Credit unions fighting to protect tax-exempt status

By Clay Moffitt, The Business Journal

With tax reform on the Congressional agenda, an old idea has been floated once again to cut the federal income tax exemption afforded to credit unions.

The discussion has struck a chord with credit union associations across the country whose members are certain of where the threat originated.

“There is only one group out there advocating to tax credit unions, and that’s the banks,” said Jeremy Empol, vice president of federal government affairs for the California Credit Union League, which counts 421 member credit unions in California and Nevada.

The trade organization has gone on the offensive to protect its members’ tax-exempt status with radio advertisements and other marketing efforts. The Credit Union National Association has launched the website to appeal to the public.

According to University of Florida emeritus banking scholar Arnold Heggested, removing credit unions’ federal tax-exempt status would reduce the federal deficit by about $2 billion a year.

However, he also told Gainesville, Fla., news station WUFT he doesn’t think it’s likely the federal government will take the tax-exemption away.

“The banks have been lobbying for 60 years and haven’t gotten it yet,” Heggested said. “Given so many people are members and believe in them, I think it’d be a real surprise to see that tax go up.”

However, Doug Kileen, CEO of Porterville-based Safe 1 Credit Union, isn’t so quick to dismiss the possibility. He views these discussions as a legitimate threat to credit unions’ current federal tax-exempt status.

“Any time Congress is looking at sources to increase its revenue level, we’re at risk,” Kileen said.

Kileen agreed that most community bankers feel animosity toward credit unions because of their tax-exempt status.

Membership with Safe 1 Credit Union is open to all Kern and Tulare County residents. It has more than $350 million in assets.

Credit unions are extended the tax-exempt status because they are operated as not-for-profit entities with volunteer boards of directors. Any profits generated by a credit union are passed along to the members primarily in the form of lower interest rates on loans and higher interest rates on savings accounts.

On the other hand, bank stockholders collect their profits from earnings.

Empol argues credit unions are a vital component in the marketplace to ensure competition.

“Our views are that it cones down to consumer choice,” Empol said. “What holds banks accountable is that there is a not-for-profit competitor in the market place. If credit unions are no longer tax-exempt, who is going to keep those banks accountable?”

Like most financial institutions, credit unions across the country were hit hard with the mortgage meltdown of 2008. However, the industry has recovered to the point where Kileen believes the majority of credit unions are now on solid ground.

However, a change to credit unions’ tax-exempt status could shake the industry to its core.

“I’m not sure credit unions would survive in our current structure if we were taxed,” Kileen said.

For the most part, the tax-exempt status allows credit unions to offer more competitive rates to its members. However not every consumer is eligible to capitalize on those rates.

Every credit union has a charter with a specific set of guidelines for who can become a member. Many times the restrictions are based on career, employer or geography.

Roy Estridge, executive vice president and chief financial officer of Visalia-based Valley Business Bank, said a well-run credit union is an asset to the community. However, he’s concerned when he sees credit unions expanding their charters to allow just about anyone as a member.

“If you’re getting a tax exemption, you should really stick to your mission,” Estridge said. “The constant expansion of membership of credit unions would be the main case to start taxing them.”

The top three credit unions operating in the Central Valley — Educational Employees Credit Union at the top, followed by Fresno County Federal Credit Union and The Golden 1 Credit Union — saw combined total assets increase more than 19 percent to about $3 billion in the last five years. Total combined membership of the three credit unions also rose about 15 percent to 362,568 in the period, according to information submitted by the credit unions for The Business Journal’s annual Book of Lists.

Although credit unions are exempt from federal and state income taxes, they are still required to pay property taxes, payroll taxes and all other business-related taxes.

By the Numbers
Top 3 Credit Unions in the Central Valley

Educational Employees Credit Union 
2013 — $2.1 billion in assets, 214,254 members
2008 — $1.73 billion in assets, 160,000 members

Fresno County Federal Credit Union
2013 — $496 million in assets, 53,500 members
2008 — $475 million in assets, 45,400 members

The Golden 1 Credit Union
2013 — $412.5 million in assets, 94,814 members
2008 — $306.4 million in assets, 110,428 members

Source: The Business Journal’s Book of Lists

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