Dollar Addresses Potential PCA Ramifications
Of Credit Union Taxation In Utah Speech
NCUA Chairman Tells Utah Credit Union League That Any Nationwide Move
Toward Taxation of Credit Union Net Worth Would Require
Major Changes
In PCA Law
Salt Lake City, UT (March 14, 2003) – A nationwide move to tax
the retained earnings of credit unions would, if successful, result
in reductions in credit union net worth sufficient to require Congress
to make significant changes in the federal prompt corrective action
(PCA) law, said NCUA Chairman Dennis Dollar in a speech before the
Utah Credit Union League’s annual meeting here today.
In a speech scheduled months before Utah became the first 2003 battleground
in the banking industry’s most recent campaign to tax the earnings
of state-chartered credit unions, Dollar addressed the controversial
issue in his remarks here today to over 250 Utah credit union officials.
Dollar stated his recognition that the issue of taxation is an individual
state’s public policy decision but he did not shy away from stating
his belief that there would be adverse financial considerations for
credit unions which must be evaluated in any taxation discussion at
the state or federal level.
Dollar had in February expressed those same views in a written response
to two Utah state legislators who had sought his insights as NCUA Chairman
on any potential safety and soundness ramifications of the Utah tax
proposal. The tax provision was removed from the legislation passed
during the recently completed session which called for a two-year credit
union tax study and restricting certain mortgage and member business
lending authority by the largest state chartered credit unions in Utah.
“As a former state legislator myself,” said Dollar who
served eight years in the Mississippi House of Representatives from
1976-84 prior to his credit union career and appointment to the NCUA
Board in 1997, “I recognize and respect the rights of each state
to apply its own laws and regulations to institutions chartered under
state law, including taxation. However, no state should lightly enter
into the taxation of credit union retained earnings without recognizing
that there are net worth considerations which are mandated by federal
law for all federally-insured credit unions, whether they are state
or federal charters. These statutory net worth provisions, established
under the PCA statute, cannot be
disregarded when taxation is put on the table.”
Dollar cited Congress’ exemption of federal credit unions from
income taxation as being based on the structure of credit unions as
not-for-profit financial cooperatives that only can build their net
worth through retained earnings. He said that the Congress’ decision
to exempt federal credit unions since 1934 from corporate income taxes,
although opposed by the banking industry, had resulted in “a
dynamic and financially sound credit union system so strong that most
states followed the federal lead and exempted their state chartered
credit unions from income taxation as well. The result has been lower
costs for consumers and stronger net worth for credit unions.”
“If credit unions are restricted in their ability to retain
earnings sufficient to meet statutory reserve requirements,” said
Dollar, “the statutory requirements of PCA to be well capitalized
would need to be seriously re-evaluated by Congress. Taxation significantly
alters the net worth dynamic for credit unions and therefore has ramifications
which must be considered by any states considering it and, ultimately,
by federal policy makers as well.”
Dollar told the Utah audience that if the 35% tax rate proposed in
the Utah legislature had been in effect for credit unions nationwide
for the past ten years, the average net worth ratio of net worth to
total assets for all federally insured credit unions in the United
States would today be estimated at 8.42% rather than its present level
of 10.71%.
“Since a credit union’s net worth ratio is the only buffer
the National Credit Union Share Insurance Fund has to protect against
losses and since that insurance fund is the buffer protecting the taxpayers
from credit union losses,” said Dollar, “it is incumbent
on legislators and policy makers to weigh the impact of taxing the
retained earnings of these not-for-profit financial cooperatives that
have no other means of building net worth.”
“Credit unions are unique in their structure as not-for-profit
cooperatives,” said Dollar. “They cannot go out and sell
stock to build equity. Their member-owners fund their statutory net
worth requirements by allowing a portion of their earnings to be retained
by the credit union so their member-owned institution can remain strong
and viable. To tax these not-for-profit institutions would definitely
result in reduction of their net worth, net worth required by federal
law that they must maintain at a specified level.”
Federal law requires a credit union whose deposits are insured by
the full faith and credit of the U.S. government through the National
Credit Union Share Insurance Fund to have a minimum net worth ratio
of 7% net worth to total assets to be considered well capitalized.
The National Credit Union Administration, governed by a three-member
board appointed by the President and confirmed by the Senate, is the
independent federal agency that regulates, charters, and supervises
federal credit unions. NCUA, with the backing of the full faith and
credit of the U.S. government, also operates and manages the National
Credit Union Share Insurance Fund (NCUSIF), insuring the deposits of
over 80 million account holders in all federal credit unions and the
overwhelming majority of state-chartered credit unions.
| 