Let’s Make A Deal — Or Not

Credit unions can finally settle the tax exemption issue by rallying the base or striking a bargain.

 
 

When the income tax exemption for credit unions was under heavy fire from banking lobbyists last September, boxes of "Don't Tax My Credit Union" postcards filled out by members began piling up in Senator Marco Rubio's Capitol Hill office.

Although this national campaign was the brainchild of the Credit Union National Association (CUNA) and involved cooperatives from all over the country, more than 30,000 postcards from people in Rubio's Florida district came from the member-rallying efforts of one institution: Suncoast Schools Federal Credit Union (now Suncoast CU).

These cards represented just 5% of Suncoast's ($5.48B, Tampa, FL). total membership — 560,000 people in 15 counties. In future campaigns, the credit union would like to get up to 10% of these members involved.

CU QUICK FACTS

  • Suncoast Schools FCU
  • HQ: Tampa, FL
  • Assets: $5.48B
  • Members: 564,231
  • 12-MO Share Growth: 5.31%
  • 12-MO Loan Growth: 5.23%
  • ROA: 1.28%

Outnumbered and outspent by banks, credit unions often struggle to be heard in political circles, but as Suncoast has already discovered, cooperatives have a different and equally powerful tool at their disposal — passionately loyal members who also vote in elections. That realization wasn't lost on Congress, which for now at least has abandoned revoking the income tax exemption that credit unions receive under a 1934 law. Nevertheless, most industry leaders believe the issue will crop up again — perhaps even as early as next year — and credit unions need to be prepared.

"It's not going to go away," says Tom Dorety, CEO of Suncoast, who believes there are only two ways for credit unions to take the tax exemption issue off the table permanently.

The first and preferred method, he says, is for credit unions to get actively involved in the political process and enlist members in those advocacy efforts so that Congress doesn't change the law. A second option and last resort is to do the unthinkable and make a grand deal that sacrifices the tax exemption in exchange for lifting other restrictions, such as those on business loans and supplemental capital, that currently hamper the industry's efforts to grow.

"We come up with a solution that meets our needs," Dorety explains. "Then we trade all this stuff for a form of reasonable taxation."

Activate The Base

Dorety himself isn't ready to pursue a grand deal — quite the opposite in fact. He believes that a strong, concerted push from credit unions could finally tip the scales in the industry's favor.

"You have to go after your members and legislators and show them why the taxation doesn't apply to credit unions," he says.

CU QUICK FACTS

  • Listerhill Credit Union
  • HQ: Sheffield, AL
  • Assets: $629M
  • Members: 78,174
  • 12-MO Share Growth: 8.92%
  • 12-MO Loan Growth: 7.47%
  • ROA: 0.63%

To do that, credit unions must educate members about what is at stake. Many people don't even know the exemption exists, let alone understand why the issue affects them.

According to CUNA, credit unions are exempt from paying federal income tax because, unlike banks, they are member-owned and provide a public service by helping communities and individuals who wouldn't otherwise have access to credit. Without the exemption, most credit unions would have to cut dividends while raising fees and rates just to survive, imperiling their public service mission.

"If we can get people to understand that, then they will understand why we need their help with some of our regulatory and legal issues," says Kristen Mashburn, vice president of marketing for Listerhill Credit Union ($629M, Sheffield, AL). Today, Listerhill is an active proponent of both the tax exemption and a higher cap for member business lending.

At Suncoast, member education takes many forms and is always changing so that the message stays fresh and new, says Gary Vien, the credit union's senior vice president of human resources and development. In August, Vien invited members to a Q&A chat about the tax exemption on the credit union's Facebook page. The session started out slow and then suddenly picked up until the questions were flooding in.

Vien also encouraged staff members to create their own videos on the topic and post them on YouTube. His efforts have run the gamut of social media including Twitter and Vine and he doesn't ignore older forms of communication either, particularly when enlisting members' help. This summer, the credit union emailed more than 220,000 members, urging them to contact Congress, and the same message was flashed on ATM screens or played over the phone for callers put on hold.

Meanwhile, in the branches, employees passed out pre-printed postcards for members to fill in with their address and signature before dropping into brightly decorated boxes that the credit union later delivered to Capitol Hill. Congressional staff members had to log every single one of those 30,000 postcards, Vien says.

Best of all, raising awareness and rallying members this way doesn't cost a cent.

Suncoast spends no money to advertise its cause, although it does hope to hire a full-time staff member to convey the credit union's views to politicians and the community.

At Listerhill, the strategy is to have members speak directly with politicians about the difference the credit union has made.

"Whenever a legislator who opposes the tax exemption is in town, we'll bring along a member to tell their story," Mashburn says.

Both credit unions also raise awareness about the public good they do by helping to fund local schools. Listerhill has donated more than $17,000 to one Tennessee county's public schools, and Suncoast has contributed more than $1.5 million to several Florida school districts.

Make A Grand Bargain

Advocacy may be the logical path for credit unions, but success isn't guaranteed. For one thing, efforts to change other restrictions in credit unions' favor — such as increasing the amount of business lending they can do or allowing them to raise supplemental capital — can complicate the goal of retaining the tax exemption.

Mashburn, for instance, says some politicians such as Senator Bob Corker of Tennessee have drawn a line in the sand about these demands.

"His response was very clear," she says. "He is in favor of not taxing credit unions as long as they maintain the small business lending cap."

That quid pro quo irks many credit union CEOs like Dorety at Suncoast and Brett Martinez of Redwood Credit Union ($2.26B, Santa Rosa, CA), who say that the two issues are unrelated.

"The tax exemption has nothing to do with the cap, which we didn't even have before 1998," Martinez says. Even the limit for the cap, he adds, was established arbitrarily.

Still, when politicians can't be convinced to separate those issues, the tax exemption argument is weakened every time credit unions push for other concessions.

"We want both the tax exemption and the cap raised, but it's a hard message to communicate," Mashburn says.

Consequently, the day may come when credit unions are forced to concede the tax exemption in exchange for other benefits. The idea, Dorety says, is the elephant in the room that no one in the industry wants to mention because of its potential to divide the community and invite attacks on whichever trade association first proposes such a deal.

Dorety knows firsthand how contentious this proposal can be. Last February, he described such a trade-off in an op-ed, and the reaction was immediate.

"Even CEOs from some of the largest credit unions who knew me said, ‘Have you lost your mind?" Dorety says. But he also heard from other CEOs who had a different reaction. "They said, ‘Give me member business lending, open fields of membership, and some reasonable tax and I'll do that deal."

Dorety isn't suggesting that credit unions seek such a bargain now, but rather that they prepare for the possibility that one might need to be made if all other efforts fail.

A serious discussion about making such a trade-off isn't as radical as it sounds, as Canadian credit unions have long advocated the benefits of paying income taxes to their American counterparts.

"Canadian credit unions pay taxes so that they can have a seat at the table," Mashburn says. "It allows them to have more of a say in things."

Although all Canadian credit unions are subject to the tax regardless of size, Dorety doesn't believe the same would happen here. In fact, one argument in favor of the industry tackling the subject proactively is that credit unions stand a better chance of limiting taxation to just the largest institutions who could most afford it, with smaller credit unions remaining unaffected. Of course, other thorny questions would also arise such as where the cutoff would be, how a credit union's net worth would be defined, and how net income would be determined.

So what would Dorety do if his credit union suddenly owed income tax? First, he says, he would hire some good tax accountants. Then he would look at Suncoast's pricing and business model.

"Ultimately, we're going to look at what are the advantages to the credit union charter," he says. "It has immense advantages today, but everybody is going to look at that if they get taxed."

If the tax is truly onerous, he might have to decide whether Suncoast remains a credit union or becomes a bank. And therein lies the justification for Dorety's argument that the industry be ready with its own tax solution.

Any tax that the industry proposes, he says, would be far more reasonable than one forced on them by outsiders, especially banks. Plus, a deal that encompasses other benefits could set the stage for all credit unions to not only survive but also thrive.