ALEXANDRIA, Va.--Two members of the NCUA board have indicated they will have difficulty supporting the agency’s 2022-23 proposed staff draft budget when it comes before the board at its meeting next week, with one of the board members calling it a “non-starter.”
During a public budget briefing held by the agency at which, in addition to the three board members and the agency’s CFO, four stakeholders also offered their input on the proposed budget, concerns were expressed over numerous issues, including why the budget continues to increase in size even as the number of credit unions has been steadily declining.
The stakeholders, who included representatives of CUNA, NAFCU, NASCUS and the Virginia league, all offered recommendations to the agency while also urging it to drop some of its plans.
As CUToday.info reported earlier, NCUA has proposed:
- A 2022 total budget of $345.3 million, which is 1.2% higher than the 2021 budget
- An operating budget is $326.6 million, which is 3.6% higher than in 2021
- A 2022 capital budget of $13.1 million, or 30.7% lower than in 2021
- A 2-22 Share Insurance Fund administrative budget of $6.2 million, or 21.7% lower than in 2021.
The NCUA’s 2022 – 2023 budget justification includes three separate budgets: the Operating Budget, the Capital Budget, and the National Credit Union Share Insurance Fund Administrative Budget. Combined, these three budgets represent the total of $345.3 million for 2022, which is 0.5% more than the initial 2022 funding level approved by the NCUA board as part of the two-year 2021 – 2022 budget, and 1.2% higher than the comparable level funded by the board for 2021, according to CFO Eugene Schied.
Driving Budget Increase
According to NCUA, a number of factors are contributing to the 1.2% budget growth between 2021 and 2022, including:
- A proposed net increase in 48 full-time-equivalents in permanent agency staffing. The agency currently has 34 vacancies in its examiner field force, which are in addition to the nearly 50 positions for which funding is being requested.
- A proposed increase of $8.6 million in travel funding for 2022 compared to 2021. That expense increase reflects assumptions that examiners will be returning to on-site visits to credit unions, but Schied conceded that number may be dialed back as the coronavirus pandemic has not faded as expected and virtual exams will remain in place for longer than had been anticipated.
- A proposed reduction to the Capital Budget of $5.8 million in 2022 compared to 2021, mainly driven by the completion of the latest phase of the Modern Examination and Risk Identification Tool (MERIT).
Overall, the Operating Budget seeks to fund 1,242 FTEs in 2022, while five additional FTEs are funded by the CLF.
Additional detail is presented in the slides below.
Harper: Proposal is Just a ‘Starting Point’
In his comments, NCUA Chairman Todd Harper called the strategic planning document “only our starting point for discussions and not a final product,” and he reminded that today, Dec. 9, is the deadline for filing comment with the agency before the board votes on the budget at next week’s meeting.
“As I have often said, a budget is a forward-looking document that establishes priorities,” said Harper. “My budget priorities have always included appropriate resources for an effective cybersecurity program, a strong consumer financial protection and fair lending program, sufficient small credit union support, and ample resources for an effective examination and supervision program."
Twenty-one months into the COVID-19 pandemic, Harper said NCUA remains focused on keeping its employees and contractors safe, so that "we can continue to perform mission-essential functions."
NCUA Chairman Todd Harper during budget briefing.
Looking forward, Harper said he is “deeply focused” on cyber-risks to credit unions and that NCUA continues to strengthen its own cybersecurity program. And he repeated a point that has received some push back from other board members and the trade groups, adding, “We have known for decades that the NCUA has maintained too light of a touch in overseeing consumer financial protection and fair lending. There is a real need for us to strengthen our commitment in this area.”
Concern for Small CUs
Harper also expressed concern over the future for small, low-income, and minority credit unions, which he said are “vital to the continued health of the credit union system and are often the only providers of safe, fair, and affordable financial services in communities of color, underserved areas, and rural communities. Yet, these credit unions are challenged by their lack of adequate resources.The pandemic has only exasperated this situation. The NCUA can do its part by supporting these credit unions through grants, loans, training, and greater technical assistance.”
Hauptman: Where’s the Correlation?
Vice Chairman Kyle Hauptman spoke out against the proposed increase in staffing and in favor of the return to credit unions of the excess funds in the operating budget. Much of the excess is the result of travel savings for examiners in 2021, as most exams were conducted virtually.
Hauptman expressed support for the budget briefing, saying it’s “crucial that there is some voice for the people whose money were are spending.”
NCUA Vice Chairman Kyle Hauptman during budget briefing.
The vice chairman said the most important area of the NCUA budget is “staffing,” but stated he does not support the proposed addition of 48 full-time employees.
“I don’t know of any correlation between the number of people we have on the payroll and the performance of credit unions,” said Hauptman.
He noted the aggregate net worth of credit unions is now 10.23% and that the industry is healthy.
Like Board Member Rodney Hood who would follow him in offering remarks, Hauptman cited data reflecting the decline in the number of credit unions while the NCUA headcount has continuously gone up.
“These are positions that never go away; that’s the nature of government,” said Hauptman.
The Cost of Examiners
Hauptman said the average annual cost to NCUA of an examiner is $138,000, including benefits. Adding 48 positions tallies a total cost of $6.6 million annually, and if factoring in inflation, over the next decade Hauptman estimated the new positions will take “$90 million out of the pockets of credit unions over the next 10 years. The ROI should be certain and should be very, very high. I haven’t seen anything that would warrant that kind of expansion.”
Hauptman said he isn’t naïve and understands there will be rainy days in the future, but believes it would be smarter to deploy assets where “they will do the most good,” and that is in leveraging the expertise of its current seasoned examiners.
Hauptman said he also supports allocating additional hours to assist smaller credit unions and for support staff for DEI initiatives, “but only after seeing measurable goals achieved. This is the way it would work at a credit union.”
He further said he also supports Board Member Hood’s call for returning excess cash in the operating fund to credit union.
“This is to fund expenses, not to build reserves,” said Hauptman. “I’ve not seen a demonstrated need for this level of excess funds in the operating budget.”
Hood: Budget is a ‘Non-Starter’
Reiterating a point he made at the November NCUA board meeting, NCUA Board Member Rodney Hood said the 50 new employees called for in the new budget “matches the yearly staffing increases we saw during the Great Recession nearly a decade ago."
NCUA Board Member Rodney Hood during budget briefing.
“I do not think we need nearly 50 new staffers at the agency, so this budget is not something that I can support in its current form,” Hood said. “Additionally, I also do not see how I can support a budget that does not return money from the Operating Fund back to credit unions in a significant way, something that I first called for earlier this year.”
Hood said his preference is to cut the NCUA’s budget year over year, “something that should not be difficult to do since we have so much money remaining in the current budget,” Hood said. “After all, as I have said on many occasions, the NCUA is funded by the credit unions we regulate, and we must be responsible stewards of this money.”
Hood noted that when he initially joined the NCUA board a decade ago for his first term there were just over 7,500 credit unions, a number that has since declined to fewer than 5,000.
“And while the number of credit unions we regulate has fallen since I was last on the board, the NCUA budget has exponentially increased since that time,” Hood said.
Hood said he is also “disappointed” with the timing of the budget.
“The budget before us is a non-starter, and everyone should recognize that,” said Hood. “However, since our back is against the wall in terms of timing, the board is engaged in conversations about what the final budget will look like without meaningfully considering the comments from others, since the timeframe we are operating under doesn’t really allow us to do so. That is wrong, and it should not be repeated.”
Overview from CFO
NCUA Chief Financial Officer Eugene Schied offered an overview of the proposed operating and capital budgets, which can be seen in some of the slides that are included below.
The personnel increase reflects 23 specialist positions that would be created, including regional electronic payments specialists, regional information systems officers and regional lending specialists, according to Schied. Other specialist positions are also being created.
'Drastic Reduction’
Schied said the majority of the $23 million available from the operating budget to carry over into 2022 is due to the “drastic” reduction in travel. NCUA is budgeting $20.8 million for travel in 2022, with the agency anticipating staff will begin to resume some onsite exams in Q1 2022. Schied said the 2022 travel budget request is actually 24% lower than what had been the proposed 2020 budget.
Harper said several parties have raised concerns over the travel budget and why NCUA hasn’t learned lessons from the pandemic and virtual examinations that could make the practice permanent. Given the likelihood there will be less travel than planned in Q1 2022, Harper asked if there is room to decrease the proposed budget.
Schied said the assumptions behind the budget over when examiners can return to on-site exams is a “moving target,” and initial projections for costs may have to be adjusted.
Stakeholder Input
Four people offered their input to the briefing. Here’s a look at what each had to say:
Mike Schenk, Chief Economist with CUNA
Schenk praised NCUA for its “level of transparency,” noting it is the only federal financial regulator to hold such a budget briefing.
But credit unions deserve to see the link between the expenditures and results, said Schenk.
Mike Schenk speaking to budget briefing.
Schenk noted the 2022-23 draft strategic plan differs from previous plans in “important ways” and in several strategic goals in particular, which he said raises “really important questions” for CUNA and its member CUs.
Schenk said it would be helpful to have more detail about the proposed expenditures for the new FTE positions and the duties to be performed, saying there doesn’t appear to be a “compelling need” for the new hires.
Schenk also told the briefing attendees CUNA has “significant concerns” around any expansion in consumer protection examination, a priority of Chairman Harper.
‘Simply Not Warranted’
“Our members believe altering the agency's risk-focused examination process and substantially increasing consumer examination-related expenditures is simply not warranted,” said Schenk. “(NCUA’s) mission statement makes very clear the NCUA exists chiefly to ensure the safety and soundness of the credit union system. Its examination program should remain focused on that primary objective.”
Schenk said there is no evidence of credit unions engaging in even minor actions that hurt consumers. “Credit unions are the original consumer financial protectors,” he said.
Adding more regulatory burden, Schenk went on to say, only reduces the ability of credit unions to offer safe and affordable options in the market.
He also called for NCUA to reconsider any plans to examine for climate-related financial risk, saying that especially in the long term it is almost impossible to predict the “frequency and severity of weather related disasters…given all the other factors in play.
He said the ability of credit unions to diversify their fields of membership could help many credit unions in mitigating climate-related risks.
Additional Issues
Other issues Schenk said CUNA would like NCUA to revisit include:
- Extended examination cycle
- PCA flexibility
- NCUSIF, its equity ratio and any need for a premium
Ann Kossachev, NAFCU VP-Legislative Affairs
Kossachev called on NCUA to focus on year-over-year budget decreases, not increases, especially by incorporating lessons learned from the COVID-19 pandemic.
“NAFCU commends the agency for utilizing the savings achieved in 2020 and in 2021 to fund its day-to-day operations (and NAFCU) continues to stress the need to fully adopt lessons learned in its approach to examinations to achieve long-term budget reductions,” Kossachev said. “This 2022-2023 draft budget overlooks opportunities to incorporate more efficient processes with potential cost savings. In fact, the 2022 operating budget would increase by 3.6% and the 2023 operating budget would increase by over 13%. But the operating budget currently contains a surplus and NAFCU reiterates its earlier request recently echoed by Board Member Hood and Vice Chairman Hoffman just today to return any surplus funds to credit unions directly or via a credit against 2022 budget expenses.”
Recommendations Made
Ann Kosachev speaking to budget briefing.
Kossachev, who said NAFCU also opposes the addition of the 48 new employees, additionally offered the following recommendations:
- The agency should preserve the strength of the share insurance fund without overburdening credit unions with exorbitant operating fees or unnecessary self assessments.
- NCUA should maintain the existing exam flexibility criteria for credit unions to qualify for extended exam cycles and incorporate exam modernization efforts, including a hybrid virtual and in-person exam posture
- NCUA should offer greater transparency regarding cyber security expenses
- NCUA should continue to support financial inclusion through the ACCESS initiative with a focus on enhancing field of membership and other growth opportunities
Kossachev noted that despite the pandemic, NCUA is projecting the equity ratio for the NCUSIF will end the year at 1.28%, which is “comfortably above the statutory minimum,” which demonstrates the overall health of credit unions.
She said NAFCU member credit unions support investments in cybersecurity and fraud prevention
Kossachev further said NAFCU supports the use of more virtual exams but appreciates the value of in-person interactions and supports a hybrid approach that should be reflected in a reconsidered budget.
Other Points Raised
Other points raised by Kossachev and NAFCU:
- The proposed nine FTEs to be hired for more annual exams of credit unions with less than $1 billion in assets that might otherwise qualify for an extended exam is “unaccompanied by data or justification beyond the specter of future economic uncertainty.”
- “Speculative” concerns about the economy contradict statements made in the economic outlook section of the proposed budget. “This attempt to expand exams for a large swath of the credit union industry without evidence of tangible risks to the SIF or the industry is improper and unwarranted,” she said.
- Kossachev called for future virtual exams to be conducted on an 18-month cycle, and also said the agency’s ongoing exam modernization initiative should create a more efficient supervision process eliminating the need for additional examiners.
Lucy Ito, President & CEO, NASCUS
Ito said she wanted to focus on three issues:
- A reminder for everyone on why it's important for stakeholders to understand the overhead transfer rate (OTR)
- Aspects of the 2022 draft budget and OTR implementation, which she acknowledged can get “pretty technical (and is) pretty dry and can cause eyes to glaze over.
“But it’s important for both state-chartered credit unions and federal credit unions to understand and closely monitor the overhead transfer rate for three reasons. First, every dollar that is transferred from the NCUSIF to fund NCUA expenses is a dollar that is not available to cover losses in the system,” Ito said. “Second, the balance between SIF dollars and federal credit union operating fees is important because there’s the potential to imbalance the dual chartering system by disadvantaging the state system. A robust state system benefits federal credit unions and a robust federal system benefits state credit unions. We need this give and take…especially as all credit unions face this digital world and an intensely competitive
Lucy Ito speaking to budget briefing.
“Third, the OTR is important in understanding is important to the NCUA board in trying to navigate the pandemic and whether or not to increase the normal operating level of the SIF.
“It behooves credit union to pay attention not only to the rate of the OTR but what expenses actually get allocated to the fund,” Ito said.
About 2022
Looking to 2022, Ito said the NCUA draft budget and OTR implementation appear counter-intuitive, noting that state and federal charters are near evenly divided 50/50 in the U.S. in terms of assets that are insured.
There are approximately 3,122 federal credit unions vs. 1,868 federally insured, state-chartered credit unions, Ito reported.
“That means NCUA has 1,250 more federal credit unions to monitor than state credit unions. This would make us expect that the workload would be greater for federal credit unions than state credit unions,” said Ito, noting the budget does not seem to reflect that ratio.
Ito said the second counterintuitive issue in the proposed budget has to do with the proposed eight FTEs in the area of consumer financial protection.
Ito said a third area that appears to be counterintuitive in the proposal relates to the costs of monitoring third party vendor risk and CUSO risk in the OTR methodology.
“Our reading of it indicates that 100% of those costs are to be allocated to the fund and, therefore, the OTR,” said Ito, calling for the issue to be revisited and clarified.
Ito and NASCUS called on NCUA to have an independent review conducted of the workload analysis by an acceptable neutral entity
Carrie Hunt, President/CEO of Virginia CU League
In reviewing the entire NCUA budget, Hunt said she wanted to acknowledge Board Member Hood’s leadership in focusing on the potential to return money to credit unions from the operating fund, and further said she joins with others in calling for the return of the normal operating level back down to 1.3%.
“What I was struck with, though, is that this budget does not generally reflect on the agency's current focus, which raises the question in my mind as to how the agency will match the budget proposal with its future-focused strategic plan,” said Hunt. “Credit unions do benefit from having a forward-thinking, vibrant regulator.
Carrie Hunt speaking to budget briefing.
“I absolutely recognize that the agency has grown and evolved, but as the agency itself notes it has two jobs: it's a safety and soundness regulator via the insurance fund and it's a functional regulator, and when I look at this budget I wonder whether it does strike the right balance between those dual functions,” Hunt continued. “It really comes down to risk and does the agency need to recalibrate how it's approaching risk to allow for more innovation and growth of credit unions as many of the other presenters have discussed?”
About the Expanded Staff
Speaking to the issue of the proposed increases for FTEs, Hunt joined with others in noting the agency is adding resources to return some credit unions to a yearly exam cycle, while also proposing to increase staffing in the area of fair lending.
“The question is are these resources really needed? They appear to be predicated on the premise that credit unions are becoming more complex or risky due to present marketplace circumstances, or perhaps there are deficiencies in fair lending or in other areas,” Hunt said. “But certainly in in the budget document and in general, when I look at the general conditions that are out there in credit unions, I don't think that the agency has presented enough justification for this current assessment as to risk. It certainly looks like the agency is presenting some issues that are in all likelihood transitory or due to economic uncertainty, and I think that we need to have a better assessment of whether or not additional resources are needed or whether these areas of uncertainty can be addressed through just management on the credit union side first.”
Additional Points
Other points made by Hunt:
- When it comes to cyber-risk, Hunt said she wants to ensure NCUA isn't necessarily just spending its way into an area of zero risk, “because we do need to leave space for innovation and we actually need to leave room for credit unions to go ahead and proactively look at and take care of these risks on their own.”
- She said the new MERIT exam program should be given time to play out to see if efficiencies are achieved that would negate the need for new hires.
- Hunt said that given the pace of change there is a need to act even more quickly, and she suggested NCUA’s Office of General Counsel could potentially play a bigger role and is issuing more Risk Alerts or legal opinion letters on areas of importance to credit unions
- She urged NCUA to take a more active look at changes to the Federal Credit Union Act that are needed.
- She urged NCUA to consider partnerships that would allow it to provide more resources and support to smaller credit unions.
