SACRAMENTO / BRADLEY INMAN : Bill to Consolidate State’s Banking Regulators Again Hits Opposition

The California banking lobby’s opposition to a bill that would consolidate state regulatory agencies rests partly on the uncertainty of who would head the agency.

“Everybody wants their own man in this slot,” said Richard Damm, consultant to Sen. Dan McCorquodale (D-San Jose) who introduced SB 2431, which called for the creation of a Department of Financial Institutions. “It comes down to everyone wanting to keep their friendly regulator.”

“Why would they want us to fool around with a system that works well for them?” he asked.

Most banking groups claim to embrace the concept of consolidation, which would wrap activities of the State Banking Department, Department of Savings and Loans and some duties of the Department of Real Estate and Department of Corporations into one super government agency.

But earlier this month, when it came time to take action on a bill that would do exactly that, lobbying by industry powerhouses such as the California Bankers Assn. and the League of Savings Assns. helped trap the legislation in committee.

“We don’t think an issue this important should be rushed through the legislature,” said Gregory Wilhelm, director of government relations, California Bankers Assn. “Headlines on the thrift debacle” sparked the legislation, according to Wilhelm, and “I’m not sure creating a super agency will prevent these kind of abuses in the future.”

Under the bill, the Commissioner of Financial Institutions would be appointed by the governor and confirmed by the Senate. But from which group would the commissioner come? The agency would regulate 14 types of financial institutions, including banks, trust firms, savings associations, credit unions, escrow agents, mortgage brokers and securities dealers.

Consolidation was first floated in 1976 but was quickly snuffed out by the thrift lobby. This time around, the League of California Savings Institutions opposed the bill, but the bankers are leading the charge to kill the measure.

Last year, Gov. George Deukmejian floated a similar proposal but he was frustrated with the warring trade groups. This year, the idea was introduced by the Legislative Analysts Office, which argued that “the state’s regulatory structure has not changed to keep pace with the changes that have occurred in the financial industry.” Damm is harsher. “The regulatory system is such a sham that maybe we would be better off having no regulators at all and just telling the public to watch out,” he said.

Aligning State and Federal Tax Laws

Bringing state tax law in line with federal rules appears to be one of the few things that the legislature agrees on in the current budget stalemate. But a close look reveals that tax conformity has problems, too.

Faced with a $3.5-billion budget shortfall, the Legislature says changing California tax laws so they are consistent with federal statutes would add an estimated $615 million to the state treasury by closing a variety of tax loopholes. But the Department of Finance says these predictions may be too optimistic and should be lowered to $415 million.

“In order to be prudent, we discounted the (legislature’s) number by $200 million,” said Patricia Landingham, a Department of Finance analyst. After the legislature conformed state law to federal changes in 1986, revenue estimates were much lower than predicted, which makes “us much more suspicious today,” she said.

Expected revenue from tax conformity could be further eroded if Proposition 129, the “War on Drugs” initiative, is approved by the voters in the November election. Pushed by Atty. General John Van de Kamp, the measure depends on tax conformity to pay a share of a $1.7-billion “Anti-Drug Superfund.”

Together with proceeds from bonds, revenue from tax conformity would fund stepped-up enforcement of drug trafficking laws and pay for a program to construct new prisons for drug offenders.

The measure was crafted long before the current budget problem unfolded. It qualified for the ballot weeks ago and the language cannot be changed. If the initiative passes, the measure would siphon off $100 million of tax conformity revenue this year and $900 million in future years. The initiative would override other legislative actions on the budget and force the legislature to fund the drug enforcement program from the general fund.

Though a cloud surrounds the exact amount of tax receipts conformity would generate, the political consensus to move forward with a bill is a reversal from past attempts to change state tax law.

Federal law was amended in 1987 and again in 1989, but the California Legislature couldn’t agree on changes to state law.

Many of the changes in the law will be related to accounting procedures that wipe out corporate tax loopholes. For example, one modification would accelerate the reporting of income on contracts when the work is only partially completed. Current law permits companies to delay reporting income until the contract is finished. This change would increase state tax receipts by about $68 million this year.

Another change would restrict the deduction for capital losses to capital income, excluding ordinary income. Nearly $10 million would be raised by this modification.

Business groups such as the California Manufacturers Assn. and the California Taxpayers Assn. (Cal Tax) fought earlier conformity bills because they weren’t “revenue neutral” and because they were viewed by industry trade groups as a guise for raising corporate taxes.

“Under other circumstances, the business community would be kicking and screaming about this sort of legislation,” said Rebecca Taylor, vice president of Cal Tax. “But considering the environment, we’re ready to give some,” she said.