There are three issues that I want to discuss in this article: Required Minimum Distributions, the SAFE Banking Act and State-Owned Bank Legislation.

I. Required Minimum Distribution (RMD)

I have done a fair amount of research on this issue. It is complicated and seems to me, much like the income taxation of Social Security benefits, to be unfair and in need of a major revision, cap or repeal.

A RMD is the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or simple individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age. In 2020, the age for withdrawing from retirement accounts changed from 70 ½ to 72 years old. You must therefore begin withdrawing from a retirement account by April 1 following the year account holders reach age 72. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.

Why do we have RMDs? The argument is that the RMD acts as a safeguard against people using a retirement account to avoid paying taxes. Required minimum distributions are determined by dividing the retirement account’s prior year-end fair market value by the applicable distribution period or life expectancy. A friend explained that the RMD was enacted to keep the wealthy from accumulating tax-deferred wealth in their IRAs and then passing accumulated IRA balances to designated beneficiaries who could use their life expectancies to determine the required payouts and thus substantially postponing the payout of income tax. It impacts many seniors by requiring them to sell equity and/or fixed income assets in a down market, for example, which causes potentially large economic losses just to make taxable distributions. If the RMD were waved during the down market, there will likely be less depletion of the corpus of their account at the very least until the market improves. Again, my friend describes the enactment of the RMD as using “a howitzer to kill an ant.”

An example of how the RMD works: Hank, an account holder, age 74, has a birthday on October 1. Hank’s IRA is valued at $225,000 and had a balance of $205,000 as of December 31 of the previous year. The distribution factors from the relevant IRS table are 25.8% for age 74 and 22.9% for age 75. So the minimum distribution for Hank is: RMD=$205,000/22.9=$8,951.97.

Therefore, Hank has to withdraw a minimum of $8,951.97 and pay federal and state income tax on that amount. It becomes even more costly in a down market when Hank needs to sell an asset with a fair market to get $8,951.97 and the $8,951.97 is further reduced to state and federal tax. If Congress would, at the very least, exempt the RMD IRAs with a fair market value of $1.5 million – the RMD would kick in on IRAs of more than $1.5 million, but the first $1.5 million would be tax exempt.

Believe it or not, Congress has been working on retirement plans during the most recent term of Congress. In March, the U.S. House of Representatives voted in support of the Securing a Strong Retirement of 2022. The proposed retirement bill, which is known as SECURE Act 2.0, builds on the original SECURE Act – the Setting Every Community Up for Retirement Enhancement Act-from 2019. The SECURE Act raised the RMD starting age to 72. But SECURE Act 2.0 goes a few steps further. Workers would have to begin making withdrawals from their retirement account at age 73 in 2023, 74 in 2030 and 75 in 2033. In addition, if you miss an RMD, SECURE Act 2.0 would also reduce the tax (from 50% to 25%) for failure to take an RMD.

Serving as the foundation for the Senate’s counterpart to the House-passed SECURE Act 2.0, the Senate Finance Committee voted 28-0 to favorably report an amended version of the Enhancing American Retirement Now (EARN) Act, which includes a series of proposals aimed at helping more Americans save. It is likely that the Senate will approve the bill and begin working with the House on merging the differences between the two proposals before Congress adjourns this year. The Senate EARN Act contains several provisions that are substantially similar to the House Secure 2.0 including increasing the age for a required beginning date for RMD.

II. Public Bank of New Mexico

As noted in Jay Jenkins’ President’s Message, it would appear that a bill creating the Public Bank of New Mexico will be introduced in the 2023 Legislature. The Alliance for Local Economic Prosperity, which has been the principal backer of the public bank legislation during the 2021 and 2022 sessions, recently testified before the Legislative Investment and Pension Oversight Committee to discuss their revised proposal (business plan) for the public bank. The legislation itself is still on the drawing board. Significant details include:

• Funding: The bill will include an appropriation of $50 million from the state general fund to capitalize the public bank, and specifically “creates liquidity to fund the bank with a $60 million deposit from current holdings from national banks managed by the State Treasurer.” The State Treasurer will be “encouraged” to increase deposits in the bank as the bank matures and demonstrates integrity in its mission. This will increase the bank’s lending capacity. The goal is a loan deposit ratio of 70-80%.
• Financial Aid Business Plan: The bank will be profitable in two years. In the bank’s first seven years, at no cost to the state, the bank’s equity/capital will increase from $50 million to more than $92 million and it’s lending capacity to more than $940 million. The bank will become operational in nine-12 months following the July 1, 2023 effective date. The return on equity would be a seven-year equity growth rate of 9.18%. The general fund appropriation of $50 million can turn into over $400 million in lending.
• Lending: The bank will work with, not compete with, the state’s commercial banks and credit unions. Potential initial lending programs include accelerated growth, business development, and value-added guarantee. Other loans include: small business startups and expansions, entrepreneurial loans, and cooperatives ($1.5 million-2 million each); smaller loans ($100,000-$200,000), long-term loans, including home solar ($10,000-$20,000), and medical students and new clinic loans. The bank will provide financing for small businesses, rural and tribal development needs, and provide the capacity to adapt to climate change and financing for post-wildfire development.

We will withhold our comments on the revised business plan once we have had an opportunity to review the actual legislation. However, our position, as noted in this edition’s NMBA President’s Message, is that the NMBA is opposed to the creation of a public bank as it is unnecessary and will provide no real benefit to New Mexico residents or businesses. The implications of creating a public bank posed risks to New Mexico’s taxpayers and would likely saddle the State with significant, unwarranted costs to replicate a highly competitive, regulated, and federally insured banking system that exists in communities across New Mexico.

III. Safe Banking Act

It appears doubtful that Congress will approve the Secure and Fair Enforcement Act (SAFE Banking Act) in this term of Congress. The U.S. House of Representatives this year voted 220-204 to pass the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, which would de-schedule cannabis under the federal Controlled Substances Act, effectively ending federal prohibition and opening the industry to more traditional banking services and capital opportunities. This is the second time the House has approved the MORE Act. The Senate, however, turned the amendment down.

Cannabis banking legislation was not included in the final version of the United States Innovation and Competition Act (The America COMPETES Act). Even though the U.S. House of Representatives formally attached the SAFE Act as an amendment to large-scale legislation dealing with innovation and manufacturing in February, the Senate’s final version of the legislation did not include that provision. In what may be a last-ditch effort, financial trade associations are urging U.S. House leadership to add the SAFE Banking Act to H.R. 7990, the fiscal year 2023 National Defense Authorization Act as sponsored by Representative Perlmutter (Colorado). Given prior action by the U.S. Senate, it appears unlikely that the Senate would approve the amendment even if inserted in the National Defense Authorization Act by the House.

The majority of the states, 37 including New Mexico, have legalized cannabis for medical or adult use. Nevertheless, federal law still defines cannabis as an illegal drug under the Controlled Substances Act and, as a result, all proceeds generated by a cannabis-related business can be considered unlawful for banks to process. Even accepting a cannabis-related deposit can be considered money laundering. The problem extends to any entity that derives revenue from a cannabis firm, including real estate owners, security firms, utilities, and other vendors and investors. That puts banks in the difficult position of either potentially violating federal law or refusing services to a significant legal sector of their local economies. But excluding the cannabis industry from the banking system has serious consequences for the communities where they operate. Cannabis businesses are handling increasingly large amounts of cash – even paying their state taxes and licensing fees in cash – creating public safety and accountability issues for the industry.

The SAFE Banking Act is designed to bring the cannabis industry into the regulated banking system and provide visibility into its financial activity. Financial institutions adhere to stringent anti-money laundering and counter-terrorist financing reporting requirements, as well as monitor accounts for suspicious activity. The increased transparency that would come from processing transactions through bank accounts instead of in cash would ensure that regulators and law enforcement have the necessary tools to identify bad actors and remove them from the marketplace. The legislation would also enhance tax collection in the states where cannabis is now legal.