Illinois banks and credit unions, angry with the governor for raising examination fees last year to help balance the budget, are fighting back.
Trade groups representing banks, thrifts, and credit unions filed suit Tuesday against Gov. Rod Blagojevich and three other state officials. The suit asked the courts to roll back the fee increase and block state revenue collectors from transferring money from exam fees to the state’s general fund.
Keith Sias, the director of state governmental relations for the Illinois Credit Union League, said state-chartered banks, thrifts, and credit unions are also demanding that the state return the estimated $6 million of fees he says they have overpaid since the fee hike took effect in December of last year.
At issue is whether the governor had the authority to raise fees to combat a budget shortfall.
The Illinois Credit Union League, the Illinois League of Financial Institutions, and the Community Bankers Association of Illinois filed their suit in Sangamon County Circuit Court after three months of negotiations with the Blagojevich administration failed to produce a compromise.
In addition to the governor, John Filan, the director of the Illinois Office of Management and Budget, Michael Rumman, the director of Central Management Services, and Fernando Grillo, the secretary of the Department of Financial and Professional Regulation, were named as defendants.
(Both the Division of Financial Institutions, which regulates credit unions, and the Office of Banks and Real Estate, which regulates banks and thrifts, fall under Mr. Grillo’s department.)
Gov. Blagojevich, a Democrat, raised the fees by 27.5% last year to help close an estimated $5 billion shortfall in the budget for fiscal 2004, which ended June 30. He was given the authority to do so by a law enacted last year that lets the governor transfer money from special funds — like the Office of Banks and Real Estate’s — to the general fund.
But the plaintiffs claim that the law is unconstitutional, because it raises regulatory fees beyond the amount needed to cover regulatory expenses. In Illinois, as in many states, banking and thrift regulators are self-sufficient; they are funded by examination fees, not tax dollars.
“If fees are levied that turn out higher than cost of regulation, those fees are supposed to be paid back either through credit or rebates,” Mr. Sias said.
The suit also alleges that the transfer of excess money from the dedicated funds to the general revenue fund violates laws that limit the way the money from the dedicated funds can be spent, according to a press release issued by the plaintiffs.
Gov. Blagojevich agreed to freeze the transfer of funds in the fall while negotiating a possible compromise with the trade groups. That freeze is still in effect. His office did not return calls for comment on the suit, and a spokeswoman for the Department of Financial and Profession regulation said it had no comment on the suit, because it had not yet seen it.
Jerry Cavanaugh, the general counsel for the Community Bankers Association of Illinois, said the fee increases are significant. The annual fees for a $25 million-asset bank have increased from $6,450 to $8,224, and the fees for a $1 billion-asset bank have risen from $92,450 to $117,874, he said.
Industry officials say they are also concerned the fee hike could persuade state-chartered banks, thrifts, and credit unions to switch to federal charters.
So far only the $51 billion-asset Harris Trust and Savings Bank, a Chicago subsidiary of Bank of Montreal, has announced plans to switch charters, but it is doing so mainly because it would be easier to expand into other states with a federal charter.
Still, Jay R. Stevenson, the president of the Illinois League of Financial Institutions, and a former Illinois banking commissioner, said even though no state-chartered thrifts have switched charters, some are talking about doing so, because they view the state’s regulatory environment as “uncertain.”
It is unusual, but not unprecedented, for states to tap the coffers of their bank regulators to help balance their budgets.
Neil Milner, the president of the Conference of State Bank Supervisors, said that when he was Iowa’s banking commissioner, the state took some money from his department on an emergency basis during the farm crisis in the mid-1980s.
Nevertheless, he said that states should not get in the habit of using the funds of its self-sufficient agencies to meet budget shortfalls.
“It appears from the way they have this structured [in Illinois], it’s a more permanent type of approach, and I think it’s inappropriate,” he said. “The industry is paying for their own costs — it’s not taxpayer money” supporting financial regulation. “Once you get significantly beyond the cost of running the department, it’s not an assessment. It’s a tax.”
Trade group officials said they have not heard from the Blagojevich administration since filing the suit, but they hoped that negotiations would continue while the lawsuit progresses.
“Should we reach an accord, the co-plaintiffs are prepared to dismiss the case,” the Community Bankers of Association of Illinois said Tuesday.
