Last week, 700,000 Department of Defense civilian employees began taking once-a-week furlough days that will cut their pay by roughly 15%. How will the temporary pay cuts affect credit unions?
NCUA Chief Economist John Worth said that while just under 2% of federally chartered credit unions have primarily military-based fields of membership, their relatively large size means they represent about 21% of federal credit union assets. The 82 federal credit unions that claim a military common bond include the nation’s largest credit union, the $54 billion Navy Federal Credit Union, and the third largest, the $16 billion Pentagon Federal Credit Union.
Over the next three months of furloughs, Worth said it’s reasonable to assume the pay cuts will have an impact on loan growth at affected credit unions.
“I would expect weaker loan growth and potentially some transitory higher delinquencies because we might have some people who haven’t effectively planned for this,” he said. “But, because these are furloughs, and not layoffs, so that income will return in October.”
Credit unions with high concentrations of Defense Department civilians in their fields of membership have already activated programs to communicate with members, Worth said, and that approach will keep balance sheet impact to a minimum. He added that he doesn’t expect loan growth to turn negative or a long-term rise in delinquencies. However, loan growth this year may be muted, and delinquency rates may not continue to fall as rapidly as they have been.
Worth also stressed the macroeconomic impact of federal sequester cuts are already apparent. For example, he said, in the first quarter of 2013, the GDP grew by 1.8%. However, federal government consumption contracted by 0.68% during the same period, as contracts were cancelled or not renewed. Additionally, he said, while the economy has added 3.4 million jobs since the beginning of 2011, government payrolls have shrunk by 100,000 positions.
“We’re seeing this tension where we are seeing job growth in the private sector, but government spending is subtracting from that growth,” he said. “There was never any forecast that sequestration would cause the economy to go into reverse, but it has subtracted from potential growth.”
Claudia Warszawski, manager of Navy Federal’s personal finance management division, said the furloughs are only a temporary setback for members who have been secure and stable throughout their membership.
“They've responded well to the assistance we've provided through both the financial tips we've shared and the special products and services we're offering,” Warszawski said. “Therefore. the assistance we are extending does not have an impact on our delinquency ratios.”
The majority of Navy Federal’s members are active duty military and are not subjected to the furloughs, she said. But for those who are, the 4.3 million member credit union is offering loan assistance, penalty-free early withdrawals on certificates of deposit and a special 3.00% APR checking overdraft line of credit. Navy has also set up a special sequestration hot line to help members assess their situation and review their available options, she said.
At the nation’s eighth-largest credit union, the $7.2 billion Security Service Credit Union, Vice President of Public Affairs Bruce Gillooly said he estimates only a couple of thousand out of 600,000 members face sequestration-related furloughs.
“That number is not staggeringly high,” he said. “It’s what we consider to be manageable enough that our call center and branches should be able to handle volume of people who have concerns.”
Because of that, he said, the San Antonio-based credit union will work with members on a one-on-one basis. Because federal budget cuts have already affected some members working under government contracts, Gillooly said the credit union has already been offering programs like no-fee loan extensions and pre-approved emergency loans, and has also been reversing fees related to insufficient funds and late loan payments.
“We have made sure that when frontline employees have an individual who says ‘I’ve been furloughed’, that triggers the employee to listen with a certain mindset, to make sure we connect them with those programs in order to ensure that the individual’s needs are met,” he said. “If, for some reason, the situation becomes too complicated for a front line employee, they can refer it to management. We will push the issue as high as possible to make sure their needs are met.”
On the West Coast, the $704 million Pacific Marine Credit Union isn’t anticipating a large impact from the furloughs, either. Vice President of Strategic Development Brad Smith said Southern California’s Camp Pendleton, the nation’s second largest marine base that is home to the credit union’s headquarters, has about 40,000 active duty marines and just 2,000 civilian employees.
“I don’t believe it will be a very large percentage of membership, because the number of DoD personnel that are not active duty in this area is not a significant as in some other areas,” he said.
Additionally, Pacific Marine expanded to a community charter in 2000 to include San Diego, Riverside and San Bernardino counties, which further dilutes the effect of the furloughs.
Worth said field of membership diversity is key when dealing with sequestration-related furloughs.
“Smaller credit unions with less diverse fields of membership will be more affected,” he said.