Other proponents of the notion of communities or the credit union industry holding onto the retained earnings of converting credit unions point out that the principle is enshrined in the U.S. tax code as well.

“When a 501(c)(3) nonprofit organization files for nonprofit status, its bylaws have to contain a provision for what happens to the assets of the organization should it fold and those assets most often go to similar organizations,” noted Randy Chambers, the CFO of the $243 million Self Help FCU and an organizer of the Center For Member Trust. “I think it's entirely appropriate that we begin to look at what happens with the retained earnings of converted credit unions.”

The biggest precedent for communities maintaining control of the retained earnings of converting credit unions may be the health care industry, which has had its share of conversions of nonprofit health care plans to for-profit insurers.

According to Consumers Union, there are currently 64 health plans licensed by the Blue Cross, Blue Shield Association – 34 nonprofit, 16 mutual and 14 for-profit. The conversions of the nonprofit health plans into for-profit corporations have provided some of the best models for what can be done with money originally made as part of a nonprofit effort in one area and which is retained after a conversion, according to Laurie Sobel, lead attorney for the Consumers Union's Community Health Assets Project.

Sobel points to the creation of the California Endowment for Health, a $3.5 billion foundation established in 1996, when the nonprofit Blue Cross of California converted to the for-profit Wellpoint Health Networks. Since then the foundation, which is run independently, has granted more than $1.4 billion in grants to over 7,000 California organizations.

“The health plans built up their reserves free of taxes because they served a public good, Foundations like the endowment help make sure work is still being done to attain that public good even though the original organization has become a for-profit company,” Sobel said.

One of the biggest stumbling blocks for the idea might be what to do with retained earnings that a converting credit union would have to leave behind as it became a nonprofit. In his remarks, Kanjorski appeared to favor simply taxing the money, reflecting the simple symmetry of having the government collect back taxes on money that it had refrained from taxing while the CU was organized as a CU. Interestingly, this point of view resonated as well with at least one banker in the country. In a letter in the ABA Banking Journal's May issue, James Lavoie, CEO of Middlesex Savings Bank, took issue with the Journal's April cover story on two credit unions in Texas, Community Credit Union and OmniAmerican Credit Union, which converted to mutual banks in 2005.

Community Credit Union, now Viewpoint Bank, has already filed its paperwork for the initial offering of stock under an MHC.

“This will result in the management and other insiders getting very rich quick,” Lavoie wrote. “All at the expense of the American taxpayer who allowed them to build up capital over many years while paying no taxes. Those retained earnings (almost half of which should have gone to federal and state taxes) will eventually end up in their pockets. Pretty nice end game.They should have to pay back taxes to convert,” Lavoie wrote.

But Hazen and Bucky Sebastian, CEO of the $880 million GTE FCU and chief organizer of the NCMT, don't tend to favor taxation and would rather see the money go to a foundation (Hazen) or simply be returned to the members (Sebastian) even though that would mean acknowledging that the current group of members would enjoy the benefits of money built up by previous generations.

Sebastian indicated that he had no firm opinion on what to do with the retained earnings of converting credit unions except that he knew what not to do with them. “I might not know what to do with money, but I know what not to do with it and that's to pass it on to line the pockets of people who have no claim on it,” he said.

Interestingly, the idea is new enough that none of the mainstream proponents of conversion were willing yet to discuss it for the record. The only one who would, in a limited way, was Keith Leggett, senior economist with the American Bankers Association, who commented like the others that he had not studied the question sufficiently to answer questions about it, but who allowed that its chief negative might be its disincentive to conversions. “The impact of what will be perceived as a negative tax policy can be phenomenal,” he said. Kanjorski's office did not return calls for additional comment as of press time.

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