Colorado credit unions face another setback in bid for public deposits

A proposal to allow public institutions to deposit funds at credit unions has been indefinitely postponed, but those for and against change say the fight will still go on.

Colorado’s House bill 22-1277, which was tabled in late March, sought to amend current state laws that prohibit public institutions such as schools and local municipalities from depositing public funds into an institution not insured by the Federal Deposit Insurance Corporation. Certified institutions are those that meet specific requirements set out by the state’s Public Deposit Protection Act.

Many of the aforementioned laws were put into place prior to the 1970 establishment of the National Credit Union Administration and the Share Insurance Fund, which provides a similar function as FDIC insurance. In other words, credit unions weren’t deliberately excluded from receiving deposits from public institutions; instead, they were formed and regulated in a way that lawmakers did not predict. In later 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.

Supporters of the bill argue that it puts the banks’ needs ahead of those of the taxpayers by limiting competition.

“I take it pretty seriously that we should be as responsible as we can with the taxpayer dollars, and the way I viewed this was 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 may be, that I wanted to do all I could to be part of that,” said state Representative Kyle Mullica, a Democrat and one of the main proponents of the bill.

Jenifer Waller (left), president and CEO of the Colorado Bankers Association; Dan Diorio (center), director of political financing and policy for the Moutnain West Credit Union Association; and Helen Gibson, vice president of strategic outreach at Denver Community Credit Union. “Credit unions have existed in the state for almost 100 years and we still only have 14% of the market,” Diorio said.

Past campaigns for credit union acceptance of public funds in regions such as Florida and Arkansas have similarly led to bills that were struck down or abandoned in perpetuity, whereas others in New York and Washington have been successful in passing new provisions. In many instances, legislative defeats are only temporary.

Jenifer Waller, president and chief executive of the Colorado Bankers Association, testified at the recent hearing and said the bill was the third instance of credit union groups pushing for inclusion within state law across her 23-year tenure at the CBA.

“The law, which has been in place since before my time at the CBA, was done so because we have a pretty aggressive Public Deposit Protection Act that banks comply with and they wanted to put the protection and safety of public funds first,” Waller said. “[Where fairness is concerned] since credit unions do not pay income tax and banks do, the legislature at the time felt it was unfair for a non-taxpaying entity to benefit from holding those funds.”

During the hearing, the CBA argued that moving state deposits to credit unions may not result in better rates, but it would make it harder for banks to serve their market through Community Reinvestment Act lending activity, Waller said.

“While it’s easy to kind of be enticed by the potential of a higher rate that 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 those CRA investments made into the community, it really outweighs the benefit of moving those funds,” Waller said.

Credit union experts and trade groups say the issue has less to do with disrupting communities and more to do with increasing the number of viable depositories that local municipalities can partner with to securely deposit funds.

Experts at the Mountain West Credit Union Association — which represents approximately $67 billion of assets throughout Arizona, Colorado and Wyoming and also testified at the hearing in March — said claims of credit unions seeking to take over the public fund market do not reflect the economies of scale for all institutions involved.

“Credit unions have existed in the state for almost 100 years and we still only have 14% of the market…to say that somehow, there’s going to be a dramatic decline in banks getting public money so that they can lend it out, it just doesn’t speak to the reality of the market and the size of credit unions compared to banks,” said Dan Diorio, director of political financing and policy for the MWCUA.

Diorio stressed that for many, the concept of reinvesting in the surrounding communities is built into the credit union model.

“We make the right types of investments within our field of membership because that’s who we are, not because we’re required to by law like banks are…most credit unions were founded to serve the underserved and that’s what we’ve been doing,” Diorio said.

Greg Mesack, senior vice president of government affairs for the National Association of Federally-Insured Credit Unions, explained that the reason credit unions are often excluded from public funds is due to the history of the laws themselves.

“The FDIC goes back to the 1930s, which is around the time that several states began crafting these laws to ensure that municipalities had federal insurance [as] they didn’t want municipal deposits being put into institutions that were not federally insured,” Mesack said.

Mesack said that additional concerns revolve around the rural areas of the state amidst the trend of branch closures, where there might be only a credit union to provide services to residents.

Credit unions seeking to launch initiatives for underserved communities and to broaden their economies of scale are left waiting for change.

Representatives of the $445 million-asset Denver Community Credit Union testified in support of the proposal after years of being unable to work with the city government to develop funds and other programs. Helen Gibson, who works as the vice president of strategic outreach for the Denver credit union, explained that the history of its founding is closely tied to the local governments and often leads to a desire for collaboration.

“We were started by employees of both the City and County of Denver, and because of that we’ve retained a very close relationship with both municipalities…for us, it’s just honestly annoying because we can’t try [to partner with them] and innovate,” if public institutions can’t deposit funds with us, Gibson said.

In speaking with many local municipalities, Gibson said she saw a niche for credit unions of smaller scale to assist the governments in starting up programs for underserved consumers.

“In the city of Denver and in municipalities that are larger, we don’t have those small community organizations or banks that are willing to do these pilot programs…that could be a big game changer [and] we could make an impact,” but the law prevents that from happening, Gibson said.

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