CS FOR SENATE BILL NO. 277(HES) "An Act relating to the Alaska Commission on Postsecondary Education; relating to the Alaska Student Loan Corporation; relating to bonds of the corporation; relating to loan and grant programs of the commission; relating to an exemption from the State Procurement Code regarding certain contracts of the commission or corporation; making conforming changes; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this legislation pertains to the student loan program and is sponsored by the Senate Rules Committee at the request of the Governor. He noted that the legislation "would allow the Alaska Student Loan Corporation to issue bonds and use the proceeds for purposes other than funding student loans and creates a mechanism for the Corporation to return money to the State through the financing of capital projects." He stated that $260 million is anticipated to become available over a three year period beginning in FY 04 as a result of this bond issuance. He noted that a sectional analysis of CS FOR SENATE BILL NO. 277(HES) is included in the Members packets. SFC 04 # 12, Side A 10:44 AM DIANE BARRANS, Executive Director, Postsecondary Education Commission and Executive Officer, Alaska Student Loan Corporation, read her testimony as follows. Co-chair Wilken, Co-chair Green, committee members, my name is Diane Barrans and I am the executive director of the Alaska Commission on Postsecondary Education as well as the executive officer of the Alaska Student loan Corporation. Thank you for hearing the legislation before you today. Appearing with me today are Sheila King, commission and corporation finance officer and by teleconference, Ken Vassar, Wolforth, Vassar, Johnson, and Brecht. Over the past decade I have appeared before you several times seeking your support for agency initiatives. First, the Commission asked to be given the tools and administrative latitude to modify our processes so that we could operate as a self-sustaining enterprise agency of the state. The next step was putting in place a mechanism for the corporation to begin paying to the state some portion of its annual net income, as a return on the state's original investment in the corporation. Most recently, in 2001, our organization requested your approval to redefine its role-becoming Alaska's full service financial aid assistance and postsecondary education planning agency. On each of these occasions, you and your fellow legislators consistently exhibited strong, bipartisan support for the mission of this agency, to promote postsecondary participation and success by Alaskans, and you unanimously passed this series of bills. I am extremely pleased to sit before you today and commend for your approval CSSB 277. The commission and corporation, having successfully implemented the AlaskAdvantage suite of programs and services for Alaskans, now seek your support for the next step of our organizational growth. The objectives of Senate Bill 277 which are five-fold: 1) To broaden the scope of the Corporation's bonding authority to include the ability to bond for the general benefit of the state. To contribute to statewide efforts to use state assets as efficiently as possible, the corporation has developed a plan to return a substantial portion of the capital the state original gave the corporation. The change in corporation statue is requested to insure that, as ASLC has capacity to return contributed capital back to the state, it will have a variety of means to do so and will be able to select the most beneficial way of doing so; 2) To reconstitute the state student grant program to better focus on Alaska's workforce needs and to enhance the Commission's current outreach and early awareness initiatives; our proposal redesigns the grant program to clearly have an Alaska-centered focus. 3) To provide the Commission with greater flexibility in offering loan consolidation options to borrowers. Current statutes limit the way in which the Commission can offer consolidation and certain customers, who have borrowed from both the discontinued loan program and the AlaskAdvantage loans, cannot currently be served through consolidation. 4) At the recommendation of the Department of Law, this bill will clarify the Commission's ability to administratively issue liens in the collection of defaulted education loans and set out the due process for appealing such an action by the Commission; and 5) Lastly, to provide an exemption from the State Procurement Code for certain services related to guaranteeing and disbursing education loans. Under the current business structure for education loans, a lender must be prepared to conduct business with the guarantors and disbursing agents preferred by the schools participating in the loan programs. In the Sectional analysis in your bill packet these changes, as well as several minor or conforming changes are identified. I would be happy to respond to specific questions or provide a walk through of the bill, section by section. Co-Chair Wilken asked Ms. Barrens to review the changes to the bill that were made in the Senate Health, Education, and Social Services (HES) Committee. Ms. Barrans stated that one change, included in Section 5 of the bill, specifies that an aggregate limit be placed on the amount of bonds that the Corporation could issue. Sec. 5. AS 14.4.220 is amended by adding a new subsection to read: (g) The corporation may not issue bonds to finance projects under (a)(3) or this section in an aggregate amount that exceeds $280,000,000. Ms. Barrans stated that the HES Committee determined that while it is anticipated that the program "could return a substantial amount of the contributed capital to the State, that in the future the Student Loan Corporation not be looked to, to bond itself in perpetuity beyond what it could afford to do." Therefore, she continued, this aggregate limit was designated to finance State projects. Ms. Barrans continued that the second change "is relevant to the prioritization for the awarding of State grants" in that the original version of the bill allowed individuals "enrolled in programs of study leading to employment" in specific workforce shortage areas. She shared that the Senate HES Committee determined that these specification "were too narrow and did not provide for the advent of emerging workforce needs," and therefore, she noted, that language was eliminated. Co-Chair Wilken pointed out that an additional change is located in Section 23, subsection (2) on page 11, line 24, in which "ten percent" was changed to 15 percent as follows. (2) "severe shortage" means a current or recurring job vacancy rate of 15 percent of greater, as determined by the Department of Labor and Workforce Development or by another workforce data source determined reliable by the commission. Ms. Barrans affirmed. She noted that this change is the result of the aforementioned broadening of the workforce area shortage needs. Senator Hoffman asked why the bill's language limits the amount of bonds that could be available to finance projects to $280 million as opposed to Ms. Barrens' testimony specifying that $260 million would be available for this purpose over a three-year period. Ms. Barrans responded that the bill's language would deliberately establish the amount at $280 million in order to allow the associated costs of bond issuance to be paid for from the bond proceeds. Furthermore, she noted that it would be beneficial to be able to finance the minimal reserve fund from the bond proceeds rather than requiring the Corporation to utilize other resources to fund either the cost of issuance or the reserve fund. Senator Hoffman surmised therefore that the bond issuance expense and the reserve fund expenses would amount to approximately $20 million. Ms. Barrans concurred. She shared that it is typical for a Bond Reserve Fund to be approximately ten percent and the cost of issuance to be approximately two percent of the bond amount. Senator Bunde asked that further information be provided in regards to the grant program, specifically the definition of financial need. He additionally asked whether a student could be eligible for both a grant and a student loan. Ms. Barrans responded that the Commission would like to work with "financial aid officers at Alaskan institutions to develop a formula that would best serve this constituency." Typically, she noted, the Commission "would rely on a needs analysis that is based on a federal free form for student financial aid, which is a standard calculation for financial need." However she noted that, "one point of discussion…is whether we should use…a standard cost of education in order to level the playing field " in a situation where a student might elect to attend a more expensive institution as opposed to a less expensive institution. She voiced the understanding that, in order to efficiently utilize grant funds, "the standard cost of education would be considered in that mix." Senator Bunde understood that the grants would be limited to students who chose to attend college in the State. Ms. Barrans replied that this is true, however, she noted that while the standard cost of education to attend the University of Alaska might range between $8,000 and $12,000, the cost of attending another institution such as Sheldon Jackson College or Alaska Pacific University "might be considerably higher." She noted that students could be recipients of both the grant and loan program. Senator Bunde opined that a student might require both funding sources. Ms. Barrans agreed. Senator Olson stated whether some schools might not qualify for some of the eligibility and priority specifications that are identified in Section 23 of the bill beginning on page ten and continuing through page eleven; specifically in subsection (2) (A) that reads as follows. (2) enrolled or about to be enrolled (A) at an institution approved to participate in federal financial aid programs under 20 U.S.C. 1070 - 1099c-2, as amended, located in this state; and Ms. Barrans responded yes, "some very small vocational schools" in the State "are not regionally or nationally accredited." Senator Olson asked whether the Kotzebue Technical Center in Kotzebue or the Ilisagvik College in Barrow are accredited and therefore would qualify for the grant money. Ms. Barrans responded that the Ilisagvik College and the Alaska Vocational Technical Center in Kotzebue are accredited; however, she was unsure of the status of the Kotzebue Technical Center and would supply that information to him. Co-Chair Wilken asked for confirmation that the money that would be available from the sale of bonds would be separate from the Corporation's dividend program that has been contributing funds to the State's general funds for the past four years. Ms. Barrans affirmed that, "it is a separate initiative." Co-Chair Wilken concluded, therefore, that the State would continue to receive "the dividend in addition to the payback." He voiced the understanding that proceeds from the bond dividend must be used for capital projects. Ms. Barrans clarified that the Internal Revenue Service specifies that the proceeds from tax-exempt bonds are federally limited to specific types of projects and that typically a capital project would qualify. She noted that "principle payments on outstanding debt service" is also an approved use of the funds. Co-Chair Wilken noted that the Corporation has provided additional information, titled "Alaska Student Loan Corporation Return of Contributed Assets to State" [copy on file], that could supply Committee members with further information. Senator Bunde asked the current status of the Commission's student loan default rate as compared to the rate a decade earlier. Ms. Barrans responded that the most recent year's default rate is approximately four percent and is approximately 13 percent lower that the default rate of ten years prior. Co-Chair Wilken shared that when he had served on the Commission in the late 1990's, it was determined that the State could garnish an individual's permanent fund dividend (PFD) check when their loan was outstanding. He asked how much the Commission garnishes in this manner each year. Ms. Barrans responded that approximately $6.8 million was recently collected in this manner. Co-Chair Wilken recalled that during the first two years that the garnishing of one's PFD was allowed, the State collected $13 million and $12 million, respectively. Ms. Barrans agreed that being able to garnish PFD's is "an effective tool." Co-Chair Wilken noted that the State's Student Loan Corporation is fairly unique in the nation. Ms. Barrans agreed that while there are similar programs operating in the country, the Corporation's programs and services are unique. Senator Hoffman informed the Committee that he would be developing an amendment to this legislation that would allocate ten percent of the funds to support maintenance needs of the University of Alaska, another ten percent to support major maintenance of schools, and the remaining 80 percent would be retained by the State. Co-Chair Wilken noted therefore, that the bill would be held pending drafting of the amendment. Senator Olson voiced concern regarding the fact that the intent of this legislation is to fund State capital projects now, via the student loan program's issuance of bonds that "might encumber future generations of students." He questioned whether trying to solve a problem by using these bonds is the best option, and therefore, he asked whether "there are other loan type corporations that are also contributing to the State's general fund." Co-Chair Green opined that each of the programs that have been funded with State general fund dollars "have the obligation, when they can, to pay a dividend." Therefore, she stated that she recognizes this proposal "to be a dividend back to the State." Senator Olson responded that the Corporation is already paying a dividend. Continuing, he restated that his concern is that it would "encumber future generations." The bill was HELD in Committee.