CUs Dodge Tax But Lose Powers In Utah; Iowa Targets Earnings

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Headlines:

  • Study On, Business Loans Off In Compromise
  • Six Large CUs Target Of Iowa Legislator's Bill
  • Study On, Business Loans Off In Compromise

    Utah credit unions held the wolf at bay, at least temporarily, when the state legislature agreed last week to table a proposal to tax the state's largest CUs and instead study it for two years before acting.But the high-pitched legislative battle took its toll as the final bill will halt all member business lending by the three targeted credit unions-American First, Mountain America and Goldenwest-until completion of the study, and raised the specter that Utah will become the sixth state to tax its state-chartered credit unions.

    But more importantly, in framing the debate, the state's bankers succeeded for the first time in separating the credit union movement into two-the large, diversified credit unions, called the "non-exempt," and those "traditional" credit unions that will continue to be "exempt" from the some of the responsibilities assessed banks, specifically taxation.

    "This was a huge step forward on this issue," said Howard Headlee, president of the Utah Bankers Association, which helped draft the tax proposal. "The critical issue is we drew the line. Now there are exempt credit unions and non-exempt credit unions."

    Bill's Original Intent

    The bill originally targeted those three large credit unions, which have broken from the pack by expanding broadly into member business lending, yet are the only ones in the state able to retain their multiple-county fields of membership (FOM) under a 1999 legislative compromise. The original bill would have assessed those three with both the state's 5% corporate franchise tax, as well as a newly invented 30% "competitive equity fee" to continue their business lending and multi-county operations.

    The final measure will create a 12-person legislative task force to study those tax proposals and a broad range of credit union issues for the next two years. Among the issues to be studied are business lending, a proposal to give members "meaningful control" over management perquisites like dividend rates and capital expenditures, as well as the FOM issue, which has created broad enmity in this state since the 1984 allowance for multiple-county FOMs.

    Scott Earl, president of the Utah League of CUs, said they were glad they were able to hold off the tax man for the short-term and force the issue into a comprehensive study. "We wanted a task force all along," said a clearly weary Earl. "It's not perfect. It's not what we wanted. But the key thing is there are no taxes."

    But Earl, who has waged legislative conflict with the banks for years, expressed confidence in the study process, which he thinks will help credit unions win the tax argument. "I honestly believe that once the legislature is given all the facts that this won't be an issue," he said.

    Among the issues the task force will explore is the financial toll to the state, currently mired in a $200 million annual budget deficit, that a credit union tax will have as several state credit unions seek to convert to federal charters as a shield from state assessments. For example, Cypress FCU, a $200-million credit union based in Magna, converted to federal charter last year and saved $250,000 of sales tax on its new $4 million headquarters project. America First CU alone pays about $1.3 million a year in state sales taxes, which the state would lose if the $2-billion credit union giant switches to federal charter.

    The bill will immediately halt all member business lending by the three targeted credit unions as of May 5, as well as enact caps on the real estate and consumer lending.

    Just as ominously for those three credit unions, the legislature passed a separate bill last week that will overturn a state court ruling and bring separately chartered CU Service Organizations, like the business loan CUSOs run by the three, under the rulemaking authority of the state's Department of Financial Institutions. The bill, prompted by a legal challenge brought by Mountain America CU over the DFI's authority over CUSOs, will explicitly give the state regulator the power to write rules, set limits on products and services offered by CUSOs, and examine CUSOs.

    The Best Of Charters...

    Earl worried that Utah, once known as one of the most liberal state charters in the country, is on its way to being considered one of the tougher ones, as much as for the 1999 legislation repealing the multiple-county allowance as for the constant attacks by the bankers. "We used to be ahead of other states, now we're behind other states and behind NCUA and the federal charter," he said.

    As many as six state charters, including the two giants, have already expressed interest in switching to a federal charter. "I think what you're going to see is the three large credit unions looking at the federal charter," said Earl. "That might be their best bet."

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    Six Large CUs Target Of Iowa Legislator's Bill

    Taking a page from Utah bankers, the Iowa Bankers Association succeeded in getting lawmakers to introduce a proposal in the state legislature last week that would tax the growth in retained earnings (reserves) by the largest credit unions.

    The bill, with separate versions introduced in the House and Senate, takes aim at the state's six largest credit unions, those over $150 million in assets and operating under multiple common bonds.

    The proposal would expand taxation for the state-chartered credit unions in Iowa, one of just five states to tax credit unions. Credit unions, of which all but one of the 176 are state-chartered, already pay a Moneys and Credit Tax to the state that amounts to 0.5% of reserves.

    Rep. Lance Horbach (R-Tama), the chief sponsor of the bill, said the proposal would benefit credit union members because it would require CUs to pay out more of their retained earnings in dividends or in lower fees in order to lower their taxes. "If you take the money and give it back in increased dividends or fee reductions there's no tax," he said. "The whole idea was to go back to the original credit union motive of years ago where they truly shared profits with the membership."

    But Pat Jury, chief lobbyists for the Iowa CU League, said the issue of setting of dividends and fees is the domain of the management and directors of individual credit unions, not state legislators. "Ultimately, credit union members own that money," he said. "If they don't like the way they pay it out they can vote out the board of directors and replace them with someone who they agree with."

    The new tax proposal, said Jury, would hurt credit unions by limiting their ability to build reserves, the target of the Horbach bill. Though Horbach insisted that other Iowa cooperatives, like agricultural co-ops, have their net earnings taxed, Jury noted that those institutions don't have net worth requirements, like credit unions.

    "If you're talking about financial institutions, all the rules are different," said Jury.

    Jury was confident that despite the state's tight fiscal situation they will be able to defeat the bill. "The (legislative) leadership doesn't want a tax increase and the members don't want a tax increase," he said.

    The Iowa league has initiated a major media campaign aimed at solidifying public opinion against the new tax proposal. The league has begun taking out radio and print ads featuring testimonials from members and urging people to contact their lawmaker and oppose the bill.

    The House version of the bill has 19 co-sponsors on it, including Horbach, and the Senate version has eight co- sponsors.

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