federal fisheries in Alaska would be encompassed by either ITQ or IFQ programs. 4:07:33 PM CHAIR OLSON asked how many of the 42 IQE communities depended on subsistence fishing to feed their families. MR. FIELDS answered that a number of the smaller Gulf Coast communities rely on subsistence for a substantial amount of their diet. The same applies for Kodiak Island and he suspected it was true for the Chignik area as well. Dependence on subsistence is probably less in the larger communities, but it's still a component of their diet. CHAIR OLSON asked how commercial fishing entities view subsistence users. MR. FIELDS said there seems to be general cooperation between the local residents who are fishing CQE halibut and those who are subsistence users. He opined that sport charter operators and non-resident fishermen would be more likely to compete with subsistence users. CHAIR OLSON asked Ms. Ayers to comment. 4:10:38 PM WANETTA AYERS, Director, Division of Economic Development, Department of Commerce, Community and Economic Development (DCCED), said that DCCED followed HB 141 last session and provided a fiscal note on SB 204 regarding operating costs. The division would be able to manage this loan fund if it were to be implemented; it appears to be very similar to the current Fisheries Enhancement Revolving Loan Fund. She agreed with Mr. Field's answer regarding loan payments and defaults. CHAIR OLSON asked if selling the quota generally covers any delinquency and default. MS. AYERS answered yes; quota is considered very good collateral and DCCED has liquidated it in the past when necessary. CHAIR OLSON said he asked because it appeared that the number and size of halibut was on a downward trend. MS. AYERS said that DCCED would take all regulatory, management, and market factors into consideration when making a loan. CHAIR OLSON asked if the administration was in favor of SB 204. MS. AYERS answered that the administration does not have specific position on the bill, but DCCED was prepared to implement it should it be adopted. 4:14:42 PM MICHAEL O'CONNOR, President, Ouzinkie Native Corporation, said Ouzinkie was a nonprofit corporation that focused on economic development. He relayed that Ouzinkie currently had 8,000 pounds of halibut IFQs and Old Harbor had 16,000 pounds. These were the only CQEs that own and actively fish halibut IFQs. In Ouzinkie, the individual who leased the halibut IFQs received 55 percent of the catch and the CQE nonprofit corporation received 45 percent. This brings substantial money to a small community. Responding to a comment from the Chair, he elaborated on the timber sale that made it possible for the Ouzinkie CQE to buy 8,000 pounds of halibut IFQ shares. He confirmed that conventional lenders are not interested in loaning money for community owned IFQs. 4:20:55 PM CHAIR OLSON asked if it was because of the risk. MR. O'CONNOR answered yes. CHAIR OLSON questioned why the state should undertake that risk. MR. O'CONNOR opined that it wasn't large risk because the market for IFQs was fluid. CHAIR OLSON asked if he agreed that the growing farmed fish market might threaten Alaska wild fish. MR. O'CONNOR answered that he believed that the public perception of farmed fish was turning negative. 4:22:43 PM CHAIR OLSON found no further public testimony and announced he would hold SB 204 in committee.