CU Taxation, Is it likely? Taxation Compromise May Keep Credit Unions Trapped

We're in the heat of the battle, NCUA's Dennis Dollar recently told CUNA's News Now about the threat of taxation. If credit unions lost the war, the structure of how credit unions do business would dramatically change, he warned. Dollar said credit union conversions to banks could become the end result if banks win the tax war, reported the CUNA publication.

 
 

''We're in the heat of the battle'', NCUA's Dennis Dollar recently told CUNA's News Now about the threat of taxation. If credit unions lost the war, ''the structure of how credit unions do business would dramatically change'', he warned. Dollar said credit union conversions to banks could become the end result if banks win the tax war, reported the CUNA publication.

Dollar, along with CUNA and NAFCU lobbyists are perhaps in the best position to measure the likelihood of taxation and the number of credit unions planning a bank charter conversion. Because of this inside information, they are hitting the ''panic button'' and crafting measures to ''freeze'' credit unions in a credit union charter before the tax bill arrives, say some observers.

One such measure, the proposed NCUA rulemaking targeting credit unions converting to banks, in part, generates the presumption that some are converting for personal gain rather than to benefit the membership and the community by eliminating credit union restrictions. By spreading this presumption among members of Congress, Dollar and the trades may hope to, at a minimum, enact a return to the pre-1998 rule providing that a conversion must be approved by a majority of all of the members of the credit union (not just those interested enough to vote), prohibit director compensation, plus add other punitive & costly requirements, hence making it challenging to complete larger credit union conversions. A second measure involves raising fears among members of Congress about the safety and soundness of the NCUSIF & ASI should defections increase. A flood of conversions would create budget shortfalls at the CU trade associations and NCUA; and, the reserve ratios of NCUSIF and FDIC could be affected. Just 1,100 credit unions over $100 million in assets (those most likely to be taxed) control almost 80% of the fund deposits. In the 1990's, Congress stopped S&Ls from leaving the Savings Association Insurance Fund (SAIF) because of comparable solvency fears.

If credit unions are taxed, converting to a bank could become much more difficult because a flood of applications might clog the system. During deficit times, at what could be brief Congressional and State Legislature taxation debates, those that argue publicly to preserve the flexibility to convert to a bank might face the charge that their defense of the conversion option is rooted in a desire for personal gain and they will be compared to the executives of Enron, MCI, and Tyco. In the end, CU lobbyists could claim a compromise victory for saving the credit union movement by halting conversions and argue that taxation, as many would agree today, is unstoppable.

Some communities, institutions, and members, however, could suffer because credit unions will continue to face the many constraints CU leaders are complaining about today. Poor consumer awareness, for example, will continue to plague community credit unions since recent studies have shown that only one in two people can name a local credit union and only one in five know what a credit union is. In addition, capital restraints, corporate structure and governance limitations, product and market limitations, and other political risks generate wasteful inefficiencies. Correcting these costly perceptions and limitations will take years and cost millions; meanwhile market share and scale are being forfeited to others. Credit union leaders moving to the bank charter are proactive by selecting a charter that (for their institutions) best supports the modern day mission; it's not about personal gain.

In conclusion, NCUA's Dollar often uses a barnyard analogy about NCUA wanting to use ''carrots'' rather than just ''sticks'' to control credit union executive choices. The recent attack on conversions to the bank charter is an admission that NCUA's ''carrots'' are used up and now the ''stick'' must be used to keep credit unions in the movement / system ... or in the view of some CU leaders ... the ''barnyard''.

Should you want to preserve the option to convert to a bank charter, please contact, me at 800-649-2741. It's unlikely the CU trade associations, NCUA, or the bank trades will defend conversion flexibility when taxation compromise discussions surface. Clearly converting to a bank should remain an option for credit unions. During my visits and discussions with Congressional staffs as I argue in favor of ''charter choice'', your confidential letter of concurrence and ongoing support to keep the bank conversion option open is sound strategy.

Finally, if you think a bank charter is in your future, please contact me for help with the feasibility and implementation. As advisor to the vast majority of those converting, our firm has developed many helpful tools for both evaluating and executing a conversion. These cost effective tools, tested during multiple conversions, are available when you decide to work with the bank charter Conversion Team.

 

 

 

Oct. 13, 2003


Comments

 
 
 
  • Could us more detail. A little self-serving
    Anonymous
     
     
     
  • Timely and excellent thoughts!
    Anonymous
     
     
     
  • good piece
    Anonymous
     
     
     
  • Informative & provided enough detail.
    Anonymous
     
     
     
  • "Charter choice" is good as long as members are allowed to fully hear both sides of the conversion issue before voting.
    Anonymous