Indiana bankers may face deposit insurance premium

Northwestern Financial Review, Jun 1-Jun 14, 2003 by Dullum, Justin

Indiana bankers may have to pay premiums into the Public Deposit Insurance Fund following the passing of legislation that removes $50 million from the fund in the form of a loan. Previously, the fund was flush with $297 million - $15 million more than the $282 million level determined actuarially sound by an independent accounting firm in 1999. Banker groups fought the legislation saying the state has never contributed to the fund.

The legislature took the money as an interest-free loan to help compensate for an $850 million state budget deficit. The repayment schedule extends through 2014.

"Originally, the legislators wanted to take $50 million out and not pay it back," said Kerry Sprandlin of the Indiana Bankers Association's government relations department.

Bank lobbyists were also seeking language that would alleviate the banks' obligation to pay premiums to replenish the fund until the loan was paid off, but this measure was not successful.

The Public Deposit Insurance Fund protects the depositors of public funds. If a bank with public deposits fails, the PDIF covers the amount of those funds not covered by the FDIC.

"If a school board deposits money in an Indiana bank, the bank doesn't have to collateralize," said Sprandlin. "Municipalities get a higher rate of return on their investments because banks don't have to bear those costs. And banks get access to the funds. Everyone wins but unfortunately the insurance fund that allows this to happen has been compromised."

Sprandlin said it's unclear whether the board that governs the fund will assess a premium, which hasn't been done since the early 1980s.

Two years ago, the legislature took the interest earnings from the fund and diverted them to support police and fire pension obligations. "The fund has not been growing since then," said Sprandlin, who said one of the most upsetting things to bankers is that since the fund's interest is not fed back into the fund, it can't grow back on its own.

"It's a backdoor tax," said Sprandlin. "It's a rotten deal."

Indiana's PDIF was created in 1937. To date, the fund has paid out about $1.6 million, according to the state treasurer.