At a time when it’s difficult to convert deposits to loans, does it make sense to open the door to an additional flow of money into a credit union?
That’s one of the questions surrounding the acceptance of deposits of public funds. While federally-chartered credit unions can offer such accounts, a tally by the League of Southeastern Credit Unions found that in 17 states the transactions are still forbidden to those with state charters. Efforts are underway to change that in states such as Alabama, Florida and Ohio. In New Jersey and Oregon, campaigns have succeeded with efforts continuing to clear up the details.
In one sense, credit unions do have mixed feelings on adding another source of deposits, said LSCU CEO Patrick La Pine said. Others who are seeing weak loan demand may be chasing away deposits. Then there are credit unions who view government accounts as a chance to further strengthen relationships. For example, a credit union serving educators may welcome the ability to accept funds from local school districts.
John Kozlowski, general counsel for the Ohio State Credit Union League, said in the Buckeye State, it would be an opportunity to participate in lending programs through the state treasurer’s office. There are some business lending programs and agricultural programs. He said by not being eligible to accept public funds, state-chartered credit unions are not included among the potential lenders.
Both La Pine and Kozlowski also emphasize it hasn’t been a case of credit unions banging on the doors of local officials. It’s been the opposite. Mayors, school boards and others have been the ones approaching local credit unions, only to be puzzled and frustrated when they discover the credit unions can’t accept municipal deposits.
Then there’s the time issue. Even when credit unions get enabling legislation, it can take time – lots of time – to implement it. For example, in June 2011 the New Jersey legislature approved a law allowing counties, school boards, municipalities and other local government units to use credit unions as depositories. But it wasn’t until mid-September of this year that the New Jersey Credit Union League met with state regulators to review the final details needed to put the law into effect. It may not be until 2013 before state-chartered credit unions there actually begin accepting government funds, according to officials.
The effort to turn law into reality has taken even longer in Oregon, where credit unions had been limited to taking in no more than $250,000 in deposits from a single public entity. However, legislation passed in 2009 lifting that ceiling requires a minimum of five credit unions to submit letters from municipal officials confirming they plan to place more than $250,000 in a credit union. Those five credit unions must provide a signed agreement and proof of board approval.
Meanwhile, the Northwest Credit Union Association must submit a packet to the state treasury that includes a $199,065 check to cover the cost of administering the program for one year. The treasurer’s office then has six months to actually get the program going.
In late August, a headline in the NWCUA regulatory update summed up the slow process: “Road to Public Funds in Oregon Longer than Anticipated – But End is in Sight.” The best projection is local government units will actually be able to deposit money in state credit unions sometime between January and March 2013, according to the association.
In some cases, Oregon credit unions are already accepting public funds by remaining within the $250,000 ceiling. The City of Portland has deposits with the $928 million Advantis in Milwaukie, $915 million Unitus Community in Portland, and $3.2 billion OnPoint Community Credit Union in Portland.
Advantis President/CEO Ron Barrick said it makes sense to accept the funds.
“Today’s rate environment won’t last forever, and establishing these relationships now can provide credit unions with a stable source of lower cost deposits to meet future loan demand as rates paid by banks for public funds are often 30 basis points lower than those paid on consumer deposits,” he indicated. “Credit unions can also limit the amount of deposits they accept under this program.”
In Florida, Alabama and Ohio, the battle is in an even earlier stage. Despite efforts by state leagues, no legislation has passed.
Officials from both the OCUL and the LSCU, which includes represents credit union in Alabama and Florida, point out much of the impetus to allow government deposits comes from local officials who are familiar with their area credit unions and frustrated when they can’t use them as depositories.
La Pine said tight economic times have encouraged local governments to pursue better deals on their deposits.
“I have heard from more and more credit unions that have been contacted by their local school districts, municipalities and other governmental units,” he said. “They’re looking for the best return on any deposits. Just like individuals, public entities have been shopping around.”
Last year, enabling legislation was introduced in the Florida legislature. It received a hearing and passed a House committee, but didn’t go any further.
“Of course the banks opposed it,” La Pine said. “This session we went back, reintroduced it, and ran into more well-organized roadblocks. The banks were a little more prepared.
La Pine said the legislation will be reintroduced in the next session, and the LSCU will continue to work on educating lawmakers and legislative leaders.
“Florida has a part-time legislature and the session only runs a couple months, so we have to be prepared when the session starts.”
In Alabama, where legislators also serve part time, the league raised the issue with both House and Senate leadership in 2011. No bills were introduced and 2012 hasn’t been any more promising.
“I think it’s a no-brainer from a public policy standpoint because all you’re doing is saying you’re going to give local units of government a choice,” La Pine said. “Choice has never been a bad thing for consumers when it comes to having a nonprofit credit union as an alternative in the marketplace. I don’t think it’s going to be bad for local units of government.”
With the legislators in Florida and Alabama spending more time in their home districts than in respective capital cities of Tallahassee or Montgomery, La Pine believes it is important to get credit unions engaged with lawmakers on the local level. He also wants to encourage local officials to contact their legislators and support the idea of credit unions accepting government deposits.
Kozlowski at the OCUL explained bills were introduced in both the Ohio House and Senate and are currently in committee. However, the General Assembly is not scheduled to meet before the November election. It will then hold a lame duck session. For now, it appears the bills will have to be introduced again next year. With 2013 being a budget year, the assembly is expected to give priority to the state’s financial issues.
“We’ll probably sit down and talk about where we want to go with this,” Kozlowski said. “A lot of local officials and local governments want to do business with credit unions. County commissioners and township trustees have endorsed our legislation. One thing we have seen is constant in the last few years – local officials continue to approach credit unions wanting to do business with them. Credit unions don’t go out and solicit them. They come to the credit unions.”
Ohio bankers have opposed the legislation as they have for the past three or four times it has been proposed.
Term limits play an important role in the league’s efforts to educate lawmakers. Kozlowski said credit unions have a lot of friends in the legislature but representatives and Senators can only serve eight years. Because the turnover provides a constant flow of new arrivals, Kozlowski and others in the credit union movement need to meet and familiarize with key issues.