HOUSE BILL NO. 172 "An Act relating to an investment in the education loan fund; relating to authority for the commissioner of revenue to enter into a bond purchase agreement and letter of credit with the Alaska Student Loan Corporation; and providing for an effective date." 4:36:36 PM DIANE BARRANS, EXECUTIVE DIRECTOR, POSTSECONDARY EDUCATION COMMISSION, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT, explained that the legislation allows the Alaska Student Loan Corporation (ASLC) to partner with the Department of Revenue to provide interim financing for the purpose of originating student loans. As a result of the continuing disruption of the capital markets, ASLC has been unable to issue student loan backed bonds to finance new student loans. Internal liquidity was used to finance $95 million in new originated loans for 2008 - 2009, but these funds will be exhausted by the 2009-2010 loan year. House Bill 172 allows the commissioner of the Department of Revenue to invest directly in student loans with an investment cap of $100 million. The ASLC would have to repay the obligation in no more than five years. Ms. Barrans said that this legislation would also authorize the commissioner to provide a liquidity facility or letter of credit. Under current market conditions, the cost to acquire a letter of credit or liquidity facility in order to issue variable rate bonds is so high that ASLC would be unable to make student loans available on an economic basis under existing statute. The liquidity facility or letter of credit would act as a standby bond purchase agreement that would allow ASLC to issue bonds that would be attractive to investors. 4:40:42 PM Ms. Barrans noted that the department has suspended applications for the 2009-2010 academic year. The suspension will continue until the loan financing situation is resolved. JERRY BURNETT, DEPUTY COMMISSIONER, DIVISION OF TREASURY, DEPARTMENT OF REVENUE, explained that the Alaska Student Loan Corporation had come to the department over a year ago for assistance in securing funding and liquidity for the loan program. Mr. Burnett furthered that discussions ensued with the Office of Management and Budget and all options were carefully considered. A direct appropriation from the General Fund, specifically the GeFONSI pool (General Fund and Other Non-segregated Investments) up to $100 million was concluded to be the workable solution. He elaborated that the plan would use GeFONSI funds to directly invest in the Corporation's loan fund and create a liquidity facility to back the loans. The GeFONSI pool has a current balance of $7.2 billion and in the last 14 years has never dropped below $600 million. The department is confident the pool could support the $206 million provided for in the legislation as illiquid investments. He stated that the department would charge the corporation interest at market rates on the loan, and still earn the 15 basis point fee on the credit facility, which would allow it to continue to invest in other securities. 4:43:26 PM Co-Chair Stedman asked if Power Cost Equalization (PCE) funds were included in the GeFONSI fund. Mr. Burnett replied that the PCE endowment is not in the fund, however some PCE funds are in the baseline group. Co-Chair Stedman asked for clarification regarding the baseline group. Mr. Burnett responded that the baseline group contains funds that retain a relatively stable balance over time, such as the Oil & Hazardous Substance Response Account. The GeFONSI fund also contains approximately 100 other funds, including the general fund, the statutory budget reserve and the capital income account. Co-Chair Stedman requested additional backup and detailed information regarding the composition of the GeFONSI Fund. Mr. Burnett replied that he would obtain and distribute the information. He added that GeFONSI is currently comprised of $2.4 billion unrestricted general funds and $4.8 billion of other encumbered funds. He emphasized that GeFONSI is a pooled investment fund. Co-Chair Stedman inquired if the $2.4 billion fund contained the Constitutional Budget Reserve (CBR) and the Statutory Budget Reserve (SBR). Mr. Burnett replied that only the SBR is included in the $4.8 billion pool of other funds. Co-Chair Stedman remarked that the committee has concerns regarding liquidity of the funds. 4:46:29 PM Co-Chair Hoffman asked what the returns on the funds amounted to over the last year. Mr. Burnett replied that he did not have that information with him but would make it available to the committee. Co-Chair Hoffman requested that Mr. Burnett estimate the amount. Mr. Burnett reported that the returns were positive; mostly short term, fixed income investments. Co-Chair Stedman reiterated his questions regarding PCE funds. Mr. Burnett clarified that PCE was removed from GeFONSI and a separate PCE endowment was created in 2005. 4:47:36 PM Co-Chair Hoffman asked for details concerning the guidelines and schedule ASLC has to repay the loan funds. Mr. Burnett replied that the details of repayment had not been negotiated. The funds will be backed by student loans and the intent is to have the corporation refinance the loans as soon as capital markets allow. Co-Chair Hoffman noted the breakdown of student loans; 60 percent in state and 40 percent out of state. He asked if the same ratio is expected if the plan is approved. Ms. Barrans remarked that she did not expect the composition of borrowers or borrowing behavior to change due to the funding source. She suggested that there may be an increase in the percentage of loans for attendance in Alaska primarily due to the impact the current economic crisis has on families. Co-Chair Hoffman asked if a preference were given to students who remain in Alaska. Ms. Barrans reported that there is no preference to students to access the loans but a preferred interest rate of one-half percent is granted to students who return to or attend in Alaska. 4:50:26 PM Co-Chair Stedman wondered what the number of student loans is anticipated to be issued by next June. Ms. Barrans estimated 12,000 loans would be issued at a total loan volume of $85 - $95 million. Co-Chair Stedman asked if $100 million will be sufficient. Ms. Barrans expounded that the corporation believes this approach is significant enough to avoid another appropriation request next year. She stated that if the market disruption continues and the corporation could not successfully issue bonds in the interim that this proposal, allowing for the internal receipt of funds, potentially provides enough funds through the 2010-2011 cycle. She believes ASLC will be able to issue debt within the next six months via variable rate demand bonds. Co-Chair Stedman cited the Department of Revenue's fiscal note (DOR 4) analysis and asked for an explanation of what fiduciary duties apply and how that will earn a return to the state. Mr. Burnett explained that the bill requires that the bridge loan to the corporation be backed by student loans. Therefore, the department will enter into a contractual agreement with ASLC that states the terms of repayment of the principle with interest. The loan to the corporation will be over collateralized with respect to the default rate on student loans and an origination fee will be charged. Co-Chair Stedman asked how internal policies and procedures will be addressed. Mr. Burnett stated that new policies will be created to be consistent with the fiduciary requirements of the legislation. He explained that current policies would not allow for the investment concentration in one asset [student loans] that the bill establishes. 4:53:52 PM Co-Chair Stedman requested the schedule of outstanding student loans. Ms. Barrans replied that as of December 31, 2007 the balance of outstanding alternative student loans was $561 million with $81 million of student loans in default. She explained that she could provide a report containing additional characteristic information and a summary of the status of the outstanding student loans. Co-Chair Hoffman requested the information include a breakdown between in-state and out-of-state students. Co- Chair Hoffman asked what other states provide state loans that allow students to attend out-of-state institutions. Ms. Barrans replied that all other state's alternative loan programs allow portability. Co-Chair Hoffman wondered if they were similar to the ASLC program. Ms. Barrans stated that they are all similar in many respects. She exemplified New York State's loan program that contains a fund to guarantee those loans against default as an example that while some elements of other states programs might be different they all allow portability. 4:57:54 PM Co-Chair Stedman cited the April 7th letter from ASLC (Copy on File) to the committee. He asked for clarification of the information submitted to the committee specifically to the requested sum of $100 million for approximately 12,000 loans and what amount will be issued within the next year. Ms. Barrans replied that it would be over a period of one to two years depending on loan volume. She guessed that the volume will drop slightly due to the tightened credit standards being implemented. She expected the amount to total close to $85 million next year. Co-Chair Steadman requested the discussion focus on the issues as they relate to a one year period. Co-Chair Stedman asked Mr. Burnett to explain if the economic crisis credit seize up as it relates to the Alaska housing issue earlier this year causes exposure for the state and if it still has an effect on current credit conditions. Mr. Burnett responded that except for the period of last September through December there has not been a serious liquidity issue that cannot be met by existing credit providers such as Alaska Housing Finance Corporation. He stated that DOR is not considered a credit provider. Co-Chair Stedman queried the corporation for other ideas, solutions, and options rather than soliciting for state funds. 4:59:59 PM Ms. Barrans answered that the corporation along with their financial advisor had studied solutions other states employed to solve this problem. She said that each case required some financial support from their state. She reiterated that the dilemma is that the capital markets the student loan entities would be accessing, without dependence on their state are no longer available at an affordable cost. The other option discussed was for the state to finance the program with a direct appropriation from the general fund for a period of time. The option was rejected because the ASLC program was initially created to avoid dependence on the use of state general funds and the variability of those funds from one year to the next. Ms. Barrans stressed that this market disruption is unprecedented. Co-Chair Stedman surmised that there are not a lot of alternative solutions available. Senator Huggins asked for the interest rates on in-state and out-of-state loans. Ms. Barrans answered that the interest rates are 6.8 percent for in-state and 7.3 percent for out-of-state alternative loans. She added that the loans offered through the federally guaranteed Stafford loan program present the lowest risks to the corporation and can be offered at interest rates of 6 percent or below. Senator Huggins asked what the interest rates will be in 2010-2011. Ms. Barrans expected rates to remain in the same range. She said there was a statutory cap of 8.25 percent. 5:04:08 PM Co-Chair Hoffman requested the amount that the corporation was able to sell the bonds for and at what interest rates over the previous five years. Ms. Barrans replied she would provide the information. Co-Chair Stedman asked if this bill was the only option available to fund higher education in Alaska. LEE DONNER, MANAGING DIRECTOR, FIRST SOUTHWEST COMPANY, CONSULTANT, STUDENT LOAN CORPORATION, DEPARTMENT OF EDUCATION AND EARLY DEVELOPMENT (via teleconference), explained that the provisions of the legislation is to provide interim financing and a stand-by bond purchase agreement or letter of credit. He stated that if this strategy works the corporation should be able to access capital markets and raise capital in the open markets, within the next six months to finance the FFELP (Federal Family Education Loan Program) and fixed rate alternative loans. The combined financing of both types of loans would allow the corporation to repay the interim financing. He agreed with Ms. Barrans that other states options to the loan crisis all involved direct intervention, albeit different approaches. Other plans vary in costs to the state ranging from direct appropriation, to risk of general obligation coverage on the debt, to plans similar to Alaska's with the little associated risk. He exemplified the state of Texas direct involvement to grant the state's general obligation to the bondholders. The debt becomes a general obligation of the state of Texas. In contrast, Alaska's plan has no cost to the state, if the bond purchase agreement or letter of credit is adequately rated as anticipated, and has the potential of generating revenue. He noted that in the event that the state has to purchase the bonds there is an applicable interest rate that the bonds bear to the state during the length of time the state owns the bonds. 5:08:51 PM Co-Chair Stedman referred to the historic balance of the GeFONSI account indicated on the graph provided in the DOR handout (copy on file) and asked what the minimum balance was since 1996. Mr. Burnett replied that the minimum balance was $600 million. Co-Chair Stedman asked when the $100 million tied up as liquidity would be a risk to the state especially if there are repeated requests for additional appropriations. Mr. Burnett stated that he was comfortable with an amount well below $600 million. Co- Chair Stedman recapped that the department is comfortable with the $100 million request but repeated appropriations are not advisable. Mr. Burnett agreed that this amount would cause concern after two years. Ms. Barrans reminded the committee that $100 million is a maximum cap, not per annum request. She explained that the $100 million could be expended over a period of more than one year. She added that the corporation does not expect to request additional funds. 5:11:52 PM Co-Chair Hoffman asked if the economy continues to falter would the department return to the legislature and request additional loan guarantees. Mr. Burnett replied that if the markets continue to fail over a two year period the student loan corporation will need to consider more extreme measures such as termination of the program. He emphasized that the state could not continue to loan under those circumstances. CSHB 172(FIN) was HEARD and HELD in Committee for further consideration. 5:14:00 PM AT EASE 5:17:14 PM RECONVENED