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Statehouse fight continues over bank-insurance fund

April 19, 2011

Indiana lawmakers likely will avoid tapping an obscure bank-insurance fund to help bolster state coffers, but bankers may not survive the battle completely unscathed.

The budget approved by a Senate committee on Monday did not include a measure to use the $250 million public deposit insurance fund, or PDIF.

The fund has been built up over decades through payments from banks and interest earnings to replenish public deposits in the event of a bank failure. Gov. Mitch Daniels’ budget introduced earlier this year proposed transferring most of that money to the state’s general fund.

The Senate’s budget would, however, allow the state to avoid paying back $50 million it borrowed from the fund in 2003. That loan comes due in 2013.

In exchange, banks, like other companies, would benefit from a proposed decrease in the state’s corporate-income tax rate from 8.5 percent to 6.5 percent over four years. Banks previously had been excluded from that break, which is offered in a separate Senate bill.

Sen. Luke Kenley, the Republican chairman of the Senate Appropriations Committee, said he thinks the compromise “would be a good deal for the banks.”

It arose out of negotiations with Daniels, who said late last year that the PDIF has outlived its use in light of new collateralization requirements for banks, and Rep. Jeff Espich, R-Uniondale. As chairman of the House Ways and Means committee, Espich also avoided tapping the PDIF in the House’s proposed budget.

Kenley, of Noblesville, said including banks among the recipients of the corporate-income tax break would save them $20 million per year, which would help compensate for not paying back the $50 million loan.

Bankers aren’t convinced. On Monday, the board of the Indiana Bankers Association voted to reject the proposal. The group’s lobbyists now are fighting to persuade lawmakers to do the same thing.

They’re committed to getting the loan back, even if it means, for now, forgoing the tax break that would go into effect starting in 2013.

“We feel like it’s our responsibility to protect the PDIF,” said Amber Van Til, vice president of government relations for the Indiana Bankers Association. “To take money from the private sector against their will—particularly for folks who are in the business of lending—it’s a difficult pill to swallow.”

It also would be setting a precedent for lawmakers to continue taking from the fund, she said.

And there’s another practical consideration. The $50 million is now considered an asset of the PDIF, which is taken into consideration in actuarial studies of the fund to determine its sufficiency. In the absence of that money, there’s a chance that banks could have to put up additional collateral, Van Til said.

Some lawmakers share those concerns. Sen. Travis Holdman, R-Markle, plans to introduce an amendment when the bill is read in the full Senate on Tuesday or Wednesday. It would take out the provision to forgive the state’s loan, as well as the tax cut for banks.

“Unless there’s agreement from everyone at the table that we forgive that debt, we shouldn’t forgive that debt,” Holdman said.

The bankers could reinvigorate their battle over the income-tax reduction next year.

They might not have to, though. Sen. Brent Waltz, R-Greenwood, plans to introduce an amendment to another bill dealing with economic-development incentives that would reinstate the break for banks.

Even if the banks can’t declare victory yet on the PDIF, they are celebrating an amendment to another bill that would allow local government units to seek help from the state and, if necessary, file for bankruptcy.

That bill had raised concerns among municipal bondholders about whether they would get repaid when distressed government units sought assistance.

An amendment approved Monday would obligate the state—soon after the unit seeks help—to collect enough money from the local units to ensure debt obligations are met and bondholders are paid.

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