HOUSE SPECIAL COMMITTEE ON FISHERIES February 27, 1995 5:05 p.m. MEMBERS PRESENT Representative Alan Austerman, Chairman Representative Carl Moses, Vice-Chair Representative Gary Davis Representative Scott Ogan Representative Kim Elton MEMBERS ABSENT All Members Present COMMITTEE CALENDAR Presentation: Alaska Commercial Fishing and Agriculture Bank Presentation: Division of Investments, Department of Commerce and Economic Development HB 141: "An Act relating to the appointment of members of the Board of Fisheries." PASSED OUT OF COMMITTEE AS CSHB 141 (FSH) WITNESS REGISTER ED CRANE, President Alaska Commercial Fishing and Agriculture Bank (CFAB) 2550 Denali Street, Suite 1201 Anchorage, AK 99509-2070 Phone: 276-2007 POSITION STATEMENT: Provided presentation for the Alaska Commercial Fishing and Agriculture Bank MARTIN RICHARD, Director Division of Investments Department of Commerce and Economic Development P.O. Box 34159 Juneau, AK 99803 Phone: 465-2510 POSITION STATEMENT: Provided presentation Division of Investments, Department of Commerce and Economic Development GERON BRUCE, Legislative Liaison Department of Fish and Game P.O. Box 25526 Juneau, AK 99811-5526 Phone: 465-4100 POSITION STATEMENT: Supported CSHB 141 (FSH) JERRY MCCUNE, President United Fishermen of Alaska 211 Fourth Street, Number 112 Juneau, AK 99801 Phone: 586-2820 POSITION STATEMENT: Supported CSHB 141 (FSH) PREVIOUS ACTION BILL: HB 141 SHORT TITLE: TERM OF FISH & GAME BOARD MEMBERS SPONSOR(S): REPRESENTATIVE(S) AUSTERMAN, Grussendorf, Elton JRN-DATE JRN-PG ACTION 02/01/95 199 (H) READ THE FIRST TIME - REFERRAL(S) 02/01/95 199 (H) FSH, RES 02/15/95 (H) FSH AT 03:30 PM CAPITOL 124 02/20/95 (H) FSH AT 05:00 PM CAPITOL 124 02/20/95 (H) MINUTE(FSH) 02/21/95 431 (H) COSPONSOR(S): ELTON 02/27/95 (H) FSH AT 05:00 PM CAPITOL 124 ACTION NARRATIVE TAPE 95-12, SIDE A Number 000 CHAIRMAN ALAN AUSTERMAN called the meeting to order at 5:05 p.m. He noted for the record Representatives Elton and Moses were present and that a quorum was present. Number 015 ED CRANE, President, Alaska Commercial Fishing and Agriculture Bank (CFAB), testified saying, "CFAB was established through legislation which occurred back in the 1978 and 1979 legislative sessions," and, "The intent was to attempt to create in Alaska and for Alaska fishermen and farmers, a private cooperative financing institution which would be analogous to what was then called a production credit associations (or) a cooperative farm loans in the lower 48." Representative Gary Davis joined the committee at 5:07 p.m. MR. CRANE resumed, "Of course any institution or any kind of business, particularly a business which is going to be involved in finance, making loans, must have a source of funds. More particularly must have some base capital, initial capital. The state of Alaska put $32 million into CFAB in the form of a stock purchase. Ever since its inception, CFAB's largest single stock holder has been the state of Alaska to the tune initially of $32 million. It was and is a requirement of the statute today that that capital be retired, the stock be repurchased by the year 2000. As of this moment, we have retired $21,500,000. There is still $10,500,000 outstanding and we are retiring $250,000 a month." MR. CRANE continued, "It is a private institution but again, private by statute, the statute directs it to be private and we act as a private institution. We're subject to state income taxes and subject to federal income taxes and subject to all the things that main street businesses are subject to. But yet, the state is the largest stockholder. It's mandated by its statute to be a cooperative but it's exempt from the state's cooperative act, and there's a number of reasons for that. It's called a bank. That's the name the legislature bestowed on it. But it's exempt from the provisions of the Alaska State Banking Code." Number 142 MR. CRANE added, "What CFAB has been able to accomplish? It hasn't all been good. CFAB started business with an air of exuberance, flamboyance, and also at a period of time in the early 1980s when inflation was running at double digit rates. There was, not only in CFAB, and not only in Alaska, and not only in the seafood business, but I think almost universally in America, there was an anticipation that you could borrow your way to success." He said, "CFAB did in the first couple years put a lot of loans on the books but then came time to try to collect some of those loans and along 1984, just a few years after it started, CFAB very nearly self- destructed. And the next few years were kind of tough but for the most part, CFAB has been able to recover from those early misadventures and poor judgments. Today we're a fairly conservative organization." He gave examples describing the differences in CFAB and said, "It's really difficult to take a one size fits all approach." Representative Scott Ogan joined the committee at 5:14 p.m. Number 324 CHAIRMAN AUSTERMAN voiced concern about a prevailing perception that many loans are in delinquency. MR. CRANE said, "The raw statistics can be extremely misleading and confusing. On the one hand, I have the responsibility to tell you exactly what our records show, at the same time I must provide some explanation because we maintain the records the way we do for internal informational purposes and also to accommodate the accounting requirements for being a cooperative and not necessarily for providing raw data for the purposes of comparisons with other institutions," and indicated the seasonality of payments is unique with CFAB since there are a lot of fishing industry loans. He said, "For commercial fishermen, in general, they have one payday a year and in general, one loan payment a year." MR. CRANE continued, "Over time, CFAB's loan portfolio, over a span of at least going back to 1985, has averaged between 20 and 25 percent of its dollars delinquent at any one point in time. I'm not at all uncomfortable with that." He explained, "Assuming a delinquent borrower is communicating and cooperative with CFAB, and assuming that we can determine that he's not fallen prey to some bad habit or something bad has happened to him, that he's still the same fisherman we loaned money to, we'll work with him a long long time because if we don't, if we go and foreclose on his vessel mortgage or on his permit lien, we're simply going to sell that to another fisherman that looks just like him. So we actually pride ourselves in being willing and able in dealing with difficult accounts over a long period of time." Number 460 CHAIRMAN AUSTERMAN asked for specific a percentage of bad loans. ED CRANE replied, "We have made something over $600 million dollars in loan advances since CFAB was established and through the end of our fiscal year, May 31, 1994, we've had net losses of $19,400,000. $15 million of that was before 1985. So really, it's only been $4 million dollars over the last ten years." Number 498 REPRESENTATIVE OGAN said, "You've had $4 million dollars in foreclosures since 1984?" MR. CRANE said, "That $4 million is the actual losses that we've incurred." CHAIRMAN AUSTERMAN pointed out that some of the defaults were due to industries other than commercial fish. MR. CRANE said, "Yes, CFAB historically has financed and is authorized to finance, not only individual fishermen, harvesters, but also processors, farmers and agricultural processors, including timber processors. Actually, my estimate would be, of the $19 million in losses that CFAB has incurred in its history, probably $13 million or more of that has been in loans to processors, or people who wanted to be processors, or timber operators or something other than individual harvesters. Even now, a good 40 percent of our total dollars which are delinquent are for loans of that kind." REPRESENTATIVE OGAN asked about a collateral formula for obtaining a loan. MR. CRANE indicated there is not one formula used and added, "We're not at all unmindful of collateral. Essentially, we base our loans on what the applicant, the fisherman, and CFAB are able to project as available debt service." Number 598 REPRESENTATIVE OGAN regarding CFAB stated, "The people of Alaska are the stockholders and if they had a voting share in the corporation and you had a problem going into arrears with these loans, do you think these stockholders would be happy?" MR. CRANE said, "CFAB has recorded losses in two of its 20 years of existence. CFAB has not lost any state money. CFAB has only three sources of funds. One is that initial state investment of $32 million. The state has said in the statutes, `We want it all back.' Then we also borrow money from the bank for cooperatives, they very definitely want theirs back. Then our only other source of funds is the capital of our customers, our borrowing members. And in the final analysis, those are the people who have lost the money." REPRESENTATIVE OGAN said, "I would like to raise the level to more of what a commercial bank would do to make sure there's enough assets there." MR. CRANE indicated that that "would be impossible to accomplish." Number 677 REPRESENTATIVE KIM ELTON referred to the $4 million in losses incurred since 1985, and said he was surprised the losses were so low. He added, "What is a commercial bank write off? I would assume that you're not that far out of line." MR. CRANE said, "I really don't know how it would compare to another institution. We feel pretty good about it." CHAIRMAN AUSTERMAN asked, "If you were traded on the stock market, would you be paying a dividend each year?" MR. CRANE said, "I would expect so. Again, as a cooperative, CFAB doesn't have profits per se, whatever excess income there is is either given back to our borrowers, the people who pay the interest in the form of cash, or additional equity in the bank, the last few years it has been fifty-fifty, or it's used to pay taxes or retained in an unallocated surplus account. Yeah, we would be paying a dividend." TAPE 95-12, SIDE B Number 000 MR. CRANE explained that losses are also covered by CFAB's borrowing members. Number 010 MARTIN RICHARD, Director, Division of Investments, Department of Commerce and Economic Development (DCED), began his overview. He said, "The Division of Investments is involved in loan administration. We administer 11 programs for the DCED, three of them are active lending programs. We also service for five other state agencies. So we're not just involved with commercial fishing but commercial fishing is one of our largest." He added, "The last appropriation into the Commercial Fishing Revolving Loan Fund was made in 1985. Over the 22 years of the program, we've actually lent out $271 million to some 4,000 something loan accounts. Our current portfolio is around $65 million. Cash balance in the fund is right now I think about $14 million, and we have returned to the general fund about $56 million dollars to date. The commercial fishing fund is probably the healthiest revolving loan fund in the history of the state of Alaska." MR. RICHARD described the different types of loans within the commercial fishing loan program and the specifics of those programs. He then described the Soft Collections Program instituted in FY 87 saying, "We've been very successful with that and simply, if a payment is missed within 30 days, the borrower gets a telephone call from a loan officer trying to find out what happened and if we can be any help in straightening out their money priorities or things of that nature. We've had very good response to that program and it's still in existence today." Number 249 CHAIRMAN AUSTERMAN asked how much money was originally invested into the Commercial Fishing Revolving Loan Fund. MR. RICHARD replied, "Approximately $60 million was appropriated to the fund over a period of about 12 years, by the state, from the general fund and since that time, since about 1985, money has been appropriated back to the general fund to the tune of about $56 million." CHAIRMAN AUSTERMAN noted a higher default rate in 86 through 89. MR. RICHARD indicated those were bad years for the fishing industry. Number 275 REPRESENTATIVE OGAN asked, "If someone defaults on a loan, are they eligible for a loan again?" MR. RICHARD said, "I don't know if there's anything that specifically prohibits them from getting another loan. However, to my knowledge, we have never made a loan to someone who has defaulted to us." REPRESENTATIVE GARY DAVIS commented that the loan program extended to pay IRS tax debt should perhaps sunset although he preferred the permits going into the state's possession. MR. RICHARD said, "These loans are capped at $30,000 and remember we have a three year sunset for that section. So they're only available for a short period of time," and, "That essentially represents 98 limited entry permits that would have been sold off by the IRS." CHAIRMAN AUSTERMAN asked if it is likely the sunset will be extended. Number 335 MR. RICHARD said, "I think the sunset is going to be a reality. What has happened here is the fishermen, to a large extent, thought the permit was untouchable and once court cases determined otherwise, the IRS stepped up there effort substantially to take those permits. So hopefully, we're looking at a situation that was pretty much a one time deal and if during the next three years, these people don't get their affairs with the IRS straightened out, I don't know that we'll be able to help them anyway." Number 346 CHAIRMAN AUSTERMAN asked about future cases which might have IRS problems. MR. RICHARD replied, "Hopefully, most people realize that the IRS means business with these permits." CHAIRMAN AUSTERMAN called an at ease for two minutes. HFSH - 02/27/95 Number 410 HB 141 - TERM OF FISH AND GAME BOARD MEMBERS CHAIRMAN AUSTERMAN brought forth CSHB 141 (FSH), for the purpose of discussion. GERON BRUCE, Legislative Liaison, Department of Fish and Game, described the two changes brought forth in the committee substitute (CS). He pointed out the first change on page 1, line 11, deleted "a successor is qualified to serve on the board" and replaced it with "an appointed successor's term begins." The second change modified the transition section of the bill to affect only the members appointed after January 1, 1995, for the next three years thereafter. REPRESENTATIVE OGAN stated that he wanted his support for this legislation on the record because he supports depoliticizing the Board of Fish process. REPRESENTATIVE DAVIS asked if votes of appointed Board of Fish members are legal before those individuals are confirmed. MR. BRUCE indicated that he believed Title 39 specified that appointed members have all powers of a confirmed board member. He added, "The idea for this bill did come from the Fisheries Policy Transition Team and it was an unanimous recommendation from that team." REPRESENTATIVE OGAN moved that the CS be adopted. Hearing no objection, it was so ordered. Number 449 REPRESENTATIVE ELTON said, "It's also important to note that the transition team that recommended this, had representatives from the sport, the commercial and the subsistence segments of the industry." JERRY MCCUNE, President, United Fishermen of Alaska, testified in support of CSHB 141 (FSH). "We do support this bill 100 percent. I think it will take a lot of the confirmation battles out of the legislature. We'll be able to have more public candidates put their name forth knowing that they're not under the gun. Knowing that you have to be confirmed, sitting on the board, makes it pretty tough to make any kind of decisions because you're going to be under the microscope when you get back. So I think this will be healthy." Number 470 REPRESENTATIVE OGAN moved CSHB 141 (FSH) out of committee with individual recommendations. Hearing no objection, it was so ordered. ADJOURNMENT CHAIRMAN AUSTERMAN adjourned the meeting at 6:22 p.m.