Fleet loses primary role as state banker

By Raphael Lewis, Globe Staff, 9/3/2003

FleetBank Financial Corp., in the middle of a dispute with the Massachusetts Department of Revenue over $20 million in back taxes, lost its role as the state government's primary banker yesterday.

State Treasurer Timothy P. Cahill says taxpayers will save $5 million to $6 million over the next three years as a result of his decision to put Fleet's prestigious banking contracts out to bid for the first time in 14 years. But he maintained that Fleet's tax battle had nothing to do with that decision, just the desire to save taxpayer dollars.

"We've got a process in place and a philosophy that, if there's business, it should be competitively bid," Cahill said. "The competitive process really worked in this instance, and that's what we're trying to do systemwide here."

Fleet managed to hold on to just one of the three contracts awarded yesterday, which are worth about $4.5 million in fee revenues a year to the Boston banking giant.

Sovereign Bancorp of Pennsylvania won the contract for the state's core depository banking services, which entails managing balances and controlling disbursements of $30 billion a year. The contract will be worth as much as $2 million a year in fees for Sovereign.

Since then, Sovereign has moved aggressively to compete with Fleet. Late last year, Sovereign hired Kevin Sullivan, former secretary of administration and finance, to entice municipalities to put their banking business out to bid and has succeeded in putting a small dent in Fleet's dominating market share.

Joseph P. Campanelli, president and chief operating officer of Sovereign Bank New England, said the contract award was an "exciting" result of that effort.

"It's a very attractive, high-profile contract, for sure," he said.

Currently, Sovereign provides similar services in Rhode Island and Pennsylvania, but neither job matches the size or scope of the Massachusetts contract, Campanelli said.

Fleet will maintain its contract for providing lockbox services for the state, which is also worth about $2 million annually. Meanwhile, Banknorth Group Inc. of Maine won the state's emergency accounts contract yesterday, after submitting a bid to do the work at cost.

Fleet did not submit a bid to retain this aspect of its state banking services.

Fleet spokesman James Mahoney said the company was "obviously disappointed" to lose the core depository services contract, but said Fleet officials were still "pleased that we will continue to be a major provider of financial services to the Commonwealth."

Mahoney said Fleet had no intention of appealing the Sovereign contract award, saying Fleet officials were confident the bank's back-tax dispute played no role in Cahill's decision-making.

The state has argued that Fleet owes about $20 million in corporate excise taxes related to a real estate investment trust it inherited in the BankBoston merger, saying the trust was set up as a way to avoid paying taxes. Fleet has argued the trust was a bona fide investment vehicle.

State law prohibits Cahill's office from awarding a contract to a vendor that is not in tax compliance and gives Cahill the power to put off any contract award until a vendor has ironed out all of its tax issues.

Tim Brooks, assistant treasurer for cash management, said the state will realize savings of about $2.1 million a year under the new contracts, once the transition has been fully worked out. The three-year contracts will become effective Nov. 30.