CS FOR HOUSE BILL NO. 304(FIN) am "An Act relating to the commercial fishing loan program; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. REPRESENTATIVE JOHN COGHILL, the bill's sponsor, stated this bill would revise the Commercial Fishing Revolving Loan Fund (CFRLF) program administered by the Division of Investments in the Department of Commerce, Community and Economic Development. His "philosophical" belief that government should not compete with private enterprise has influenced his actions in the Legislature and thus, prompted his interest in the CFRLF program. 9:55:03 AM Representative Coghill shared that he began his "journey of understanding" the Division's loan-lending activity with the commercial fishing industry, as allowed by Alaska Statute (AS) 16.10.300-370 enacted in 1972, several years ago. Overtime, he became convinced the program was beneficial; particularly as some of the State's commercial fishing permits are designed in a manner which has served to reduce the entities lending on permits to only the Commercial Fishing and Agricultural Bank (CFAB) and the CFRLF program. Thus, "it is probably not wise to take it off the books". Representative Coghill specified that his goal was to make the CFRLF program "the lender of last resort as much as possible so that those who are fishing in the fishing fleet who are servicing their loan through commercial lenders don't have to compete with people who are getting probably a much better deal from the State". To that point, this legislation "would tighten up some of the provisions" and would codify law so that, in order to qualify for the program, a person must have first attempted "to apply for a loan with another federally chartered institution or CFAB". He reiterated that the Division and CFAB are "the only two" entities providing loans for fishing permits in the State. Provisions pertaining to other loan programs, such as the Community Quota Shares program, are also addressed in the bill. 9:57:08 AM Representative Coghill informed the Committee that commercial fishermen also utilize CFRLF to refinance their commercial bank loans. The Sponsor Statement addressed this and other proposed provisions as follows. HB 304 reduces the amount of loans for refinancing a debt to $200,000 per person, down from $300,000. It increases the loan limit for past due federal tax obligations from $30,000 to $35,000. And it limits all loans, including purchase of entry permits and gear, vessel purchases, repair of existing vessels, and federal tax debt for one person to $400,000. That limit now totals $930,000. The bill reduces security of a loan from 90% to 80% of the appraised value of the collateral. HB 304 changes the interest rate to prime rate plus two percentage points and keeps the cap at 10 1/2%. Representative Coghill pointed out that this legislation would also repeal a State Statute, which required the Division "to set aside ten percent of the funds" to support loans of less than $35,000. This directive was deemed unnecessary; this has not been an issue since the Division has sufficient cash available. Representative Coghill specified one of the major components of the bill as the lowering of "the aggregate loan" limit a commercial fisherman could obtain for their boat, license, and equipment from $930,000 to $400,000. The exception to that provision would be the Community Quota Shares program, which is a community loan issue. 9:58:41 AM Representative Coghill pointed out that another key component of the bill would establish the interest rate at prime plus two percent with a limit of 10.5 percent. The 10.5 percent is a "compromised" rate, resulting from a "reasonable attempt to tighten up the Division of Investments". He worked with the Division as well as former State Senator Alan Austerman, whose current capacity is Fisheries Policy Advisor, Office of the Governor. Greg Winegar, Director of the Division of Investments, has agreed to the changes proposed in the bill. Representative Coghill informed the Committee that, even though he had preferred establishing a limit other than the proposed 10.5 percent, he was "content" to see how it would function. Representative Coghill characterized the legislation as "a work in progress". This was the fifth year he had addressed the issue. It was "a reasonable effort" and would benefit those fishermen who must compete "in the same waters for the same fish and have to go to a variety of different banks". The CFRLF would continue to provide "flexibilities that are still very generous" even with the 10.5 percent limit. 10:00:39 AM Co-Chair Green asked for further information about the $930,000 limit. Representative Coghill identified $930,000 as being the current aggregate limit. Co-Chair Green surmised that, rather than being specifically identified in the bill, $930,000 was the sum of a variety of different things. Representative Coghill affirmed. Senator Dyson understood that the provision that required a fisherman applying for a CFRLF loan to have participated in a commercial fishery had been omitted from the bill. The language deleted is depicted in Section 1(a)(1)(D)(i), page 3 lines 5 through 10. Representative Coghill pointed out that language in Section 1(a)(1)(A) on page 1 lines 7 through 13 specifies to whom a loan could be made. Among the requirements is that the loan recipient must hold a commercial fishing license and be a resident of the State. 10:02:29 AM Senator Dyson ascertained therefore that Section 1(a)(1)(D)(i) was eliminated because it was redundant language. Senator Bunde concurred. Co-Chair Green affirmed that the language had simply been moved to a different location in the bill. 10:02:50 AM Representative Coghill stated that other qualifiers and disqualifiers are included in Section 1(a)(1)(B) on page 2 lines 2 through 29. GREG WINEGAR, Director, Division of Investments, Department of Commerce, Community and Economic Development communicated the bill would revise the qualifiers for tax obligation loans, which are a type of loan offered to commercial fishermen by CFRLF. The bill would retain the lack of training or economic dependence on fishing for livelihood qualifiers. In addition, the bill would limit federal tax obligation loans to people meeting Section 1(a)(1)(B) eligibility specifications rather than allowing people meeting either Section (a)(1)(A) or (B) criteria to qualify. Section 1(a)(1)(B) qualifiers would include people who did not qualify for loans elsewhere; those who were economically dependent on fishing; and those residing in rural areas of the State. 10:04:41 AM Senator Dyson asked for further information about federal tax obligation loans. He understood that a qualifying fisherman could his utilize such a loan to pay off their federal taxes. Mr. Winegar affirmed. This program was created several years ago when there was "an awful lot of non-compliance problems, mainly out in rural Alaska". The program has not been utilized much in recent years. Only three such loans have been provided in the last four years. The State worked with the federal Internal Revenue Service (IRS) to develop a program through which people could become compliant without losing their limited entry permits through IRS seizures action. 10:05:48 AM Senator Dyson ascertained that the term "compliant" meant they were paying their tax in a timely manner. Mr. Winegar replied "yes". 10:06:01 AM Senator Olson asked the number of individuals who would be affected by the proposed changes. 10:06:11 AM Mr. Winegar stated that, as specified in the May 1, 2006 Department of Commerce, Community and Economic Development fiscal note #3, the bill might lower the number of loans by two per year. Currently, only one borrower exceeds the proposed $400,000 loan limit. That borrower would be grandfathered into the $930,000 aggregate limit. Senator Olson shared the concern that out-of-state people were acquiring limited entry fishing permits. They are attractive as the price being offered for fish is making the permits "fairly valuable". Noting that the bill would require borrowers to reside in the State for two years, he asked how residency status would be verified. Mr. Winegar expressed that the two-year residency requirement is carefully evaluated. Such things as an applicant's tax return filing, the location of their car registration, where their bank account is located or whether they had received a Permanent Fund Dividend are analyzed. Representative Coghill remarked that, while he had "pressured" the Division of Investments "to not hang onto these licenses", the "direction" sent by the Legislature was that limited entry permits should be kept in the State. His position is that the Division has held onto permits "a little longer" than they should have. No further testifiers or Committee concerns were presented. 10:08:05 AM Co-Chair Wilken moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. There being no objection, CS HB 304(FIN)am was REPORTED from Committee with previous zero fiscal note #3 dated May 1, 2006 from the Department of Commerce, Community and Economic Development. 10:08:54 AM