State Can Ill-Afford to Subsidize Credit Union Industry

State Can Ill-Afford to Subsidize Credit Union Industry

As we look for ways to resolve our state’s fiscal crisis, we encourage legislators to reconsider
the tax-exempt status that Illinois credit unions enjoy – a benefit that no other private sector
financial institution receives.

As background, Congress granted credit unions a federal tax exemption and special regulatory
privileges in the early 1900s – preferential treatment not accorded to banks and modern-day
savings institutions – in order to assist them in serving people of modest means bound together
in tightly knit groups. Illinois later followed suit with a complete exemption for credit unions from
Illinois income taxes. But in the following decades, many credit unions have grown
exponentially and strayed from their original purpose of serving small groups of people with
modest means, exploiting their tax exemptions and allowing them to compete unfairly with
taxpaying banks and savings institutions.

A significant number of credit unions in Illinois and throughout the nation have grown into multi-
million and even multi-billion dollar, full-service financial institutions that offer the very same
diversified financial services as banks and savings institutions to a wide array of unrelated
customers in large geographic areas – all while keeping their tax and regulatory preferential
treatments.

In Illinois, 11 out of 331 federally insured credit unions have more than $500 million in assets,
representing almost 70% of all credit union assets held in the state, and they account for more
than 50% of all credit union members in Illinois. These same 11 large credit unions, which are
each larger than 84% of all banks and savings institutions in Illinois, together earned more than
$154 million in tax-free net income last year.

There is no doubt that the tax exemptions favor large credit unions, as the vast majority of
industry profits are concentrated in credit unions with more than $500 million in assets. In fact,
Illinois-based federally insured credit unions are on track to nearly double their combined assets
from almost 10 years ago, with two-thirds of the asset growth occurring in credit unions with
$500 million in assets and above.

According to the U.S. Office of Management and Budget, the federal credit union tax exemption
costs the federal government – and American taxpayers – more than $2 billion in lost revenues
every year. At the same time, according to a recent study conducted by the Illinois Commission
on Government Forecasting and Accountability (COGFA), the state exemption is costing Illinois
– and Illinois taxpayers – nearly $25 million in lost tax revenues each year. With our huge
annual federal and state deficits and mounting unpaid bills, our state and nation can ill-afford to
subsidize the now $1 trillion credit union industry.

Consider more facts:

      In 2012, Illinois banks and savings institutions paid more than $978.2 million in federal,
       state and local income taxes, while Illinois credit unions paid $0.

   Despite claims that credit unions serve people of modest means, banks serve far more
       low- and moderate-income customers than credit unions. A Government Accountability
       Office study found that only 31 percent of households using credit unions had low or
       moderate incomes, compared with 41 percent of households using banks. And, notably,
       despite their mandate to focus on underserved communities, credit unions are exempt
       from complying with the federal Community Reinvestment Act, which ensures that banks
       meet the credit needs of the communities in which they operate, particularly in low- and
       moderate-income neighborhoods.

      Based on the credit union industry’s own research (Credit Union National Association
       Economics and Statistics Department, March 2012), in many cases credit union interest
       rates in Illinois are no better or only marginally better than banks. In fact, Illinois banks
       provide better rates than many credit unions for many products – and banks are able to
       do this while paying their fair share of state and federal income taxes. This certainly
       doesn’t depict a “not-for-profit” where “all excess revenue goes back into the credit union
       in the form of lower rates and more affordable services,” as the credit union industry
       argues.

Finally, it is important to note that credit unions are not charities. Companies with similar
corporate structures, such as mutual insurance companies and mutual savings banks, lost their
tax exemptions decades ago when Congress realized they had outgrown their original purposes
and were not charities.

When the General Assembly asks hard working families who are struggling to make ends meet
and small businesses that are fighting to create jobs to pay more in taxes each year, then credit
unions, too – particularly the large, bank-like institutions – should contribute their fair share in
taxes to the State of Illinois. It’s time!

Linda Koch is president and CEO of the Illinois Bankers Association, a trade organization that includes
financial institution members of all sizes from throughout Illinois.

January 23, 2013

As you look for ways to resolve Illinois’ backlog of unpaid bills, pension obligations, and
overall deficit, we encourage you to consider seeking new revenue from a rapidly
growing Illinois industry that currently enjoys a complete exemption from corporate
taxation. On behalf of the over 600 tax-paying banks and thrifts throughout the state, we
urge you to reconsider the tax-exempt status that our state’s credit unions enjoy – a
benefit that no other private financial institution receives.

Congress created credit unions in 1934 to serve “people of modest means” and tightly
knit groups. In return for their limited purpose and small membership base, they were
exempted from taxes and received special regulatory treatment not shared by banks. Not
satisfied with maintaining this mission, though, the industry has aggressively sought to
expand its authority over the past few decades. Today, large, bank-like credit unions have
stretched the common bond requirement well beyond the original congressional intent.
The limited, specialized service provided by credit unions has been replaced in many
cases with super-sized credit unions that look and act just like commercial banks – just
without the income tax obligations.

As a result of this aggressive expansion, credit unions have morphed into a $1 trillion
industry nationwide. Likewise, in Illinois large credit unions are rapidly expanding and
cutting into the traditional marketplaces of tax-paying community banks. Illinois now
has almost ten mega-credit unions with close to or more than $1 billion in assets – and
the list of large credit unions will only grow as the industry leverages its regulatory
advantages and tax-free status to undercut community banks for both consumer and
commercial business.

As credit unions have grown, so has the cost to government for retaining their tax
exemption. Please take the time to review the enclosed Commission on Government
Forecasting and Accountability (COGFA) report regarding credit union exemptions. As
reported in this study, the Illinois credit union industry boasts $33 billion in assets (and is
growing rapidly). More importantly, the industry had a net income of $189 million last
year. Of course, this only includes federally insured credit unions and not the 23 Illinois
credit unions which chose not to protect consumers’ money through the federal deposit

insurance program. The bottom line of COGFA’s study is that requiring the credit union
industry to pay their fair share of income taxes would yield a sizeable $24.9 million per
year for the State of Illinois. While we realize this is not enough to remedy Illinois’
significant fiscal issues, this substantial new revenue source could serve as a valuable
component of a comprehensive fiscal solution.

                       524 South Second Street y Suite 600 y Springfield, IL 62701 y 217-789-9340
                         194 East Delaware Place y Suite 500 y Chicago, IL 60611 y 312-347-3400

Credit unions, if faced with such taxation, will try to deflect scrutiny by saying that
community banks formulated as sub-S corporations “don’t pay taxes” or that credit
unions should be tax-free because of their corporate “structure” and because of the lower
interest rates they provide to members. These arguments are easily dismissed. Sub-S
banks do, in fact, pay income taxes on their earnings. Sub-S banks are simply structured
so that the bank shareholders pay the corporate taxes owed, rather than the corporation
itself paying. By contrast, credit unions pay nothing on their earnings. The only credit
union earnings which may be subject to taxation are the “dividends” credit unions pay out
to members – which is just a fraction of their sizeable retained earnings.

Regarding the industry’s structure argument, remember - credit unions are not charities.
They are business cooperatives, formulated in a similar fashion to other mutual
companies. Yet most other mutual companies, including many insurance companies and
savings banks, are subject to income taxation. It is true that credit union members are
offered lower interest rates for some products, particularly auto loans. However, based
on the credit union industry’s own research, in many cases Illinois credit union interest
rates are only marginally better than bank rates. In fact, according to the credit union
industry’s research, banks actually provide a better rate than credit unions for many
product lines – yet banks are able to do so while remaining subject to corporate income
taxation.

If the General Assembly can ask hard working families who are struggling to make ends
meet to pay more in taxes and fees, or ask small businesses that are fighting to create jobs
in today’s economy to pay more in taxes, then why shouldn’t credit unions, particularly
large credit unions that no longer serve their mission, be asked to contribute their fair
share as well? We hope that you will keep this question, and the enclosed COGFA study,
in mind as you tackle the state’s financial problems in the coming months.

Sincerely,

Marty L. Davis                                           Linda Koch
Illinois Bankers Association Chairman and                President and CEO
President and CEO                                        Illinois Bankers Association
Murphy-Wall State Bank & Trust

December 2012

Dear Mr. Mackey,

I am responding to your November issue’s article entitled “Credit Unions Thrive Despite
Regulations.” There were several misleading remarks made in the article, but I will touch on just
a few of them.

There is no question that government regulations are suffocating Illinois financial institutions,
which ultimately will increase the cost of doing business for all customers. However, community
banks and savings institutions are being hit the hardest. Unlike credit unions, these institutions
not only incur huge expenses to ensure compliance with hundreds of rules and regulations, they
also pay millions of dollars in state and federal income taxes every year, while credit unions
don’t pay a single penny in income taxes.

Yes, Congress created credit unions in 1934 to serve “people of modest means” and tightly knit
groups, and in return for their limited purpose, they were granted an income tax exemption and
received special regulatory treatment not shared by banks. We respect those credit unions that
have stayed within their original mandate – their special treatment from the government is
deserved. However, some credit unions, like CEFCU, have grown so large that it is hard to
remember what their original tightly knit group was.

In fact, CEFCU’s “tightly knit” group now spans across 14 Illinois counties, three counties in
California, and even employees and retirees from unrelated “partner companies.” CEFCU is a
$4.5 billion institution, larger than 90% of all banks and savings institutions in this state, and
they made more than $32 million in net profit last year—and not a single penny in taxes was
paid on that profit. The president of Heartland Credit Union was correct when he said, “credit
unions might have an advantage over other financial institutions…because of the structure of
credit unions,”… but he failed to tell you that it is because of their major tax exemption.

The reality is that each of us pays more in income tax than all the credit unions in Illinois
combined. A recent study by the State of Illinois Commission on Government Forecasting and
Accountability (COGFA) estimates that all federally insured credit unions in Illinois will make a
combined net income of $273 million in 2012, which would generate an average of $25 million a
year in state tax revenue alone. That’s $25 million that could go to support police and fire
protection, schools, hospitals and roads in our local communities. On the other hand, Illinois
banks paid just under $600 million in federal, state, local and foreign income taxes in 2011.

Your article also implies that banks need “encouragement” to help our local communities. That
couldn’t be further from the truth! Banks not only pay income taxes, they invest untold dollars
and countless hours in communities by providing numerous community services, while donating
millions of dollars and their employees’ time to many charitable causes every single year. There
is nothing more important to us than our customers and our communities.

While banks are committed to serving their communities, you should know that a Government
Accountability Report actually raises questions about whether credit unions have lost interest in
their historic goal of serving individuals from all segments of society, while showing that

commercial banks were more likely than credit unions to lend to individuals from low and
moderate income areas.

We just want to set the record straight. The disparity between banks and credit unions is no
different than having one small business owner who is forced to compete for the same business
with another small business owner across the street, except that one has to pay taxes and the
other doesn’t. That’s the difference between thriving and not thriving! It is time for a change.

Linda Koch
President and CEO
Illinois Bankers Association

August 27, 2012

We are responding to your Aug. 18 article entitled “WICU Expands Member Base.”

Congress created credit unions in 1934 to serve “people of modest means” found in tightly‐knit
neighborhoods, organizations or occupational groups. In return for their limited purpose and
small membership base, they were exempted from taxes and received special regulatory
treatment not shared by banks. We respect those credit unions that have stayed within their
original mandate – their special treatment from the government is deserved.

But when a credit union declares that it is opening its membership to everyone in seven
counties, it is straying far beyond the reasons it receives special privileges from our
government. Bankers welcome competition. But fair competition! So let them pay taxes, too.
And make them comply with the same regulations as banks.

We disagree with several statements made by Mr. Higgins in the article. His statement that
credit unions are self‐sufficient because they did not receive government funds during the
recent financial crisis is remarkable. Credit unions receive a daily bailout from the government
thanks to their tax‐free status. Why should a business or family pay taxes that support police
and fire protection, schools, hospitals and roads in their local communities, while credit unions
pay nothing? That’s quite a bailout, and one that goes a long way in keeping their so‐called
“overhead” costs down.

Banks not only pay state and federal income taxes, they invest untold dollars and countless
hours in communities by providing financial literacy education and community services, while
donating millions of dollars and their employees’ time to charitable organizations and other
worthy causes every single year. There is nothing more important to us than our customers and
our communities.

Mr. Higgins comments that “the people at the University don’t need to borrow as much as you
or me . . . so why not offer [our services] to everybody that’s around here.” Apparently he has
forgotten why Congress created a special tax‐free status for his credit union. Moreover, Mr.
Higgins implies that only wealthy people own banks and only the wealthy are important to
banks. What? Most community banks have a wide base of shareholders and customers and
serve people of all walks of life, including low‐income customers. In fact, federal law mandates
that banks make every effort to reach out to their neighbors in need. Isn’t it ironic that recent
studies show the incomes of credit union members exceed those of community bank
customers, despite the mandate for credit unions to serve people of modest means?

Mr. Higgins also said: “Banks have a totally different governmental regulation, which is nice . . .
[credit unions] don’t have to adhere to quite as many rules as a bank does . . . .” He is right on
the mark there. Lesser regulation of credit unions is yet another unfair (and unwise) advantage
that they have when competing with tax paying banks.

The bottom line is this. Credit unions are having their cake and eating it too, while the rest of us
– financial institutions, businesses and consumers alike – are left footing their bill. Enough is
enough.

Todd Lester                                           Andy Bastert
Citizens, a div. of Morton Community Bank             First State Bank of Illinois

Mark Reynolds                                         Tom Claudon
Colchester State Bank                                 MidAmerica National Bank

Matt Reynolds                                         Rick Klinedinst
Colchester State Bank                                 MidAmerica National Bank

Dan Cortelyou                                         Arthur Kane
Farmers & Merchants State Bank                        Raritan State Bank

Michael Steelman                                      Stanley Jenks
Farmers & Merchants State Bank                        Security Savings Bank

Arthur Greenbank
First Bankers Trust Company, N.A.

#2: Letter to Illinois Media, May 2012
Credit Union Bill Would Increase Deficit, Not Lending

Sometimes in Washington, the facts get in the way.

Credit unions are once again pleading with Congress to increase their business lending authority.
Sound good? Not so fast. This legislation from Sen. Mark Udall (D-Colo.) will shift small business
lending from tax-paying community banks to tax-dodging credit unions.

They say it will increase small business lending. Don’t believe it.

The credit unions are pushing bad public policy by distorting the facts. Their lobbyists have lost sight
of their industry’s historic mission and continue to promote a harmful agenda that would take
business away from tax-paying community banks that serve small towns and neighborhoods across
America.

Contrary to their claims, doubling the business lending cap for the less than one percent of nation’s
credit unions would not increase credit availability for small business borrowers. It would shift loans
that are already in the pipeline at community banks to credit unions that don’t pay taxes. You simply
can’t be for community banks if you support the credit unions’ mission creep.

It’s important to remember that credit unions already have ample small business lending authority.
This legislative proposal applies only to a new breed of credit union with little resemblance to the
mom-and-pop variety that first inspired the industry’s tax exemption. These “morphed” credit unions
are not satisfied with making small business loans. If they were, they would have no need to raise
their member business lending cap, since credit unions today can make as many loans under $50,000
as they want. These aggressive institutions want to go after the corporate loans that tax-paying
community banks make every day.

If Congress does the bidding of this small minority of aggressive credit unions, it could be the
beginning of the end for community banks. One doesn’t have to be an economist to know that an
industry subsidized by the federal government will easily out-price one that pays roughly one-third of
its revenue in taxes, a typical bank’s tax burden. Or to know that this is a classic example of a
catering to a special interest group.

Another thing is also clear: If Congress sanctions the exodus of commercial loans from an industry
that pays taxes to one that does not, the U.S. Treasury will go even deeper in the hole. A similar bill
in the last Congress would have cost taxpayers $354 million in lost revenues over the next ten years.
This one will cost even more – just as lawmakers are trying to address our country’s historic budget
deficits.

Fortunately, there is a more reasonable option for credit unions that would like to expand their
business lending – convert to a mutual savings bank charter. Some have already taken advantage of
the flexibility this option provides.

This is a far more sensible than promoting more tax-dodging that runs up the national debt and
damages community banks that are the backbone of their local economies.

Linda Koch
President and CEO
Illinois Bankers Association

#1: St. Louis Business Journal - Letter to the Editor, March 2012
We take issue with the March 8, 2012, Letter to the Editor by Michael Beall, President of the
Missouri Credit Union Association.

All of us, consumers and businesses alike, shoulder our share of state and federal personal and
corporate business taxes. All of us, that is, except for one special group of businesses that, like
Houdini, has continued to escape the responsibility of good corporate citizenship: the nation’s 7,000
credit unions. Why should credit unions live in a tax-free environment, while hard-working
consumers and so many other businesses are contributing their fair share of taxes to help finance our
local schools, roads and highways, law enforcement and other government services?

Credit unions have long enjoyed special tax and regulatory privileges because of their mandate to
serve “people of modest means.” With these special privileges, there are supposed to be restrictions
on their membership and business lending. Yet laws have changed, and today many credit unions,
particularly larger credit unions, no longer meet their original mandate. They provide the same
diversified financial services, including selling insurance, engaging in securities brokerage, and
making multi-million dollar business loans, to a wide array of unrelated customers in expansive
geographic areas — all while retaining their immunity from paying income taxes or reinvesting in
their communities.

Not only that, but this new breed of credit unions is seeking to raise credit unions’ business lending
authority from 12.25 percent of assets to 27.5 percent of assets. Which bears the question: If 99
percent of credit unions are nowhere near their business lending cap, why should Congress more than
double it? And, in a time of soaring deficits, why should Congress approve an increase in credit union
business lending that would take business away from tax-paying community banks, and decrease tax
revenues?

The large credit unions have evolved to the point where they bear little resemblance to the traditional
credit unions of once upon a time. They want to remain free from taxation, enabling them to undercut
and unfairly compete with community banks and other local businesses, while our state and federal
governments forego a significant source of revenue. According to the United States Office of
Management and Budget, the credit union tax exemption costs the federal government alone – and
American taxpayers – more than $1.5 billion every year in lost revenues.

The bottom line is that credit unions are having their cake and eating it too, while the rest of us –
financial institutions and consumers alike – are left footing the bill. Enough is enough! Credit unions
should be taxed their fair share just like the rest of us.

Linda Koch
President and CEO
Illinois Bankers Association

                            524 South Second Street  Suite 600  Springfield, IL 62701  217-789-9340
                              194 East Delaware Place  Suite 500  Chicago, IL 60611  312-347-3400

All of us, Illinois consumers and businesses alike, are bearing the brunt of Illinois’ newly
increased personal and corporate business taxes that are expected to generate $6.8 billion for
state coffers. All of us, that is, except for one special group of businesses that, like Houdini,
once again has escaped the responsibility of good corporate citizenship: the state’s
approximately 400 credit unions. Why should credit unions live in a tax‐free environment,
while hard‐working consumers and so many other businesses are contributing their fair share
of taxes to help finance our local schools, roads and highways, law enforcement and other
government services?

Credit unions have long enjoyed special tax and regulatory privileges because of their mandate
to serve “people of modest means.” With these special privileges, there are supposed to be
restrictions on their membership and business lending. Yet Illinois law changed almost 20 years
ago, and today many credit unions, particularly larger credit unions, no longer meet their
original mandate. They provide the same diversified financial services, including selling
insurance, engaging in securities brokerage, and making multi‐million dollar business loans, to a
wide array of unrelated customers in expansive geographic areas — all while retaining their
immunity from paying income taxes or reinvesting in their communities.

These larger credit unions have evolved to the point where they bear little resemblance to the
traditional credit unions of once upon a time. They want to remain free from taxation, enabling
them to undercut and unfairly compete with community banks and other local businesses,
while our state and federal governments forego a significant source of revenue. According to
the United States Office of Management and Budget, the credit union tax exemption costs the
federal government alone – and American taxpayers – more than $1.5 billion every year in lost
revenues. In Illinois, taxpayers are underwriting the credit unions’ tax subsidy to the tune of
millions of dollars every year.

The bottom line is that once again credit unions are having their cake and eating it too, while
the rest of us – financial institutions and consumers alike – are left footing the bill. Enough is
enough! Illinois should join the growing number of states that are moving to tax credit unions
like the rest of us.

Linda Koch
President and CEO
Illinois Bankers Association