SB 300-AIDEA LOANS  2:21:03 PM CHAIR PASKVAN announced SB 300 to be up for consideration. 2:21:13 PM TED LEONARD, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), Department of Commerce, Community and Economic Development (DCCED), said they had been working on a strategic plan to improve the Authority's effectiveness and this bill takes the first steps in allowing them better use of capital for businesses and helps them better invest in projects as they move forward. The first section modernizes the way interest rates are set for loans that are actually funded through their own internal funds - in essence, pretending they are going out to market and asking at what rate it would buy a bond from them. He said for a period of time there was no municipal bond market because of the financially tumultuous market, so their rates went up to 9.5-10 percent in seven months. He said the second part of the bill helps the Authority help businesses expand. This one is an incentive rebate program which allows the agency certain loans or investments into areas that are economically distressed or for businesses that would be startups that would add true new jobs to the economy to the tune of 100 basis points (1 percent) of the loan for a term of five years. This would help give businesses that are investing in needs the state identifies a better cash flow for five years. 2:24:44 PM The third section of the bill is to clarify whether AIDEA can invest in a project partially rather than having to own and operate the whole project. This is important when looking at infrastructure development in the future that these projects could be in the billions of dollars, which would be far beyond AIDEA's capacity to own, and that layering of funding and working with partners like a Native corporation or an investment bank would be the best way to move forward. It would also spread the risk to the private sector. 2:25:55 PM The fourth and fifth sections deal with their Rural Development Initiative Fund (RDIF) and how to better promote it. SENATOR BUNDE asked what impact 1 percent would have on AIDEA's bottom line. MR. LEONARD replied that 1 percent shouldn't affect it. Additionally, they are partitioning off that risk by allowing only 5 percent of their loan portfolio to be used in this program. He added that for the most part, AIDEA makes money when it is loaning money rather than investing its own internal funds. SENATOR BUNDE said it would be 1 percent less money coming in and he wondered what that impact would be. MR. LEONARD calculated that 5 percent of their portfolio would be about $15-16 million and 100 basis points of that would be about $150,000. 2:28:11 PM MARK DAVIS, Economic Development Officer, Alaska Industrial Development and Energy Authority (AIDEA), Department of Commerce, Community and Economic Development (DCCED), explained that the first change in SB 300 is to AS 44.88.159(e) and that is about how they set the minimum rate for the commercial finance program, known as the loan participation program. This program works by having banks bring clients in to AIDEA, and AIDEA participates with the bank. That provides a filter for credit evaluation and underwriting. It has been a successful program creating 4,720 jobs since 2002 and about 2900 construction jobs. The portfolio stands at $376 million now and they have $24 million pending in applications. Unfortunately, he said, the minimum rate had become uncompetitive over time, because by statute it is tied to a bond rate. In fact, AIDEA has not floated a bond since 1987 to raise money for this program. So he explained that under current statute they contact Goldman Sacks every month and have them calculate what it would cost AIDEA to float a bond to fund the program and that sets the rate. In 2008 the markets collapsed and the municipal bond market is still collapsed. So, in the mid-2009, AIDEA's rate was calculated to be 9.64 percent at a time when the commercial rate for money was 5.48 percent. As of the end of February their rate was 1.33 percent over what it would be if they used the market rate. This costs companies that want to use their loan participation program - more than an extra point for really no benefit. MR. DAVIS said that AIDEA is charged with making money, but it is actually charging a little bit too much. The economic benefit of these large construction projects is pretty obvious; they also provide long-term jobs. So, he said, instead of using the bond market AIDEA is proposing to use the nationally recognized market index. That does two things. First, it ties their minimum rate to the cost of money. He reminded them that they could have a higher rate for the purposes of underwriting; they could also calculate credit risk into the portfolio, which they do. So, not every loan gets the minimum rate. They might look at the Federal Home Loan Bank of Seattle, a well recognized rate in the Northwest, treasury bills, the Federal Farm Credit Banks Funding Corporation Funding Index (the other major federal index used in the United States), or Fannie Mae. If they use those, it would also be more transparent. Right now everyone has to wait every month for Goldman Sacks to recalculate. Tying the rate to an index would help business planning because a customer or a bank could just look at an index and figure out what their rate would be. MR. DAVIS said this would protect their dividend by setting a floor for the five-year rate of return on the interest rates; so it would actually protect the agency's economic performance. He said the second change the creation of a potential rebate on that same loan participation program that would be no more than 1 percent of the interest rate charged going back to the customer through the bank. They would provide that rebate if the project creates jobs, furthers rural development or meets other economic criteria, which would be set by regulation. He said their proposals and regulations would probably be development in stressed areas following the Recovery Zone Act federal standards, for startup companies, new technology or alternative energy. He said protecting the Authority is important, so they would cap it at 5 percent of the total loan participation portfolio and the rebate would be only for the first five years of the loan. It is designed to help a business start up; after that they would float up to the full rate. It's a pretty limited rebate, but he said having worked as a private transaction attorney in the state, he found that it's usually the first five years that are the tough ones before things cash flow efficiently. 2:32:57 PM MR. LEONARD emphasized that this is a rebate, so the businesses in this program would have to show proof of hiring those 50 people every year in order to get the rebate. MR. DAVIS said he found that the United State has 44 other entities similar to AIDEA and several of them have this kind of program. They also put reporting requirements in place for all their loan participations through regulation asking how many construction jobs were used with this loan program and how many permanent jobs to get a better feel for the impact on the economy. The rebate program would work in conjunction with the strategic plan to target the loan participation program towards economic development and job creation. He said as they face the recession, the two-fold approach is to preserve the jobs you have and to find out legitimate ways to create new jobs. Large term retail and commercial construction can be useful here and that is what this program is being used for. MR. DAVIS said the final thing would be to change the other side of AIDEA which is the development finance program. That is the program in AIDEA that owns big projects like the Red Dog Mine or the Skagway Ore Terminal. Right now the statute, AS 44.88.080(5), is a little unclear. It says they can "acquire an interest in a project as necessary or appropriate." However, he said, AS 44.88.010(a) says they can incur debt "to own and operate facilities" and the definition of facility under AS 44.88.909 says a plant or facility. Throughout the years, Mr. Davis said, the interchange between those three statutes has been interpreted that AIDEA has to own a discreet portion of a project. As they approach more modern financing, it's their view that AIDEA should be able to own an indivisible interest in a project. That would mean they could invest 20 percent into a project like hydro, renewable wind farms or other projects that meet their criteria. For example, they were in negotiations yesterday with the US Department of Energy to qualify under Section 17.05 financing and this bill would allow them to have more access to federally guaranteed loans - another benefit. It would also let AIDEA have partners, so someone else could also look at the same project - to do the math to make sure that it works. A consortium of partners usually makes it a safer investment. If other people aren't interested, you have to ask yourself why you would be interested. He explained that this would be a change, but it is already consistent with the statute that says they can own an interest. It's more of a clarification. 2:36:18 PM CHAIR PASKVAN asked if he believed these changes would advance the underlying purpose of AIDEA's initial authority. MR. DAVIS answered yes. The statutes, with regard to the partial interest, already says AIDEA can own an interest in a project as necessary, but the definition of project is inconsistent. He didn't think a definition should override statutory purpose, but that is kind of what had happened here. As for the loan participation program, when the Legislature used the bond rating to float bonds, they envisioned two things: first that they would actually go the market to raise money for the loan participation program, which they have not done. And secondly, the municipal bond market for the last 30 years was a fairly low rate, so it made sense to tie it to a low rate, but, unfortunately in our country the municipal bond market is no longer a competitive rate. In this sense they are just modernizing but with the same purpose. The rebate program is consistent with the goal of alleviating unemployment and creating economic development, which is in the preamble of their statutes. CHAIR PASKVAN asked if any portion of the first three sections of SB 300 materially increases the risk to AIDEA's funds overall. MR. DAVIS replied no; the rebate program is limited to 5 percent of their portfolio as a firewall and it's at AIDEA's discretion. And it only goes for 5 years of a probably 25-year loan. This is a useful tool to get a project going - to make something pencil out when otherwise it wouldn't pencil out. There is no risk to changing a rate; having a lower rate that makes sense allows them to do more business. They are not forced to use that minimum. MR. LEONARD added that putting in the floor for their five-year annualized rate of return sets a clearer definition of how low their rates can go and protects their bottom line even more. 2:39:20 PM SENATOR BUNDE asked if their list of organizations they might use to establish a minimum interest rate is a flexible group. Would they require it to be changed from year to year? MR. DAVIS answered that the way the bill reads they could set up by regulation and they would look at each rate and put out in regulation their proposal. They would get back comments from banks and financial institutions that use it. Right now they would probably want to use the Federal Home Loan Bank, which is the bank that Alaska's banks want to borrow from when they don't want to go to the Federal Reserve Board window. So, it's a rate that they use already and it's a rate that is favorable to borrowers but isn't so low they can't make money. 2:40:27 PM SENATOR BUNDE asked why they removed the section that prohibited someone from receiving an additional loan until the original loan had been repaid on page 3, line 25. CHAIR PASKVAN responded that Cathy Jeans would answer that and they were just about at that point. 2:41:12 PM MR. LEONARD remarked the way the way the Rural Development Initiative Fund (RDIF) fund works is that originally AIDEA funded that fund and it is run by the Division of Investments and is in their financial statements. 2:41:33 PM MR. DAVIS said it evolved into a revolving fund, which is excellent. 2:41:53 PM CATHY JEANS, Systems Branch Manager, Division of Investments, Department of Commerce, Community and Economic Development (DCCED), said her agency administers a number of state loan programs including the Rural Development Initiative Fund that would be amended by sections 4 and 5. She explained that their RDIF program was established in 2000 to provide loans to small businesses, creating jobs in rural communities around the state. It is based on a similar program that was operated for many years by the former Department of Community and Regional Affairs. She said they administer the program for AIDEA and the portfolio currently consists of about 40 loans totaling about $4.1 million in debt. The program is set up as a revolving loan fund which means all repayments and earnings that come back into the fund are retained in it and all operating expenses are paid out of it. They currently have about $1.5 million available to lend. She said the changes proposed in SB 300 come about as a result of input from the public as well as internal discussions that focused on improvements that could be made to this program. So section 4 removes the restriction that a borrower can have only one loan at a time and increases the dollar amount that is allowed under the program from $100,000 per person to $150,000 and from $200,000 to $300,000 for two or more persons. Section 5 allows them to reduce the minimum interest rate that can be charged from 6 percent to 4 percent. They do support the changes because they believe these changes will increase utilization of the program, thereby increasing jobs and economic benefits to rural communities. MS. JEANS said they submitted a zero fiscal note because overseeing the changes had no administrative cost. 2:44:26 PM SENATOR BUNDE asked why allow people to have more than one loan after what has happened recently with toxic mortgages in the U.S. Maybe people "would get in over their head." MS. JEANS replied back when the program first started in 2000, people could get a loan, but maybe they paid if off after five or six years, but they want to get another one and couldn't. So they thought by removing the number of loans one could have at one time and increasing the dollar amount because things cost a lot more these days would give them more opportunity to expand and start up their business. SENATOR BUNDE asked what their process is for judging whether a person could get more money. The section clearly said they can't have another loan until the first one was paid off. MS. JEANS answered they can get do that now, but when they can't get another loan if they already have one under the current statute. SENATOR BUNDE said his concern is that if they already have a loan, they could start pyramiding and get under water with another loan. MS. JEANS replied that their agency would evaluate the loss and credit risk again if the borrower were to fill out another application. They would look at how much capital they were putting into the process and other types of financing records. 2:47:18 PM MR. LEONARD added when this provision was originally discussed with the Division of Investments, it was a challenge to decide if startup businesses should they come in when they start or a couple of years down the line. If they had the first loan for $50,000, for example, they would be stuck for the five years - even if they were being very successful and expanding, they couldn't come back to this program. So they set a limit of $150,000 for the increase, but if the business had good credit and was expanding, the idea was to give them the flexibility to increase their investment and keep moving forward. 2:48:50 PM CHAIR PASKVAN, finding no further comments, closed public testimony. 2:48:56 PM SENATOR BUNDE said he wished they could hear from the banking community. CHAIR PASKVAN noted letters of support in their packets from Key Bank, Wells Fargo, First National Bank Alaska, Alaska USA Federal Credit Union, Alaska Bankers' Association, Alaska Pacific Bank, Mt. McKinley Bank, and more. SENATOR BUNDE said he liked to have those things on the record. SENATOR DAVIS moved to report SB 300 from committee with individual recommendations and attached fiscal note(s). There were no objections and it was so ordered.