Taking on a GSE Gone Wild

By Curt Everson

Every so often a single issue transcends governmental lines and deserves the attention of policymakers at every level—federal, state and local. Such is the case with the Farm Credit System.

So decided the banker leadership of the South Dakota Bankers Association, which, with the help of ABA’s agricultural banking and policy experts, launched a policymaker education campaign in 2013 to help set the stage for Farm Credit System reform. It’s an effort that other states with a significant concentration of ag lenders may want to replicate, as Farm Credit System lenders get more aggressive and challenge the livelihoods of hometown bankers.

For the uninitiated, the Farm Credit System is the only federal government-sponsored enterprise that competes head-to-head with private industry in the agricultural lending arena. GSE status confers its own benefits. But on top of that, since 1916, the earnings of the $266 billion asset Farm Credit System have been largely exempt from taxation—both federal income tax and, in our case, South Dakota’s income-based bank franchise tax.

Our Taxation Equality Awareness campaign’s objective has been to provide policymakers facts about the Farm Credit System and let those facts speak for themselves. After all, when one compares the historical justification for tax preferences with current day information about how large the Farm Credit System has become, who the system serves (large borrowers) and who it does not (small and beginning farmers), it is hard not to conclude that change is in order.

The fact is that during the course of its nearly 100 years, the Farm Credit System’s business model has changed. Back in 1916, when Congress created the GSE, credit was not always readily available to support production agriculture. But today, credit to support the acquisition of land and machinery and to provide annual operating capital is available from banks of all sizes. Congress in 1916 also hadn’t yet conceived multi-year farm program legislation that provides a financial floor to help farmers and their lenders ride out the cyclical up-and-down swings in ag commodity prices.

The Farm Credit System’s outdated tax exemptions not only deprive the federal Treasury of more than $1 billion annually, they also reduce potential state franchise tax revenues to the tune of about $4 million per year. That’s foregone revenue that otherwise could be used to support South Dakota’s K-12 schools, as well as the budgets of our cities and counties.

Our campaign has armed bankers with these facts and sent them marching into town hall and city
council meetings across the state. The response has been gratifying. Local leaders have started asking questions, and Farm Credit System representatives are not able to supply good answers. We also have promoted greater awareness via local newspaper and radio advertising.

The net effect has allowed South Dakota bankers to shape their local government’s agenda, raising an issue that has received far too little attention in Congress. In fact, as ABA’s Frank Keating pointed out in letters to leaders of the House and Senate Agriculture Committees at the beginning of the year, Congress has not held an oversight hearing on the Farm Credit System in at least 10 years.

It’s too soon to tell if the seeds that South Dakota’s bankers have planted will ultimately bear fruit. But combined with ABA’s ongoing efforts at the national level, which include a ReformFarmCredit.org website that debuted last fall, there is no doubt lawmakers’ eyes will be opened.

For some in Congress, the truth of this “GSE gone wild” may be inconvenient. The Farm Credit System is, no doubt, a grassroots force to be reckoned with. But so are America’s hometown bankers. It’s time for us all to go to work.

Curt Everson is president of the South Dakota Bankers Association.