Gov. Mitch Daniels and Indiana lawmakers preparing to craft the state’s next two-year budget are eyeing an obscure bank insurance fund as a possible revenue source to close anticipated budget gaps.
The Indianapolis Business Journal reports that Indiana’s public deposit insurance fund, or PDIF, was created after during the 1930s to replenish money invested by schools, cities and other public entities if a bank holding those funds failed and the Federal Deposit Insurance Corp. didn’t cover the full losses.
But now that new state regulations provide another form of backup insurance, Daniels has said that tapping the fund for other state expenses is “a perfectly appropriate suggestion.”
“That fund has outlived its usefulness, and we do have needs in other areas,” Daniels said recently. “It would be perfectly legitimate to consider applying that money to other uses such as education or something else more current.”
Lawmakers who begin their legislative session Jan. 5 and Daniels expect about a $1 billion gap between the state’s revenue and expenses in the state’s next budget. They say that figure includes the need to build up reserves by $500 million.
But any attempt to dip into the fund will face resistance from the state’s banking industry. Indiana financial institutions contend that the money — which accumulated from fees paid by banks, plus interest — belongs to them, not the state.
They also say that even after a new form of collateral-based insurance goes into effect next year, it’s risky to do away with the backstop and possibly put public funds at risk at a time of financial instability.
S. Joe DeHaven, CEO of the Indiana Bankers Association, said he believes “the reasons for the fund are just as important today as they were in 1937” when the PDIF launched during the Great Depression.
“This would be one of the worst times to make the argument to take this (money),” he said.
Legislators say they’re keeping in mind banks’ concerns as they probe the PDIF as a funding source.
State Sen. Luke Kenley, chairman of the State Budget Committee, said he’s discussed the idea of tapping the PDIF with Daniels and other lawmakers. But Kenley, R-Noblesville, thinks such a proposal, which would require a change in state law, should come with some sweeteners for banks.
Those could include lowering the income tax for financial institutions from the current level of 8.5 percent.
Kenley said he doesn’t see that hurting state revenue because he anticipates more banks would establish charters in Indiana, and therefore pay income taxes, if the rate weren’t prohibitively high.
“I don’t think we ought to take the PDIF monies … without some kind of a compensating arrangement,” he said. “The money does not belong to the state. If it belongs to anybody, it belongs to the banks.”
Banks paid fees into the fund until 1985, when an actuarial study deemed it had adequate balances.
Since then, the fund, which is overseen by the state’s board for depositories that is chaired by Daniels, has grown as it accrued interest.
In its recent history, the PDIF paid out a total of $2.7 million in 1987, 1991 and 1992 to cover uninsured deposits at banks that failed.
Information from: Indianapolis Business Journal
Topics Legislation Profit Loss Indiana
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