SALT LAKE CITY – With the rest of the U.S. credit union industry watching in alarm at the Utah state House's passage of a precedent-setting credit union 5% franchise tax bill, Utah CUs were marshalling anew for a last-ditch attempt to defeat the bank-driven legislation in the state Senate. "It's definitely a setback for us, but we have confidence key Senate leaders will work with us," is how Scott Earl, president of the Utah League of Credit Unions assessed the outlook after an all-day, rancorous 43-32 House vote Feb. 17 passing the much-amended bill. The measure, drafted by the Utah Bankers Association to control CU expansion and which received strong backing of the Republican leadership, had been vigorously opposed by the League as being inimical to the industry. The House vote followed an intense last minute, phone-in campaign coordinated by the League to lawmakers over the President's Day holiday. H.B. 162, sponsored by Majority Whip Rep. Jeff Alexander (R-Provo) and which now goes before a Senate once seen as favorable to banks, would levy a 5% corporate franchise tax effective May 5 on three state-chartered CUs-America First CU, Riverdale; Mountain America CU, Salt Lake City and Goldenwest CU, Ogden. Though America First and Mountain America are the chief targets of the bank attack because of their branch and loan expansion, all three were included in the bill because they have branches in multiple Utah counties. Even before passage of the House bill, many of the state's 87 state-chartered CUs were making plans to convert to a federal charter including Mountain America which said its board approved such a move last month. The $2 billion America First, the state's largest, said it was indeed "looking at that option" but had not made a determination awaiting the outcome of the legislative battle. Just how NCUA would address the applications including how to treat field of membership questions in multiple counties was unclear, but the CU flight would be a blow to State of Utah revenues from the Department of Financial Institutions, which regulates both banks and CUs. There were also suggestions that some CUs might convert to mutual savings bank status though America First said it "had no interest in that." Brent Allen, executive vice president of America First, said his institution "will stay a credit union." At one point in the President's Day-House debate on the bill during the amending process, it appeared CUs might snatch a victory by killing the measure during an afternoon recess. But after some intense lobbying and arm-twisting by GOP leaders, the 5% measure was adopted, but the measure also contained a provision creating a legislative task force to study the CU tax issue for a year and report back in 2004. Stricken temporarily from the bill was a second so-called 30% "competitive equity" tax on retained earnings which would be levied on CUs above $100 million in assets which seek to expand to additional counties or offer business loans. In presenting their arguments endlessly voiced in TV and radio ads for months, the banking lobby maintained the three CUs were operating like banks and should be paying their fair share of taxes like other businesses. The League has tried-so far unsuccessfully-to convince the public and lawmakers that the Alexander bill would harm consumer/members and that CUs should remain tax-exempt, non-profit cooperatives because of their distinct financial structure. Earl said the House defeat illustrated the harsh environment in Utah where banks wield tremendous clout and have key banker-lawmakers in many legislative jobs. The GOP House Speaker, Marty Stephens, a candidate for governor in 2004, is vice president of Zions Bank whose management brought scores of employees to the capital grounds during hearings to urge passage of the bill and to blast CUs. "We are up against a lot of powerful people," observed Earl adding, however, the League by no means has given up "as we try to get our arms around a bill that will work for us." The Alexander bill, which as amended gives the state commissioner power to decide tax thresholds on individual CUs, was slated to be heard before the Senate Rules Committee perhaps on Feb. 24. The legislature is in a 45-day session and is expected to adjourn March 5. In the House floor debate, some lawmakers voiced the banker line that the big CUs were injuring that industry and needed to be reined in. In one account of the debate that appeared in the Deseret News, Rep. Mike Noel (R-Kanab) said he joined a federal employees CU in 1966 when it was a small operation, but after 40 years it had grown into a multi-billion dollar business. The CU was not identified, but Noel said in Kanab the Southern Utah State Bank paid $2 million in corporate income tax last year while his old CU "with 10 times the assets" paid no state income tax. He said that is wrong and made no sense. But other House members argued it made no sense to put a tax on CUs because it would just be a tax on CUs' members. The Deseret News account quoted Rep. Steve Mascaro (R-West Jordan) who said that with all the ads being run on radio, TV and newspapers, one thing is clear: the public is thoroughly confused. He said he received an e-mail from one of his constituents. "It says she's a credit union member and asks us to please kill this bill because `I like my bank.' Do you see the irony in this? She doesn't even know what she belongs to." Another lawmaker, Rep. Jim Ferrin (R-Orem) said the Alexander bill should be passed because it is a step to fairness. "I'd like to be exempt from income tax for a year to think about it. In Utah, we tax commerce. You sell a taco from a stand, you pay a tax. You sell a stock, you pay a tax." But big CUs making loans and profits like banks should not be exempted, he said. The account of the House vote was covered extensively in the Deseret News and Salt Lake Tribune which called the ad campaigns of the Utah League and Utah Bankers Assn. "unprecedented in modern legislative politics." Hundreds of CU and bank executives and volunteers from both banks and CUs crowded capital hallways for the House debate. In addition, the League joined by large Utah CUs hired a phone firm to make a reported 500,000 automatic calls to the homes of Utah residents over the Feb. 14-17 holiday weekend urging they contact legislators to defeat the bill. The Utah League acknowledged that for weeks it has received CUNA advice and counsel regarding strategy from members of the Washington lobbying staff some of whom spent time in Salt Lake as the House debate climaxed. The Project Zip Code was put into high gear during the campaign as a Salt Lake City advertising/pr firm was hired to produce ads and handle the media. But Orla Beth Peck, the state's chief CU regulator serving under State Commissioner of Financial Institutions G. Edward Leary, blamed public weariness with the bank-credit union fight and the eagerness of Utah lawmakers to "get this issue out of their hair" with contributing to House passage. Peck, who is the top CU supervisor, said "much misinformation was exchanged" on both sides and lawmakers tired of it, she said. Moreover, she added, "I think some legislators weren't all that happy that credit unions had come back to the legislature again seeking changes" in a 1999 Utah law which restricted business loans and set branching limits. "The public was sick of the advertising," declared Peck noting the negative nature of the ads. Peck also acknowledged that if the bill passes there would be state CUs eager to convert, and she listed Mountain America as one having made such a decision. Goldenwest CU in Ogden told Credit Union Times its board is "exploring" the conversion option. It was unclear how much revenue would be raised if the 5% tax is levied on these three, but America First's Allen said the 5% revenue for his institution would reach about $1 million. But "the real issue is what this represents, a radical departure of how Utah treats CUs by taxing them," he said. Peck said under the Alexander bill the formula would be 5% of net income taken from the call report and taken after dividends and operating expenses but before capital placement. That would put America First's levy at about $1.5 million, based on call report data, she said. -

[email protected]