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House GOP budget spares bank insurance fund

February 22, 2011

Indiana bankers were relieved late last week when House Republicans decided to spare a bank insurance fund from being raided to plug holes elsewhere in the state budget.

The $250 million Public Deposit Insurance Fund, created during the Great Depression, is designed to replenish money deposited in a failed bank by schools, cities and other public entities, and which was not fully reimbursed by the Federal Deposit Insurance Corp.

Banks paid into the fund until 1985 and interest has built up since. As IBJ reported late last year, elected officials were eyeing the fund as a potential revenue source.

In January, Gov. Mitch Daniels proposed transfering $200 million from the deposit fund to the state’s general fund reserves—part of his plan to build up the state’s reserves by about $500 million.

But the industry unleashed a “full assault” on the Indiana Statehouse, sending local bankers to persuade legislators and the Daniels administration that the money belonged to the banks and still provides important protection for local taxpayer funds.

“Our bankers came out of the woodwork and were very, very spirited and passionate about saving this fund,” said Amber Van Til, vice president of government relations at the Indiana Bankers Association. She added, “We didn’t have one legislator tell us they thought it was a good idea.”

At the very least, Rep. Jeff Espich, R-Uniondale, agreed with the bankers. And as the head of the House Ways and Means Committee, he decided to find the $200 million elsewhere.

“I think it’s the banks’ money, but that’s not even my point. My point is that it continues to have a purpose and that is to protecting public deposits in those institutions,” Espich said at a Feb. 17 news conference, according to The Franklin Online.

Espich’s budget proposal would generate $200 million in four ways:

1.    Collecting $610 million in overpayments made by the state to local governments more quickly than previous forecasts, bringing in $88 million in the next two years that was originally predicted to arrive in the following two years.
2.    Maximizing the collection of quality-assessment fees from nursing homes and other retirement facilities, generating $48 million.
3.    Decreasing state contributions to the Mass Transit Fund by $15 million.
4.    Tapping the remaining $50 million in the state’s surplus fund.

The Ways and Means Committee passed Espich’s budget Feb. 17 by a 15-8 vote along party lines.

However, Van Til at the bankers association intends to keep lobbying to protect the bank insurance fund, which could still be tapped during budget negotiations later in the legislative session.

“What we’ve got to do is keep the profile at a high level, keep the arguments coming, the protection of the PDIF at the top of the agenda for legislators,” she said. “Because once the doors close in conference committee, we won’t be able to stand there and make our arguments.”

Tapping the banking insurance fund is not unprecedented. The state borrowed $50 million from it in 2003 and has yet to pay it back. Also, since 2002, interest from the fund has been used to pay police and firefighter pensions.

Daniels had argued that a new collateral-based insurance program for banks, approved by the Legislature last year, renders the old bank insurance fund obsolete.

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