SENATE BILL NO. 248 "An Act relating to the financing authority, payment in lieu of tax agreements, and tax exemption for assets and projects of the Alaska Industrial Development and Export Authority; relating to renaming and contingently repealing the rural development initiative fund within the Department of Community and Economic Development, and establishing the rural development initiative fund within the Alaska Industrial Development and Export Authority; and providing for an effective date." KEITH LAUFER, Financial and Legal Affairs Manager, Alaska Industrial Development and Export Authority (AIDEA), Department of Community and Economic Development referred to the sectional analysis of the bill. [Copy on file.] Mr. Laufer stated that the legislation has three elements. The first, he said extends the AIDEA general bonding authority that would otherwise sunset July 1, 2000. The second element of the bill, he explained transfers the Rural Development Initiative Fund Loan program to AIDEA. He relayed that the third element is technical changes to provisions in existing law dealing with tax exemptions and payment in lieu of tax agreements related to AIDEA development finance projects. With regard to the bonding sunset, Mr. Laufer asserted that AIDEA has been subject to these sunsets for many years. He said the current sunset would prevent AIDEA from issuing all bonds other than refunding bonds regardless of size without specific legislative approval. Specifically, he pointed out, the sunset would prevent issuing bonds for less than $10 million for development finance projects. He noted that bonds over $10 million, currently and in the future under this legislation, to require specific legislative approval. Mr. Laufer continued that the sunset would also prevent AIDEA from issuing conduit revenue bonds. He explained that these are the bonds that AIDEA can issue and which do not obligate either AIDEA's credit or the credit of the State Of Alaska but provide qualified projects with low-cost tax- exempt financing. Mr. Laufer stated that the bill would extend the sunset provision to July 2003 and make clear that the conduit revenue bonds are not subject to the sunset. Mr. Laufer then addressed the transfer of the Rural Development Initiative Fund (RDIF). That program, he stated would formally move from the former Department and Community and Regional Affairs to AIDEA. He explained the program makes loans under $200,000 to businesses and communities with populations of less than 5,000. He expressed that AIDEA has long supported this program that also advances AIDEA's mission. He spoke of past actions where the legislature has authorized AIDEA to purchase these loans and directed the proceeds from the loans to re- capitalize the initiative fund. He stated that the relocation of this program would allow it to become self- sustaining without the need for periodic legislative appropriations. He noted that AIDEA would continue to work with the Department of Community and Economic Development to administer the program. Mr. Laufer stated that this bill anticipates that a separate appropriation will also pass that would allow AIDEA to purchase the existing RDIF loan portfolio and the other assets in the fund. Mr. Laufer continued that the bill makes technical amendments to the tax exemption provisions related to AIDEA-owned projects. Under existing law, he explained AIDEA's ownership of these projects is tax-exempt and local jurisdictions are permitted to exempt users of AIDEA-owned development projects from property tax or to enter into payment in lieu of tax agreements with those projects. Unfortunately, he shared these statutes are not clear as to the mechanism which are to be used for the tax exemption. He detailed two specific problems the bill address; pilot agreements and clarification to allow municipalities to grant tax exemptions. Co-Chair Torgerson asked about the RDIF. Mr. Laufer described that due to complicated language in the transfer provision of the bill, there could be two funds. However, he assured that once the purchase of the fund's assets is authorized and consummated, the existing program is repealed and is combined into the new program. This language, he pointed out is contained in Section 10 of the bill. Co-Chair Torgerson wanted to know if the language in the transfer is exactly the same as the existing language. Mr. Laufer replied that the new language mirrors the existing language with the exception of technical changes to allow the fund to comply with AIDEA's assets. He assured there are no changes to the program. Senator Phillips asked who asked for this legislation and why. He commented that his constituency would like to see the state sell AIDEA. Mr. Laufer answered the bill was requested by the governor with the primary intent to extend AIDEA's bonding authority. He added that the RDIF transfer is included to avoid the need for future legislative appropriations to capitalize the fund. Senator Phillips wanted to know who requested the governor sponsor this bill. Mr. Laufer shared that AIDEA and the department had been discussing this matter for "some time." Senator Donley asked the criteria for the RDIF loans. He noted that AIDEA's charter requires it to practice due diligence to get repayment of its loans. He wanted to know if the rural loans were subject to the same requirement and what action AIDEA planned to take if a number of the loans began to default. He voiced his skepticism of many loan programs trying to become independent from state funding and instead become part of the AIDEA program. He stated that by becoming part of AIDEA, the programs are no longer subject to legislative scrutiny but that the funds used for the loans could instead be deposited into the general fund as AIDEA dividends. Mr. Laufer responded that AIDEA has already been purchasing the RDIF loan portfolios and therefore has experience with these loans. He stated that the default rates are not out of line with what is expected in a typical loan portfolio that AIDEA would manage. He stressed that the loans are required to go through a similar process, as would be required in typical AIDEA programs. He detailed these requirements. Senator Donley asked if there was a maximum dollar amount AIDEA could put into the RDIF program. Mr. Laufer answered that there is not a maximum and that approximately $1 million would be a significant amount to make it the fund a truly revolving loan program. He shared that the current problem is that once the department has loaned the money, there is insufficient money returned on an annual basis to fund any new loans. AIDEA would be able to operate the fund as a revolving loan program, he assured. Co-Chair Torgerson asked if AIDEA would oppose a legislative imposed cap of $2 million as the amount that could be given to the RDIF. Mr. Laufer did not think so. Co-Chair Torgerson asked for an explanation of Section 7 asking for authorization to make loans to a political subdivision and if AIDEA is making loans to local governments. Mr. Laufer clarified that is not the case, but that the provision refers to the ability of users of AIDEA-owned projects to enter into payment in lieu of tax agreements to build the subdivisions. He stated that the language is detailed to make sure it is clear that the local subdivisions and the users of the project may enter into the tax agreements. Co-Chair Torgerson noted the bill would not be reported from the Committee at this hearing, saying he wanted to consider setting a maximum amount that AIDEA would be allowed to deposit into the RDIF. Senator Green referred to the language on page 4, line 27 "community with a population of 5,000 or less". She wanted to know how many communities fit this description in the state. Mr. Laufer did not have that information. Co-Chair Torgerson ordered the bill HELD in Committee.