CS FOR SENATE BILL NO. 25(HES) "An Act relating to the teachers' housing loan program in the Alaska Housing Finance Corporation; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken informed he has prepared a committee substitute for consideration. SHEILA PETERSON, Staff to Co-Chair Wilken, asserted this legislation "is about recruiting and retaining the best teachers possible for our students." She read the sponsor statement into the record as follows. Senate Bill 25 establishes a housing loan program within the Alaska Housing Finance Corporation (AHFC) for teachers, counselors, and administrators who are required to be certified. The new teacher-housing loan offered through AHFC permits a qualified applicant to purchase an owner-occupied home without paying a conventional down payment. This legislation will provide Alaska school districts with a tool to help to attract and keep qualified public school teachers. The recruitment and retention of a qualified workforce is paramount to the operation of a successful K-12 educational program. Unfortunately many school districts are experiencing a shortage of experienced, talented teachers and spend thousands of dollars to recruit the necessary educators. The proposed new housing loan program provides an incentive for trained teachers, counselors, and administrators to enter into the profession and settle down in local communities. Senate Bill 25 addresses one of the concerns highlighted in the October 2001 "Committee Report on the Statewide Teacher Shortage" by the House Special Committee on Education. As indicated in this report, the high cost of purchasing a home, or, in some areas of the state, the lack of available teacher housing is a frequent reason for teachers to leave the profession. Senate Bill 25 recognizes this concern and helps facilitate educators to obtain the necessary financing to purchase a home by eliminating the requirement of a down payment. Senate Bill 25 makes a small, but positive step, towards ensuring that Alaska school districts have the best, stable workforce possible. Senator Taylor moved to adopt CS SB 25, 23-LS0080\Q, Cook, 3/3/03, as a working draft. Co-Chair Wilken detailed the changes proposed in the committee substitute resulting from discussions of the Senate Health Education and Social Services Committee on this legislation. He stated the committee substitute allows teachers, counselors and administrators to participate in the program only once. He also noted the committee substitute provides that this legislation must be reauthorized in five years to allow review of the program. AT EASE 9:10 AM / 9:11 AM Co-Chair Wilken overviewed the information contained in the bill packet, including a report by the AHFC on the shortage of teacher housing, and statements in support of this legislation. [Copies on file] He gave examples of efforts of other states to attract and retain teachers. He noted that not only is the "pool" of qualified teachers smaller, competition from other states for these teachers is increasing. Senator Bunde commented that signing bonuses have been unsuccessful at retaining qualified teachers. He explained that once the required term of employment has been served as a condition of receiving the bonus, teachers seek employment in another school district to secure yet another signing bonus. He asked how the program would ensure that teachers stay in the residences that these loans were used to purchase. Co-Chair Wilken understood that once the mortgage is in place it would be difficult to track whether the teacher maintains residency or relocates and collects rental income on the property. DAN FAUSKE, Chief Operating Officer/Executive Director, AHFC, deferred to Mr. Kapansky. PAUL KAPANSKY, Mortgage Operations Director, AHFC, testified via teleconference from an off net location in Anchorage, that once a mortgage is issued the AHFC does not track the occupancy of the residence. He stated that the concern of the Corporation is that the loan payments are made. Senator Bunde voiced concerns that a teacher could secure the financing, move from the community and become a landlord utilizing the benefit of the subsidized loan. Mr. Kapansky clarified that this is technically not a subsidized loan but rather allows qualified borrowers to secure a housing loan with no down payment. However he agreed that such a situation could occur. Senator Bunde asked why other financial institutions require a down payment on the purchase of housing. Mr. Kapansky replied that some loan programs exist that provide 100 percent financing, but that state statute currently requires AHFC to obtain at least five-percent down payment. He informed that risk of default decreases in instances where borrowers have a vested interest in the property. Senator Bunde opined that because no down payment is required, this program would be a subsidy. He explained this is due to the increased potential that AHFC could sustain a loss. Mr. Kapansky responded that the risk is "covered to some extent" by mortgage insurance, which reimburses a percentage of the loss in the event a lender forecloses on a property. He explained the borrower is required to pay the premiums on this insurance. Mr. Fauske furthered that any loan of 80 percent or greater loan- to-value ratio requires mortgage insurance coverage. He noted that once the 80 percent loan-to-value ratio is reached, the borrower's loan payments are reduced because premiums are no longer collected. Senator Olson asserted that rural residents do not view housing as investments in the same manner as many urban residents because of the lack of appreciable interest on rural properties. He informed that teachers moving into villages are often faced with substandard housing. He opined that teachers are not normally businesspeople "looking at something from a for-profit perspective". He added that often teachers who have purchased homes in rural communities have suffered a loss when reselling their property. Senator Taylor referenced language on page 2, line 4 of the committee substitute " A teachers housing loan must be equal to 100 percent of the value of the property for which the loan is made." He asked if loans could be issued only in the amount of 100 percent of the property's market value. Mr. Fauske understood the language to reiterate that no down payment is required. Senator Taylor predicted that if an appraisal determined a property to be of a higher value than the market value, the borrower could only secure a loan for the higher value under this program. He also ascertained the language to prohibit the borrower from making a down payment. He suggested "equity to value" or similar terminology. Mr. Fauske did not interpret the language to prohibit a borrower from making a down payment. Mr. Kapansky explained the advantage of this program to teachers is the exemption from making a down payment and that this program provides no other benefit to borrowers. He explained that the appraisal or the sales price, whichever is lower, determines the loan-to-value. He suggested the language could be clarified and changed from "must" to "may". Amendment #2: This amendment deletes "must" and inserts "may" on page 2 line 4. The amended language reads, "A teachers' housing loan may be equal to 100 percent of the value of the property for which the loan is made." Senator Taylor moved for adoption. Co-Chair Green objected and pointed out this change would imply that the loan could be issued for more than 100 percent of the value of the property. Mr. Fauske assured that this would not be practiced due to the Corporation's underwriting criteria. He informed that borrowers could obtain loans in amounts greater than the value for the purpose of make improvements to the property; however borrowers could not receive cash in excess of the value. Co-Chair Green asked the incentive for a borrower willing to make a down payment. Mr. Fauske stressed that a borrower could make a down payment if they chose under this program. He reiterated that this would lessen the risk of default as well as shorten the term of the loan. He surmised that if a borrower had a down payment, they might choose a different AHFC loan. Co-Chair Green wanted to ensure that this amendment does not provide something that is unintended. Mr. Kapansky recommended alternate language, "may be made up to 100 percent of the value of the property", which is similar to statutes governing other AHFC loans. Senator Taylor offered an amendment to the amendment to delete "be equal to" and insert "be no greater than". The amended language reads, "A teachers' housing may be no greater than 100 percent of the value of the property for which the loan is made. Co-Chair Wilken clarified "value of property" is defined as the sales price or appraisal, whichever is less. Mr. Fauske deemed this language compatible with the Corporation's underwriting criteria. Senator Bunde asked for a comparison of interest rates offered by AHFC to that of other lenders. Mr. Fauske responded that currently, the interest rates for AHFC loans for rural properties are approximately five percent; tax- exempt first-time homebuyers and veterans is 5.38; taxable and taxable first-time homebuyers is 5.5. He commented that the Corporation is "generally competitive" in the lending market for conventional taxable and taxable first-time homebuyers loans. Senator Bunde commented that the proposed AHFC loans for teachers would have no advantage to qualified borrowers making a down payment. Senator Bunde asserted that he supports efforts to provide adequate teacher housing in rural Alaska. There was no objection and the amendment was AMENDED and ADOPTED. Senator Bunde continued speaking to the fiscal aptitudes of teachers. He concluded that this proposal would not provide a significant subsidy, although the ability to obtain a home loan without a down payment would be an advantage not available to the general public. He was assured that this program would not impact AHFC's "bottom line", nor would it reduce the amount of the dividend the Corporation pays to the State general fund. Senator Olson asked about the original teachers' loan program in rural Alaska. Mr. Fauske replied that the original Housing Assistance Loan Fund (HALF) program began in the middle 1980s was intended to provide teacher housing and was expanded to allow participation by all citizens. He told of difficulties and efforts to provide multi- family housing in rural communities. He noted that loan activity for single-family dwellings occurs "in spurts". He reported little activity of teachers purchasing homes in small villages, stating that the teacher participation in the existing program occurs primarily in larger "hub" communities such as Barrow, Bethel, Kotzebue and Nome. He expressed that the Corporation supports additional efforts to provide housing loans for teachers, as it would provide "business" for the Corporation and housing for teachers. Senator Olson asked if the witness could suggest changes to the committee substitute to streamline the process of constructing multi-family housing facilities in villages. Mr. Fauske informed of options under consideration that would be possible if additional federal funding could be secured. He told of the Section 8 voucher certificate program, whereby the federal government subsidizes rental payments to landlords. He described this rental assistance program in which the federal government is no longer constructing large public housing units. He shared that AHFC is participating in this program and told of a test program recently implemented in Barrow to expand the rental market in that community. He qualified that the loan programs could not be utilized in some communities because there is no "inventory" or true real estate market. Amendment #1: This amendment changes the title of the bill to read as follows. "An Act relating to the acquisition of teachers' housing by regional educational attendance areas and to teachers' housing loan programs in the Alaska Housing Finance Corporation; and providing for an effective date." This amendment also inserts a new bill section on page 1 following line 3 to read as follows. Section 1. AS 14.08.101(9) is amended to read: (9) provide housing for rental to teachers, by leasing existing housing from a local agency or individual, [OR] by entering into contractual arrangements with a local agency or individual to lease housing that will be constructed by the local agency or individual for that purpose, or by constructing or otherwise acquiring housing that is owned and managed by the regional educational attendance area for rental to teachers; New Text Underlined [DELETED TEXT BRACKETED] This amendment also inserts a new bill section on page 2, following line 6 to read as follows. Sec. 3. AS 18.56.580(a) is amended to read: (a) In addition to the powers authorized by AS 18.56.400, the corporation shall adopt regulations under AS 18.56.088 allowing the use of money in the housing assistance loan fund to make loans to regional education attendance areas or other borrowers for the purchase or development of teacher housing in small communities. The regulations must implement the requirements of (b) of this section and establish other terms and conditions for teacher housing loans, including those relating to borrower eligibility and the number of loans that may be made to a single borrower. The corporation may require the borrower to pay costs associated with a loan. New Text Underlined [DELETED TEXT BRACKETED] Senator Olson moved for adoption. Co-Chair Wilken objected for an explanation. Senator Olson stated the intent of this amendment is to clarify how this legislation would assist teacher housing in rural Alaska. He recalled other legislation considered during the previous legislation session to enhance the retention of teachers and emphasized the need for adequate housing to retain teachers. He proposed that some Rural Education Attendance Area (REAA) districts could participate in this program and construct rental housing for teachers. Senator Bunde qualified his knowledge of rural Alaska is limited; however, he could not understand the interest to purchase housing in an area where the investment would depreciate. He suggested expanding this provision to apply to urban school districts, although this would be in competition with private industry. Senator Olson clarified that lack of depreciation on property does not occur in the same manner as in urban areas. Senator B. Stevens asked the percentage of teachers in rural Alaska that live in REAA-owned housing units. Senator Olson did not have an exact figure, but noted that because REAAs are not currently permitted to participate in this program, these school districts have been unable to purchase housing. He stated that instead, teachers have limited availability of housing of private rental units. He told of teachers who must board together and one teacher living in a school boiler room rather than the substandard housing otherwise available. Co-Chair Wilken stated that the intent of this program is to create the buy-in of a teacher into the community. He asserted that this amendment does not reflect this intent and instead fosters the buy- in of a governmental entity. Co-Chair Wilken also voiced concerns about repayment of the debt incurred by REAAs for multi-family housing units and asked what revenue stream could support this debt. He listed: grants, federal funds, State funds, and local contributions as possible funding sources. He gave an example of a $500,000 loan to construct a fourplex unit. Senator Olson replied that rental income would be used to pay the mortgage on these loans. He stated that there would always be a need for teacher housing and therefore the units would remain occupied, unless the population of the village significantly reduced. He clarified that multi-family dwellings are not typically built in small villages due to the expense of constructing larger facilities. Rather, he said, most housing units are single family or duplexes. Co-Chair Wilken surmised that rental income would therefore provide the revenue stream for the 15 or 30-year term of the mortgage. He asked the witness if this were viable. Mr. Fauske asserted that normal underwriting criteria would be applied to any loan application and that consideration is given to rental income, grants and other revenues that could be dedicated to repayment of the loan. He furthered that vacancy rates and rental reserves are also considered. Co-Chair Wilken asked if education foundation formula funds would be expected to support this debt. Senator Olson deferred to Mr. Fauske. Mr. Fauske replied that the AHFC would consider all revenue sources when reviewing a loan application. He informed that a revenue source based on an annual appropriation would be of concern because of the uncertainty that it would be available each year. Mr. Fauske also pointed out that in some communities, the school district subsidizes rental payments for teachers. He exampled Kotzebue and described the leases granted for 12 months although the teachers are only present for 9 months a year. In this instance, he said, the school district pays the remaining three months of rent. He stated this would be a concern in determining the ability of the REAA to meet the loan obligation. Senator Bunde announced that unless such a housing facility is part of the school itself, he would not support the use of foundation formula funds to pay a mortgage for teacher housing. Senator Bunde declared that facilities would always experience some vacancy. He voiced concern that unorganized communities without taxing authority would not have an ability to generate funds to offset the absence of sufficient rental income. He suggested this provision should only apply to organized areas. Senator Olson agreed that complications and potential ramifications could be discussed, but he emphasized, "We all agree that teachers certainly are necessary" for an education system. He remarked that he offered this amendment as a method to attract teachers to rural Alaska. Co-Chair Wilken requested the sponsor withdraw the amendment and consult with AHFC to determine whether, and how, this loan program could be extended to REAAs while guaranteeing that no foundation formula funding would be used in the repayment of the debt. SFC 03 # 16, Side B 09:53 AM Co-Chair Wilken continued, declaring "In no way will foundation money be used to support this type of an effort until the local contribution on behalf of these people is put in place." Senator Olson WITHDREW his motion to adopt the amendment without objection. Co-Chair Green spoke to her opposition of the bill. She pointed out that this legislation does not require that an area demonstrate a need for teachers, nor does it require that a borrower under this program continue to teach. She furthered that the provision does not include a first time buyer requirement, an "age factor" or a maximum loan amount. She opined, "If this is good for young teachers coming into a community, it's good for the young people who have graduated from a voc-tech school, nurses or a whole rash of other people." Co-Chair Wilken ordered the bill HELD in Committee. [Note: Remainder of meeting is recorded on SFC-03 #16-II.]