SB 168-COMMERCIAL FISHING LOAN PROGRAM    CHAIRMAN PHILLIPS announced SB 168 to be up for consideration. MR. ED CRANE, CEO, Commercial Fishing and Agriculture Banks (CFAB), said he would answer questions, but explained his earlier comment about the Division of Investments being subsidized competition. Both CFAB and Division of Investments were created by the legislature to do, at least superficially, similar things, one with public money and the other with private money. First of all, the Division of Investments is not burdened with any cost of funds over the last 10 years. CFABs annual interest expense is average $687,000. The Division of Investments is not required to establish a reserve for loan losses - that we have set aside $168,000 per year on average over the last 10 years. The Division of Investments pays no taxes. CFAB has paid an average of $152,000 in state and federal income taxes over the last 10 years. The Division of Investments is not burdened with the cost of the board of directors; there's $25,000 or so per year. The Division of Investments does not bear the burden of a statutorily mandated annual audit or annual examination by the state. That costs us approximately $30,000 per year. The Division of Investments enjoys considerable infrastructure provided by the Department of Administration, the Department of Revenue, and the Department of Law, and I have no idea of who else and have no idea how to measure that. There are other aspects, as well, simply the cooperative structure our statute mandates for CFAC. It's a good structure, but the fact is that we spend a good $35,000 per year on record keeping and communications with members on things other than simply loans, because of that structure. If we were simply a lender, if we simply shoveled money out the door, we would be able to get by with probably less than 10 people in our organization rather than the 15 that we have. I think there is a considerable subsidy the state has provided to the Division of Investments, again, in competition with CFAB. But the most important element from a practical standpoint, is really unquantifiable, but it is very significant and that's the lack of accountability or oversight and the ability of the Division of Investments to change directions and policies at will with no analyses and no concern for the bottom line. I, as manager of CFAB, provide a report to our board of directors each month. We have to meet with the board of directors six times a year and are accountable to them and I do mean accountable. We are accountable to our members through an annual report and our members expect to receive the patronage refunds we pay and they also expect the dividends on the stock. I mentioned before the cost of our annual audit by outside auditors and the examination by the State of Alaska banking examiners. We are required by statute to provide those to the legislature as well as to our members. You have nothing that's anywhere analogous from the Division of Investments. They set their own standards in many ways… SENATOR AUSTERMAN said he could tell that CFAB has done well over time and asked if they are in trouble now and that's why they need the other loans to keep going. MR. CRANE replied that they are not in trouble, although this year hasn't been particularly good: I won't say that we necessarily need more loans. I would stress and reemphasize what is mentioned in the sponsor statement and what is illustrated in the page of numbers you have in your packets there. CFAB actually provides significant benefits to those people who borrow from it. I have, and our Board of Directors has and all our management has a very clear fiduciary responsibility to those people who are the owners of CFAB - our borrowing members. Those are the people we have to attempt to protect and provide for. Fortunately, everything we do in that regard is totally consistent with our effort and intent to keep CFAB strong so that we can lend to fishermen in the future. It is not really a matter of survival or anything like that. It is, perhaps in a more general sense, a desire to have as much good loan volume and as diverse a loan portfolio as we can get. But as to what has precipitated this bill, again, I'm not necessarily trying to pick a fight with anybody, but I would say over the last three or four years in particular we have become increasing frustrated by the aggressiveness of the Division of Investments, the liberalization of certain of their policies and what we see as irrationality in some of their practices. One of the effects of that and we see it in some of the letters we have seen about this bill from fishermen's organizations, it's almost an instinctive perception on the part of many people of, "Gee, if it's state money, it must be a better deal." There are many loans that we never get a chance for and we never have the opportunity to address. We believe there is some exploitation. I'm not questioning anybodies' motives. This bill is also part of our reaction to our concern… TAPE 01-21, SIDE A  MR. CRANE continued: "…I'll give you a reference to it on the top of page 3, line 1, this is a reference to the quota share loans (IFQs). The statute has said for about five years now, the Division of Investments can make loans for quota shares to people who are not eligible for financing from other recognized commercial lending institutions. Our view, and I know the Division will disagree with us, but our view, and we have seen considerable evidence to support our view, is that the Division has ignored that. That has been troubling to us. In summary that's really what's behind this bill, Senator. MR. GREG WINEGAR, Director, Division of Investments, testified: We have several problems with this legislation, especially under section (a). Borrowers currently have a choice as to which program they wish to utilize. If this legislation passes, basically, they will have one choice and that's to go to CFAB first. The concern we have is that most of our borrowers under this section will not qualify for CFAB financing. There may be a few, but most will not. So, those applicants are going to have to through the extra process, the extra paperwork, time and effort necessary to go through the process twice. The other thing we are concerned about is that although the number of applications are relatively small, those are going to be the stronger loans and so CFAB will basically pick and choose which loans they wish to have for their portfolio. Those stronger loans do help balance out the risks of our portfolio and that does benefit the program as a whole. Some of the things I mentioned last week that we are still concerned about - the use of the word "identical," which is used in several places here in the bill - on page 1, line 12; page 3, line 2; page 4, lines 1 and 8. We are concerned about the use of that term, because our rates and our terms are not related to CFAB's or not tied to CFAB's nor are they tied to any private sector lender. So, we're concerned that the use of "identical" may make it very difficult for borrowers to actually meet that requirement. In section 10 of our statutes, which is actually page 3, line 29, of the bill, this is an internal refinancing program and the sole purpose of this section is to allow existing borrowers to take advantage of lower interest rates when they occur to lower the rates on their loans. As I testified last week, requiring these borrowers to go through a whole new application process through another lender, the time involved in that, the money involved in that, is going to pretty much eliminate the usefulness of this program. I think it's important to note that since inception, we've had 1,300 borrowers that have taken advantage of this program and have been able to lower their rates. And also, because rates are dropping rapidly right now, this will have an effect on future borrowers under the program. I think it's very important to point out that this fund has been a very successful program for the last 29 years. A House Research Agency report done a few years ago said it was one of the healthiest loan programs ever created by the state. The fund is totally self sufficient. We get no general fund monies; it's been that way since 1985. There was a total of about $60,201,000 that was used to set up the program that went from the general fund into this fund. Sixty-nine million dollars has actually been transferred back out of the fund with the majority of those funds going back to the general fund. On top of that, we've been able to leverage those funds into $341 million in loans. Certainly, we've had some challenges. The industry has had a lot of changes. We have had to work with a lot of our borrowers; we've had some difficult seasons; market conditions have changed and so, we have had to modify a number of loans for our borrowers. But the flexibility that we have because we are a public sector lender has been very important in a real important public policy issue, which is to try to keep Alaska fisheries in the hands of Alaskans. So, we are concerned about the legislation. We're worried it is going to limit the effectiveness of this program and we do continue to oppose the bill. Thank you Mr. Chairman, I appreciate the opportunity to testify and will answer any questions you might have. SENATOR AUSTERMAN asked when this program was originally set up, was it set up to help pick up those loans that were not eligible for other funds. MR. WINEGAR replied: There has been a number of changes in the program over the years, but I think that was one of the very important purposes of the fund - was to make financing available to a majority of Alaskans. A lot of those harvesters do not meet your standard lending type of criteria. I think the program was created to try and insure that those folks have access to financing - so that we can keep those fisheries in the hands of Alaskans. SENATOR AUSTERMAN asked if they currently require them to be declined from another agency first. MR. WINEGAR answered: It depends on the section. Our statute is divided up into several different sections and each has different eligibility requirements. The situation Mr. Crane was referring to, for example, under section (c), loans for quota shares, there is language in the statute that says you need to not have access to financing through a private sector lender. The Division was basically looking at those applications and in cases where it was obvious they did not have access to that financing, we would consider the request without the turn down letter. In November Mr. Crane indicated a concern about that policy to us and so we actually had two meetings with him in January and February. We amended our policy so that now in every case, we require a turn down letter now for someone to apply under section (c). On the other hand, like section (a), loans for limited entry permits, currently there is no restriction. There are only two options available, our program or CFAB's and right now borrowers have a choice as to which program they wish to pursue. So, I guess what I'm saying is different parts of the statute have different eligibility requirements. Some require turn downs and some do not. Number 600 CHAIRMAN PHILLIPS said he understood that no other industry, other than the fishing industry, has a loan program like this within state government and asked if that was right. MR. WINEGAR replied that they have a couple of other small business programs. CHAIRMAN PHILLIPS asked if they were for a specific industry. MR. WINEGAR replied that they cover lots of different industries. He explained that the small business program they had was turned over to the Alaska Industrial Development and Export Authority. They provide financing for different types of industries like mining and tourism, etc. CHAIRMAN PHILLIPS said that was a multi-industry portfolio and his was for just the one industry. MR. WINEGAR said that was true of this particular loan program. SENATOR LEMAN commented that the state has other incentive programs for other industries. SENATOR AUSTERMAN stated: "This program has been there 29 years and I think the reason it's there obviously is that it's the number one industry in the State of Alaska…It's the number one exporter of product in the State of Alaska. It's not oil; it's fish. We need to make sure that we do protect our fishermen." SENATOR TORGERSON added that the reason the program was started was that the fishing industry was in bad array. You couldn't borrow anything from a commercial lender. MR. JERRY MCCUNE, United Fishermen of Alaska, Cordova District Fishermen United, said when CFAB was created, there was a lot of discussion, and Cordova fishermen thought an alternative to the state program would be good, because banks couldn't use permits as collateral. He said that the two are very useful loan programs. He thought the Division of Investments was a good program because it encourages permits to stay in residents' hands. CFAB is a very conservative bank and has high profile loans, but in a lot of cases in the villages and out in the other places, young people don't have a credit history. They have to have some experience to be able to get this loan. This helps a lot of young folks. I can name four or five guys in Cordova coming out of high school that took part in the educational fishing program that got loans from the state and are now successful fishermen and have paid their loans back. That's the usefulness of the Division of Investment Loan Program. If you were to do away with the Division of Investments' loan program and leave CFAB on its own, I don't think we're encouraging residents to keep the permits in the state. He added that CFAB has a floating interest rate and the Division is more flexible and the reason is encourage residents to get into the fishery. Number 1000 MR. CRANE responded that at CFAB, "None of us have any desire or intent to see the Commercial Fishing Revolving Loan Fund done away with or no longer be able to do what it does." MR. CRANE agreed with Mr. McCune's remarks, but he thought the loan administrator should not look upon the program as a loan program. "It should not be looked at or talked about as being one of two programs. It is not. It is a state loan program. CFAB is a private lending institution. They are not two loan programs…." He said that five or six years ago, there was a requirement that an applicant be denied by two other lenders before a loan could be made and he didn't know why it was changed. He said it wasn't impossible for anybody to live with at the time and he pointed out the letter of intent, which describes the program that was in place then when CFAB would often forward applicants' paperwork and some of their analysis to the Division of Investments. So, there was no redundancy. He also didn't know why this bill would affect the opportunity to change interest rates. SENATOR TORGERSON interrupted him and asked what they do with CFAB's profits. MR. CRANE replied that they distribute them to their borrowers.