Tax Initiatives Help Swing Pendulum Back To Fed Charter

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The dual chartering system appears alive and well. After a seven-year period during which more than 150 credit unions fled from the federal system to state charters, the pendulum appears to have swung back.

Last year was the first time during that period that more credit unions switched to federal (17) than to state (15) charters, and another seven have boarded the flight to federal charter so far this year, including the three large Utah credit unions fleeing that state's tax threat.

Tax battles like the ones in Utah and Iowa, New Mexico, as well as the growing threat of the Unrelated Business Income Tax, or UBIT, coupled with an expansion of federal chartering powers, are expected to extend this trend, at least over the short term.

"I think we've made a lot of progress over the past three-and-a-half years," said NAFCU President Fred Becker, who has made enhancement of the federal charter a main priority during that time. "If you look at all the changes at the regulatory level, I think there's been substantial progress. If you look at the statistics, you'll find the number of credit unions going to federal charter is greater than the number going to state charters."

Like a pendulum, the move towards either the federal or state charter seem to swing back and forth over time. During the early and mid 1980s, hundreds of federal credit unions converted to state charters to avail themselves of the private deposit insurance option. In the early 1990s the trend swung the other way as private insurers closed down and hundreds of state charters converted to federal insurance and federal charters.

Around 1996, as NCUA's multiple-group field of membership policy appeared doomed because of the bankers legal assault, as many as 200 federal credit unions moved to convert to state charters for more flexibility on FOM.

States Applying Pressure

The onset of the state tax fights and the work to enhance the federal charter appears to have pushed the pendulum back again. Observers, at least in the front-line states, see the trend continuing. Scott Earl, president of the Utah League of CUs, said the continued pressure on state credit unions in Utah by the bankers and legislators allied with them has helped push at least six credit unions, including the big three, America First CU, Mountain America CU and Goldenwest CU, to flee the state system over the past two years, and more are expected. A handful of others are also considering the switch.

"The bottom line, I think, is it is an unfavorable credit union environment here in the state. We've got a legislature that is not caring or understanding of the value of credit unions and a state regulator, the Department of Financial Institutions, that is trying its darndest to sit on the fence, making sure it's not even a competitive charter," said Earl. "There are some advantages that the federal charter brings, that the state charter does not bring right now."

In Iowa, too, where all but one of the state's 375 or so credit unions have a state charter, some credit unions are looking anew at the federal charter. Pat Jury, chief lobbyist for the Iowa CU League, said that is a factor of the new tax fight that emerged this year and the fact that NCUA has reached out more to federal credit unions to make the federal charter more attractive in the past few years.

"During the (tax) debate there was a lot of discussion about converting to a federal charter," said Jury, "I think everybody's taking a breather now to see how friendly the legislature is going to be."

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