California CU Tax Study Bill Meets Quick Demise After Assembly Hearing

SACRAMENTO, Calif. – With so many credit union leagues across the country having already faced bankers’ efforts to tax state-chartered credit unions and attempts to limit credit unions’ powers, California credit unions can take a sigh of relief knowing bankers’ attempts in that state were quashed before they barely got off the ground. A bill to study taxing California credit unions – along with looking at imposing mandatory community reinvestment obligations, additional capitalization requirements and more stringent conflict of interest rules – was shelved after a hearing by the state`s Assembly Banking and Finance Committee. Assemblywoman Cindy Montaez (D), a committee member and author of the bill, AB1226, withdrew the measure after it failed to gain support in the April 21 committee hearing. Credit unions had mounted a massive lobbying effort against the bill. The measure was supported by the banking industry. No vote was taken by the 12-member committee but it was apparently obvious during the hearing that the bill had no chance of success, with only one or two lawmakers appearing in favor. “Several members of the committee were clearly uncomfortable with the language of AB1226 and questioned why the bill was so stridently anti-credit union,” reported Bob Arnould, vice president of state governmental affairs for the California Credit Union League. Although the bill can be reintroduced in the coming year, it would still have to go up against the same members of the Banking and Finance Committee who heard it at hearing. “Essentially the bill is dead for at least 2003 and may be gone for good,” Arnould said. “Most bills that become two-year bills are never heard from again.” Montaez’s office did not return telephone calls seeking comment. The hearing attracted a roomful of credit union officials, who crowded in to make sure the measure was quashed. Prior to the hearing, credit union leaders heavily lobbied lawmakers throughout the day to complain about provisions in Montaez’s bill, which her office has admitted was drafted by the California Bankers Association. Credit union officials previously met with lawmakers in early April during the league’s annual government relations rally in Sacramento. “It was a classic grassroots effort,” Arnould said of the lobbying effort on the bill. Arnould said the hearing room was packed “wall to wall” with credit union personnel who showed up to oppose the bill. In between the meetings with legislators in early April meeting and again on Monday, credit union leaders telephoned lawmakers and launched a major letter writing campaign, with thousands of letters sent in opposition to the bill, he reported. “We had several legislative offices call our offices and ask us to slow down the faxes so they could use their fax machines for a couple of days,” Arnould said. “So it was a very large letter writing campaign.” He said that while AB1226 was no longer an issue this year, credit unions needed to remain “ever vigilant” because of assaults by the banking industry on the tax-exempt status of credit unions. The bankers’ attacks across the country come at a time when states are struggling to balance their budgets. California faces up to a $35 billion shortfall this budget year and has been slashing programs and looking for new sources of revenue. Montaez`s bill asked the state’s Legislative Analyst’s Office to conduct a study into the “tax exemption provisions applicable to state and federally chartered credit unions” to determine if a “fee” should be imposed on them. The goal, according to the bill, would be to benefit public education and create “some parity” between credit unions and other financial institutions. Arnould said credit unions effectively rebuffed the banks’ arguments by pointing out the benefits that banks enjoyed under Subchapter S status. In California, the number of Subchapter S banks has increased 600 percent, according to the league. Banks nationwide are currently seeking to expand the rules for Subchapter S status, which makes them exempt from paying corporate income taxes. “Bankers in California, Utah, New Mexico, Iowa, and Florida are calling on their legislators to tax credit unions in the name of `fairness,’ at the same time they are quietly building a growing stock of untaxed banks behind the scenes,” said Matthew Davidson, league executive vice president. “It’s one thing for bankers to take advantage of legitimate tax-reduction strategies, but to simultaneously call for the taxation of non-profit financial institutions in the name of `fairness’ or `competitiveness’ is simply hypocritical,” he said. “The emperor doesn’t have many clothes left on the Subchapter S issue,” Arnould added. In an amended version of her bill, Montaez, a freshman Democratic legislator, added requirements that the study include a look at imposing requirements on credit unions concerning community reinvestment obligations, increased capitalization and more stringent conflict of interest rules. The measure would have applied to credit unions with more than $1 billion in assets, those that offer commercial products and loans and those that do not require a traditional common bond for membership. Montaez’s office has maintained that the bill, including the subsequent amendments, was never intended to challenge the tax exempt status of credit unions. “I realize it looks like we’re going after the tax credit but we have no intention of doing that,” said Janelle Beland, Montaez’s legislative director, shortly after the bill was introduced Feb. 21. “It’s a study bill,” said Jo-Ellen McChesney, chief of staff for Montaez, after the bill was amended. “All it is is a study bill.” Arnould described Montaez`s office a “extremely hard to read and difficult to work with.” “I always felt confident that in the end, if the bill was unfavorable to credit unions, we would be able to defeat the legislation,” he said. David L. Chatfield, president and chief executive officer of the League, had described the measure as “typical banker propaganda of unfounded assertions against credit unions.” “AB1226 is a solution in search of a problem,” he said. “There is absolutely no need for the Legislature to spend taxpayer money on a study whose foregone conclusion would be to impair the ability of credit unions to provide needed and desired services to working men and women, to the benefit of no one but bank executives and stockholders.” -