Here’s a news flash: The NCUA’s annual budget is a sound investment by credit unions to protect their bottom lines.
By paying $48 million in NCUA budget increases in 2010 and 2011, the industry was spared $1.5 billion in losses to the National Credit Union Share Insurance Fund.
When the economic crisis hit America full force, the percentage of shares in credit unions rated CAMEL 3, 4, or 5 quadrupled from the 5% historical norm to more than 20%–and nearly 2,200 credit unions had significant problems. Several billion-dollar credit unions were on the verge of failing.
The NCUA immediately took several steps to address these problems, each of which had budget implications. We moved from an 18-month exam cycle to a 12-month exam cycle, and we hired more examiners. It was critical to get into credit unions more frequently to detect and prevent problems. And we needed more boots on the ground to do so. We also invested in expanded training for examiners to deal with the growing number of complex and higher risk activities. And of course, with more examiners and more frequent exams, we needed corresponding increases in travel expenses.
These investments saved credit unions $1.5 billion by stabilizing the vast majority of troubled credit unions that were in imminent danger of failing. In 2010, 28 credit unions failed, costing the share insurance fund $221 million–an amount lower than the entire NCUA budget. So far this year, 13 credit unions have failed, at a total cost of $46 million.
To ensure the NCUA has the resources to protect the growing number of consumer deposits in credit unions and to continue to protect the insurance fund from losses, the NCUA board last week voted to increase the agency’s 2012 budget by 5%. This increase is less than half the annual 12% to 13% NCUA budget growth rates over the last three years.
Here’s how we achieved a smaller budget increase:
Zero-based budgeting. The NCUA board asked staff to build their budgets from the bottom up. Every region and every office started with zero authorized funds. They had to justify each line item, instead of simply rolling over budget levels from prior years.
Cost cutting. We continued the cost-cutting process that resulted in a $2 million savings to credit unions from our mid-year 2011 budget adjustment. NCUA staff successfully worked to identify additional areas where we could trim the budget without compromising our mission of safety and soundness. In 2012, just like credit unions, we will continue to search for ways to reduce expenses and introduce efficiencies wherever possible.
Pay freeze. A major factor in keeping the budget growth in single digits was the NCUA’s decision to voluntarily apply the federal pay freeze to all NCUA employees in 2012. The NCUA is an independent agency and is not bound by the general federal agency pay freeze ordered by President Obama. However, we negotiated and signed a three-year collective bargaining agreement with the National Treasury Employees Union that will not allow any employee pay raises as long as the federal pay freeze remains in effect.
As credit unions well understand, the lion’s share of most budget costs is payroll. Your people are your greatest asset. The same is true at the NCUA. Yet astoundingly, when I became NCUA chairman in 2009, we had fewer employees than when I began my previous term on the NCUA board in 2002. Such a reduced staffing level was untenable, given the daunting financial crisis the country was facing and the work that needed to be done.
The NCUA’s 2012 budget authorizes 33 new hires, including examiners and specialized experts in high-risk areas of lending, capital markets, supervision and troubled institutions. Acquiring further in-house expertise to deal with increasingly sophisticated activities continues to be a necessary investment.
Another factor affecting the overall budget was a double-digit increase in travel costs resulting from the need to examine credit unions more frequently.
Taken together, we were able to produce a strong NCUA budget at just half the prior year’s growth rate, while still funding key initiatives related to supervision and exams.
Looking forward, next year’s increase of $11 million is an investment that will continue to protect the share insurance fund and credit unions from losses from failed credit unions.
For perspective on budget growth, compare the NCUA’s recent budget growth to the FDIC, which more than doubled its entire budget during the economic crisis. The FDIC has indicated that banks will be paying insurance premiums for failed bank losses for years to come.
For credit unions this year, because of losses the NCUA prevented, there will be no share insurance fund premium. The budget investments that credit unions have made in the NCUA these past few years are paying off.
Through the efforts of credit union management and careful supervision by the NCUA, credit unions are coming through the economic downturn and can look to a future of increasing members and a stronger bottom line.