Local governments, schools boards, utilities and other public agencies, working to stretch their budgets as the economy struggles, are looking beyond their banks to the higher interest rates and lower loan rates offered by nearby credit unions.
But the member-owned financial cooperatives have had to shun that business because Alabama law limits public deposits to federally insured banks. Credit unions that serve special populations such as teachers find it especially awkward not to be able to serve related organizations such as school boards, whose individual members may be members of the credit unions.
“We haven’t been marketing to public entities, but we have seen an increase in requests from them. We hate to have to turn them away, because our mission is to serve the community, ” says Steve Swofford, chief executive officer of Alabama Credit Union, in Tuscaloosa.
Here’s one of many examples playing out across the state. Listerhill Credit Union, based in Muscle Shoals, has a branch office at the University of North Alabama. The process of planning and creating the branch created a strong relation between the credit union and the UNA administration, Brad Green, chief executive officer of the credit union says. “The UNA president talked to me about UNA joining the credit union. It would be so convenient for them with the branch there on campus.
Unfortunately, I had to tell him we were not allowed to serve UNA, ” Green says.
Frustrated with the current law, Listerhill, Alabama and many other credit unions across the state have united with the League of Southeastern Credit Unions & Affiliates to work to amend the Security for Alabama Funds Enhancement (SAFE) Act to include federally insured credit unions. “It’s one of our top priorities and will be until a law is passed, ” says Jared Ross, vice president of government affairs for the league. “Currently, 33 states allow credit unions to take public deposits. We believe it’s a question of educating Alabama lawmakers.”
On the other side, banks are vehemently fighting to maintain the status quo. “Credit unions have an unfair advantage, because they are tax exempt. We believe that since they are not contributing to the public coffers, they shouldn’t be benefitting from them, ” says Scott Latham, chief executive officer of the Alabama Bankers Association.
Historically, the banking industry has lobbied to limit the reach of credit unions because of credit unions’ federal and state tax-exempt status. After the credit union system was created by national law in 1934, credit unions were limited to serving specific populations. With legislative changes made in 1982 and 1998, credit unions have been able to expand their membership parameters. “Credit unions want to act like banks until it comes to paying taxes, ” Latham says. “When they start paying taxes, we’ll be on a level playing field.”
Latham also says banks have a greater regulatory burden than credit unions. The league disagrees. “Financial cooperatives have also faced greater regulation in recent years and have higher compliance costs, as well, ” Ross says.
In addition, Ross points out that although credit unions don’t pay corporate taxes, they do pay sales, payroll and property taxes. Latham says the corporate income tax savings credit unions receive is what allows them to offer better rates. But Ross says financial cooperatives are able to offer better rates because the credit union members, called shareholders, are the owners of the credit union. Banks, on the other hand, are profit-driven entities that are obligated to provide high returns to stockholders, he says.
“Regardless of that, the bottom line is that leaders of public agencies consider themselves stewards of the public’s money, so they want to be able to have access to the best rates, ” Ross says.
Last year, legislation to amend Alabama’s SAFE Act to include federally insured credit unions was introduced by Sen. Bill Holtzclaw (R-Madison) and Rep. Mike Ball (R-Madison). The league is working with lawmakers to introduce similar legislation this year. Florida lawmakers also introduced legislation this year to expand public deposit authority to credit unions.
If the law were changed in Alabama, public agencies could not only make deposits to credit unions, they could also take advantage of loan and credit card offers that are now only allowed to credit union members. Green points to stories such as the municipal leader who would like to take advantage of a credit union’s credit card because of its competitive interest rate. “But because credit unions can’t hold any public funds, the credit union can’t take the municipality’s membership deposit, whether it’s $5 or $25, ” Green says.
Kathy Hagood is a freelance writer for Business Alabama. She lives in Homewood.
text by Kathy Hagood • photo by Robert Rausch