Colorado credit unions face another setback in their public deposit offering | Credit Union Journal
A proposal to allow public institutions to deposit funds in credit unions has been postponed indefinitely, but those for and against the change say the fight will continue.
Colorado Bill 22-1277, which was filed in late March, sought to change current state laws that prohibit public institutions such as schools and local municipalities from depositing public funds in a non-insured institution. Federal Deposit Insurance Corp. Certified institutions are those that meet specific requirements set by the state Law on the Protection of Public Deposits.
Many of the aforementioned laws were put in place before the creation in 1970 of the National Credit Union Administration and the Share Insurance Fund, which performs a function similar to that of FDIC insurance. In other words, credit unions were not deliberately excluded from receiving deposits from public institutions; instead, they were formed and regulated in ways lawmakers had not intended. In subsequent years, lawmakers defended the status quo by arguing that since credit unions do not pay state taxes, they should not benefit from holding state deposits.
Proponents of the bill argue that it puts the needs of banks ahead of taxpayers by limiting competition.
“I take very seriously that we should be as responsible as possible with taxpayers’ money, and the way I saw that was that competition benefits the consumer…so if we allowed credit unions to be an option, and there was an opportunity for the taxpayers to get a better rate on their money, or better service or whatever it was, that I wanted to do everything I could to be part of that,” the rep said. State Kyle Mullica, a Democrat and one of the bill’s leading supporters.
Past campaigns for the acceptance of public funds by credit unions in states such as Florida and Arkansas have also led to bills that were slaughtered or abandoned in perpetuity, while others in New York and Washington succeeded in having new provisions adopted. In many cases, legislative defeats are only temporary.
Jenifer Waller, president and CEO of the Colorado Bankers Association, testified at the recent hearing and said the bill was the third example of credit union groups pushing to be included in state law. during his 23 years with the ABC.
“The law, which has been in place since before I was at the ABC, was passed because we have a pretty aggressive public deposit protection law that the banks respect and they wanted to push through the protection and security public funds first,” Waller mentioned. With respect to fairness, “since credit unions do not pay income tax and banks do, the legislator at the time felt that it was unfair for a non-taxable entity to benefit holding these funds”.
During the hearing, the group of Colorado bankers argued that moving deposits from the state to credit unions might not result in better rates, but would make it more difficult for banks to serve their market through the Community Reinvestment Act lending activity, Waller said.
“While it’s easy to be lured by the potential for a higher rate a credit union might be able to pay, they don’t consistently pay higher rates on deposits…if you lose [agricultural] funding, if you lose small business loans, you lose ARC investments in the community, that really outweighs the benefit of moving those funds,” Waller said.
Credit union experts and trade groups say the problem has less to do with disrupting communities and more to do with increasing the number of viable depositories local municipalities can partner with to securely deposit funds .
Experts from the Mountain West Credit Union Association — which represents about $67 billion in assets in Arizona, Colorado and Wyoming and also testified at the March hearing — said the co-ops’ claims seeking to take control of the market for public funds does not reflect economies of scale for all institutions involved.
“Credit unions have been around in the state for almost 100 years and we still only have 14% of the market…to say that one way or another there is going to be a dramatic drop in the number of banks getting public money so they can lend it out just doesn’t align with the reality of the market and the size of credit unions relative to banks,” said Dan Diorio, director of political finance. and policies of the Mountain West group.
Diorio pointed out that for many, the concept of reinvesting in surrounding communities is built into the credit union model.
“We make the right kinds of investments in our membership area because that’s who we are, not because we’re bound by law like banks are…most credit unions were founded to serve the underserved and that’s what we did,” said Diorio.
Greg Mesack, senior vice president of government affairs for the National Association of Federally-Insured Credit Unions, said the reason credit unions are often excluded from public funds has to do with the history of the laws themselves.
“The FDIC dates back to the 1930s, which is around the time that several states started developing these laws to make sure municipalities had federal insurance. [as] they didn’t want municipal deposits placed in institutions that weren’t federally insured,” Mesack said.
Mesack said additional concerns revolve around rural areas of the state in the middle of the branch closure trendwhere there might be only one credit union to provide services to residents.
Credit unions looking to launch initiatives for underserved communities and expand their economies of scale must wait for change.
Representatives of the Denver Community Credit Union, with assets of $445 million, testified in favor of the proposal after years of failure to work with the city government to develop funds and other programs . Helen Gibson, who works as vice president of strategic outreach for Denver Credit Union, explained that her founding history is closely tied to local governments and often leads to a desire for collaboration.
“We were started by employees of the city and county of Denver, and because of that, we’ve maintained a very close relationship with both municipalities…for us, it’s honestly annoying because we can’t try [to partner with them] and innovate,” if public institutions cannot deposit funds with us, Gibson said.
Speaking with many local municipalities, Gibson said she sees a niche for smaller-scale credit unions to help governments launch programs for underserved consumers.
“In the city of Denver and larger municipalities, we don’t have these little community organizations or banks that are willing to put these pilot programs in place…it could be a game changer. [and] we could have an impact,” but the law prevents that from happening, Gibson said.