2:21:44 PM SB 66-AIDEA: NEW MARKETS TAX CREDIT PROGRAM  CHAIR EGAN announced SB 66 to be up for consideration. TED LEONARD, Executive Director, Alaska Industrial Development and Export Authority (AIDEA), said SB 66 would help a very successful federal program, the New Markets Tax Credit Program, that is designed to use tax credits to spur development by private investors into low income census tracts. This program allows two types of investors to invest in a project; the two components are a private investor with capital and a financial institution providing credit. The program was designed to allow a project seven years to pay interest only on the capital it has gotten -in essence allowing the project to "gain its legs" in order to use conventional financing. 2:23:23 PM MARK DAVIS, Economic Development Officer, Alaska Industrial Development and Export Authority (AIDEA), explained that this bill permits AIDEA to work with the existing U.S. Treasury tax credit program. Right now AIDEA has a small guarantee program that does not permit it to make guarantees of loans in conjunction with this federal program. The essence of SB 66 is to amend AS 44.88.700 to allow AIDEA to issue loan guarantees and to make, as a last resort, its own direct loans for the debt side of a new market tax credit deal. The ways those work essentially is that investors who have tax liabilities put their own equity (usually up to 30 percent) into the project in a rural area or an area that has high poverty rates and then the rest is borrowed from a bank. But the bank has to be able to do two things. First, it has to take interest only payments for seven years and then it has to agree to not foreclose. Well, recently with the credit crunch, banks have been reluctant to make those loans, so the program has stalled in some states, including Alaska. MR. DAVIS said that through Alaska Growth Capital, Alaska has an allocation of new market tax credits, and has been in contact with other companies that have those credits. He did an analysis and talked to companies that do this kind of work, including Alaska Growth Capital, and they recommended that if AIDEA could guarantee the loan portion of a deal or if it could issue its own loans then it would get the program going. So, AS 44.88.700 says basically that AIDEA could guarantee a bank loan in conjunction with a new market tax credit. He said these loans have a very low default rate, and for a very simple reason. The investors who put their money directly in the project and who get the tax credits can only take so much percentage of a credit - up to 300 percent - over seven years. If before seven years has elapsed the project has not cash-flowed, then the equity investors owe all their taxes back to the IRS with interest and penalties, a "tax capture." When these investors make their analysis of what to invest in, they are very careful, making the defaults very low. By offering guarantees, AIDEA could free up the program without a great deal of risk. AS 44.88.710 provides that a guarantee does not create a debt or liability to the state - so it would only apply to AIDEA and not the state government, he said. AS 44.88.715 establishes applicant qualifications; that is AIDEA would reserve the right to guarantee loans or to make loans only to projects they agree with. Just because a deal qualifies for new market tax credits doesn't mean that they would want to be in it. MR. DAVIS said that AS 44.88.720 requires an applicant to provide certain information to AIDEA, which would be set by regulation, and an economic benefit analysis. This is not required under the federal law for the tax credits, but AIDEA is an economic development agency, so they want to make sure if they offer a guarantee or a loan that it actually creates the economic benefits they are charged by statute to create. 2:26:43 PM He said AS 44.88.730 establishes the conditions for a loan guarantee while section .740 requires a financial institution holding the guarantee to service the loan. That is to reduce AIDEA's costs; it means if they guarantee the loan, the bank will still deal with the collection and all the other costs. AIDEA is just not set up to do that and is not trying to hire more employees. MR. DAVIS said AS 44.88.750 allows AIDEA to leverage the loans. This means that AIDEA could make a direct loan, but probably they would not do it frequently. If no bank steps forward and if the new market tax credit seems solid economically and if it would create a lot of jobs or if it was in a rural area, they might sometimes step forward. But this language just gives them the discretion to do that; it doesn't require them to do so. AS 44.88.760 sets a cap at $50 million, so this program won't "take over the agency" and AIDEA can continue to do its other programs. MR. DAVIS concluded the analysis saying AS 44.88.770 is a housekeeping provision, which says the AIDEA board can adopt appropriate regulations to implement the program. 2:28:14 PM SENATOR MENARD asked why they decided on capping it at $50 million and if the IRS gives the "tax capture" a form number. MR. DAVIS answered that they recommended the $50 million limit, because they can make that kind of commitment without affecting their other programs, their current reserves being about $350 million. He said new market tax credits deals tend to be very large, $20-30 million, and complicated with a lot of parties. That means they could probably do one a year, which is what they should be doing because it would take a lot of work. The $50 million was picked to do one or two a year. The answer to her second question was there is no particular section under the codes; this is actually in a 51-page IRS circular, which he offered to get a copy of. A new report put out by the New Market's Tax Credit Coalition, a private group, points out that unlike most federal programs, using these tax credits costs the government an average of $12,000 per job, about the lowest of all job incentive programs in the United States. SENATOR MENARD asked if they would consider lowering the figure from $50 million to $30 million. MR. LEONARD said it should be at $50 million, and $30 million is the absolute lowest it could go and still be a viable program. CHAIR EGAN thanked everyone for their comments and held SB 66.