DAVID HOFFMAN: Tony and I will be talking today about economic development in Alaska. We're going to be talking about a public/private partnership that has generated some very considerable benefits for the Alaskan economy and a partnership that has the potential to generate more benefits in the future.

This partnership is a partnership between a private sector corporation, Alaska Growth Capital, and a federal agency, the U.S. Treasury Department. And I bet not many people knew that the Treasury Department was involved in economic development, but it is in a very big way.

Tony and I will be kind of doing the Mutt and Jeff act format this morning, but -- and I'll pass off the mike to him shortly, but I've got to say a few things.

Tony has lived in Florida for the last 20 years, but in the last two days he has become a quick study Alaskan. He's done a number of things which I guess I'll let him explain, including dog sled rides in Unalakleet and a bunch of additional things, but it's really been a pleasure to have Tony here the last few days for his first trip ever to Alaska.

And I think it's important as we all know for senior federal officials to get a sense of the unique nature of our state and I really appreciate the time that he spent coming up here and learning about it. So he will start and we'll sort of do this together.

TONY BROWN: Okay. Thanks, David. First let me also thank Joe for the nice introduction and thank all of you for allowing me to come and address you so early, early in the morning.

I want to thank David for what I called a -- what he called and pitched as the CDFI Alaskan expedition. And, indeed, it was truly that. The Alaskan adventure for me included a three city tour, Unalakleet, Ruby and Galena.

Now I'm used to touring communities, but I have never -- I have to admit, I have never toured a community by plane. And so when I got the itinerary I say wow, how impressive, to travel by plane. And so they put me next to the pilot in the co-pilot's seat and I have a little experience flying a plane, just a single engine, so I was excited about that.

And so as we travelled from Anchorage on our way to Unalakleet then we came through the clouds and I saw the runway. As we came across the frozen water and I was looking -- first, I had a difficult time finding the runway and so the pilot had to show me between the lights where the runway was and to my horror the runway was covered with snow and ice. And then he said that the runway was about 2,000 feet so we actually landed. So that was actually my -- you know, my first taste of adventure.

Then while we were there -- as I was introduced coming from Florida, obviously when you get to water and if you get on water you get on a boat or you might jet ski. So we were -- I was told that I'd have the opportunity to travel by dog sled which didn't scare me, but I didn't realize that I would travel by dog sled on the Norton Sound, on frozen water. So needless to say, I have something to write home about and, in fact, did so on my Blackberry (ph), but being in the great frontier, the message didn't get sent until I landed back in Anchorage so.....

But really the true joy of this travel was having the opportunity of meeting three elders in each of the three cities that we travelled.

And as I'll talk about the CDFI fund and our role in Treasury. As you know, Treasury has great resources, we manage the nation's cash flow, the whole -- we collect cash through IRS and we regulate financial institutions through the office of Thrift Supervision and the office of Comptroller Currency. But my role in Treasury is to find great organizations like Alaska Growth Capital to invest in who helps ensure the access to capital to many Americans throughout the country.

And what I enjoyed about this trip was one of an educational experience for me, because as I travel across the country and I recognize that the true spirit of America, that America is made up of its many communities. And coming from my background where my community was made up of largely an urban ghetto an urban project where growing up our whole motto was a goal to get out of the hood, to get out of the ghetto. And what I learned from the three elders that I had the chance to meet that in Alaska that's not the goal. That in Alaska when you're surrounded by such beauty, when you're surrounded by such tranquility, it's not a goal to get out of, it's a goal of no matter what I will never leave.

And what struck me is as we focus on economic development, economic revitalization and community development that I had a chance to learn about what that means for you and for your communities here in Alaska. And so for that, David, I again want to say thank you for that fine expedition. Thank you.

Now let me tell you a little bit about what we do, if I may start with the slides. As I mentioned that the purpose of the CDFI fund is to promote economic revitalization and community development through investments in and assistance to community development financial institutions.

A community development financial institution is -- could be a loan fund, could be affordable housing fund, we even have banks that are dedicated to a mission of serving low income communities, providing capital to start up businesses. And we're also responsible for enhancing the liquidity of the community fund with financial institutions that make up our network.

I talked a little bit about how the fund is part of the Treasury mission. Treasury's goals is to promote a prosperous U.S. and world economy and to preserve the integrity of our nation's financial institutions. We do that by supporting the network of CDFIs so that they can improve the economic and living conditions of under served communities by providing an array of community development financial services through a network, and I'll explain this network, of CDFIs who have to be certified by us to participate in our program.

And a very -- and an important new program that Congress has given us the authority to administer is the New Markets Tax Credit program which you have to be certified as a community development entity, and so, hence ,the other acronym, CDE, as part of the goal or the objective of helping preserve the nation's integrity or reliability of the U.S. financial institutions by strengthening the financing capacity and sustainability and self-reliance of this network where David and his organization is able to partner with many of our traditional financial institutions and take a level of risk that many of our banks in their focus of safety and soundness cannot.

CDFIs have originated in excess of $9 billion. As I mentioned they provide affordable banking services to individuals, help finance small businesses, provide financing for low cost housing and community services that in turn help to stabilize neighborhoods and alleviate poverty.

CDFIs include loan funds, credit unions, banks, and venture funds all with the mission dedicated to community development.

We have four basic programs. Our CDFI program for 2004, Congress will likely provide us with about $40 million in 2004 to support a network of about 700 institutions. These institutions through a competitive round about a fourth of them will apply for funding and receive funding from our organization. And I have a slide to talk about the number of CDFIs that have been certified and funded here in the state of Alaska.

Congress three years ago gave us some money and a very important initiative, which is why I'm here, to support the development and growth of CDFIs that are dedicated to serving our Native American communities, Alaska Native and Native Hawaiian.

And we have a program where we will write a check to a financial institution that's insured with FDIC deposits, a bank or thrift, for their investments in support of our CDFI network or for increasing their level of lending in low and very distressed communities.

The Bank Enterprise Award program is being shifted and we're finding that many of our large banks are looking now at the New Markets Tax Credit program which I will base the bulk of my talk today on the New Markets Tax Credit program. But this program creates a tax credit for equity investments into community development entities. And in the program's nearly two years existence we've certified about 1,200 community development entities.

And in 2002 we allocated 2.5 billion, and that is the B word, $2.5 billion in tax credits that these organizations will use to try to raise private equity into their organizations to continue their mission of community development. In the next 90 days or so we'll be announcing the 2003, 2004 round and we will be allocating $3.5 billion in New Markets Tax Credit allocations.

Here in Alaska we have supported seven CDFIs that have received 11 awards totaling about $8.4 million, five CDFIs are certified here in the state, most of whom are here in Anchorage and one in Juneau, Alaska.

Under the New Markets Tax Credit program that you'll hear more about, David's organization was a successful allocatee. His organization competed nationally with over 260 organizations that competed for $2 billion where we receive $26 billion in request. And as a credit to this organization and to your organization here in Alaska the Alaska Growth Capital competed and won and received a $5 million allocation. And I believe your primary investor's Wells Fargo in this initiative? And there are currently four certified CDFIs in Alaska and they're listed here on the screen.

MR. HOFFMAN: So Tony is sort of explaining globally how this works and how they support institutions. But Alaska Growth Capital is a local, private sector company, we're a subsidiary of Arctic Slope Regional Corporation, and we are one of these animals called a CDFI or a community development financial institution.

We have a formal partnership with the Treasury Department. The way it works is that we've applied and received three different awards from the Treasury Department, so they've invested in us. The total has been $4.5 million dollars. In return for that investment we are obligated to provide funding into economically distressed areas, not in the abstract, but very specific levels of funding into a list of economically distressed communities and we're obligated to do that for five years.

I might add also that the model that we've developed in our partnership with the Treasury Department is a model that later developed through a partnership with the Denali Commission. I see Jeff Stasser here. So we've got two strategic partners that have been critical to the success of our company.

So what's the result of this partnership? As a result of this partnership we focus our activities on market nitches (ph) in the state that are ignored and that's our mission. We work very closely with the banks, but we're (indiscernible) where -- into the high risk lending areas where banks aren't able to go.

Since we've started we've done about $60 million in loans. We've done, as you can see here, about $13 million of lending into the most economically distressed communities in the state, and those are the ones that are -- this -- these communities account for probably about 10 to 15 percent of the population of the state that are really in tough shape economically. Also we've done about $35 million of lending into rural communities that are off the road system. We've done $25 million in lending to minority owned businesses and then we've done about $8 million in start ups.

And, again, we lend to people that typically aren't bankable, we work with banks, banks give us referrals. Often we'll work with companies for several years and they'll graduate to the point where they can become bankable and when they switch from us to a bank we look at that as a success and we celebrate those.

The company's been growing, we started in 1997, the first nine months we didn't do any lending, we were getting a sense of the marketplace and then we grew and then in 2002 we had a big jump and it was sort of -- everything came together in terms of our systems, in terms of recognition. And now we do roughly $20 million a year, our budget for 2004 is to do $25 million in lending next year.

In addition to the traditional lending, we also do equity investments. So we -- I think we're the only sort of institutional source of venture capital in Alaska. We don't do venture capital the way it's done in Silicone Valley, but we have taken an equity investment in companies.

We also have business consulting services and this function as a business consultant has arisen out of the needs of our clients. So our borrowing clients, part of our model is we provide a great deal of technical assistance both before the closing and after the closing, we've learned what their needs are. So we focused our consulting services on accounting which it seems like everybody has a need for a knowledgeable person, in strategic financial planning. So our company has grown, I think we've become a factor certainly in the rural market Alaskan economy.

And Treasury has initiated a new program that I think has real potential, tremendous benefits for Alaska and I'll hand the mike back to Tony just to describe this new program. MR. BROWN: Now I'm going to talk about how I can get into your pocketbook. And I understand that later today I'll have an opportunity to also speak to the Rotary and I'll talk a little bit about the same thing, but my angle there will talk about the broader aspect of the New Markets Tax Credit program and what we expect from allocatees like David's organization.

But what I really want to do is talk to this audience as a prospect -- as investors. And as investors perhaps you would look at this program and find it as a way to serve your low income areas and create some economic stimulus.

The whole purpose of the New Markets Tax Credit program is to stimulate private sector investment in the economic development of low income communities. And in a moment I'll show you a slide and that's -- represents about half of Anchorage's -- Anchorage geographic area. And by focusing on low income communities the purpose of the program is to improve economically distressed communities and to spur economic growth in new and emerging markets.

The program passed in December of 2000 which was part of the Community Renewal Tax Relief Act that expanded the number of poverty zones throughout the United States. Here the New Markets Tax Credit program creates a tax credit for an equity investment in a community development entity. And a community development entity is a corporation or partnership that has a mission of community development and the other test is that it has on its board or an advisory board representatives of the communities that they're looking to target.

Nationally the program benefits nearly 40 percent of the nation's geography and that holds true here for Anchorage, This map might give you some idea of the vastness of the geographic area that qualifies for investments and for investments by (indiscernible) in the Anchorage community.

This graphic -- in a sense I'm going to show you how the program works. And we have -- we give and there are trade associations and other organizations that give a two day seminar on the New Markets Tax Credit program, so I'm going to try to give this to you in five minutes or less.

The centerpiece of this total initiative is the community development entity. And what you have here -- the community development entity has to be a for profit organization. And without getting too technical nonprofit community development entities can benefit as well. But the community development entity applies to the CDFI fund two ways. First it has to get certified as a community development entity and get a -- and that we attest that it does have a mission of community development and that the local community is represented on its board or advisory board.

The second relationship that the community development entity has with the CDFI fund is that it then competes for an allocation of New Markets Tax Credits. We are currently in the second round and we received over 250 applications, requested $30 million in the tax credits that are being allocated.

I shared with you Alaska Growth Capital who last year won who was one of 66 allocatees last year that won $5 million. One of the largest allocatees has a market -- also has a market in Alaska and that's Key Bank. And Key Bank, through two subsidiaries, won in excess of $200 million in New Markets Tax Credits allocation.

So you can see between mission driven community development entities and for profit traditional financial institutions who through their community development corporations, Goldman Sachs was an investment banker was also a winner in the last round of this program.

But here's how the program works. Once the community development entity competes and wins an allocation of New Markets Tax Credits, it then uses the tax credits as an incentive to attract private investors. The CDE can offer the credits to investors within five years of receiving the allocation. And once they receive the allocation and if the investor makes an investment the investment into that community development entity, that QEI, that qualified equity investment, must stay with the entity for a seven year period.

Now the entity can pay out profits, it can pay out interest, it can pay out dividends, it can pay out capital gains, but the capital invested must stay with the community development entity for seven years.

The investor can move from one project to another. Again this is an equity investment in the community development entity who in turn uses the cash for one of four purposes. Once the community development entity gets cash from its investor it has 12 months from the receipt of that cash to substantially invest all of its proceeds in typically one of four activities.

They can invest in and lend to qualified active low income community businesses and these businesses can be engaged in anything from operating a business to real estate. The credit allows for an investment for particularly just about everything except rental development and the reason why that's excluded is because of the Low Income Housing Tax Credit program.

Proceeds of the investment can be used to provide financial counseling to business and many of the allocatees are providing that service such as David's organization as part of their credit product.

The tax credit and the proceeds from the tax credit can be used to invest in and to lend to other community development entities. And in large urban areas or even in Anchorage where you have more than one community development entity which say communities that are setting up sort of a secondary market for a parent funding structure that in turn is using to fund other CDEs that's making the whole capital drive more efficient so that you don't -- you know, so corporate partners don't have to choose between, you know, several community development entities, they can use one super entity to fund a variety of activities. And the community development -- the New Markets Tax Credit program can be used to purchase loans from other CDEs so it creates sort of a secondary market opportunity for this network.

From an investor's perspective if you invested $1 million into a community development entity you will get to save in your federal income tax liability a total of $390,000 over a seven year period. You can offset your federal income tax liability by 5 percent in each of the first three years and 6 percent in the subsequent four.

Again, without getting technical we're seeing that partnerships are being established as a vehicle to fund community development entities. And where the partnership is established is that it's combining both the equity and the debt instrument that makes the tax credit a more richer investment than what many would say is a shallow investment where you just get a 5 percent return strictly on the direct investment to a CDE. If you leveraged it and had a debt instrument as a way to fund a project through a CDE, we're finding that the return in many instances can go up as high as 20 to 30 percent.

There is some risk to an investor in the program that recapture could occur if the strategic party -- if the community development entity failed to invest 85 percent of its cash proceeds into low income communities, if it failed to invest in a business that did not meet the requirements of a qualified active low income community business and if the community development entity failed to invest the investor's cash within one year of its receipt. The other requirement is if the CDE ceases to qualify as a community development entity or if the rate redeems the investment can also be a capture -- a recapture risk.

I gave you the tip (ph) of the version of the New Markets Tax Credit program, but you can go to our website and you can find more information about the program as well as the list of other types of entities and their profiles that won an allocation of New Markets Tax Credits.

So again I just want to thank you for your attention and I guess we'll look forward to questions.