This week, I received the same dreaded email that you did, or soon will: it’s time to work on the 2014 budget.
I hate the budget process.
For one thing, it requires sitting still and giving your full attention to an Excel spreadsheet with a mile-long list of general ledger numbers. God bless the bean counters, they are as vital to a credit union as the air we breathe, but it is just not my thing.
And what a dream-dasher the budget is. It doesn’t matter which division you run, the budget takes the fun out of any strategic plan. There’s never enough money to do it all, and your brilliant idea often sustains so many cuts, it transforms into some craptacular make-do version that's a chore to implement.
There are also so many unknowns, and this year is particularly difficult. I can think of five major budget uncertainties that must be driving credit union executives nuts as they put their income and expense projections together.
The Tax Threat
Yeah, yeah, I know. Congress isn’t likely to accomplish a complete overhaul of the tax code. Not given the partisan canyon that divides the two controlling parties. It’s not a pleasant task, either: increasing tax revenues is guaranteed to make somebody mad, and that will be a problem for legislators as they start asking for contributions to their midterm re-election campaigns. While it’s unlikely the credit union tax exemption would be completely repealed, the industry could be hit with some new taxes. I’ve heard unrelated business income is one area the House Ways & Means Committee is eyeing. If your credit union would be hit hard by a UBIT, you might want to leave that line item open until the end of the year.
As of Aug. 21, the Federal Reserve said it would appeal Judge Richard Leon’s decision that invalidated the interchange cap and a provision in the rule that mandates network competition. It’s possible the Fed will prevail, particularly since the merchant plaintiffs are joining forces with the Fed to push for an expedited appeal. And, both the Fed and merchants told Leon they don’t think he has the authority to require financial institutions to pay merchants damages. Both of these developments are good news for credit unions. However, if the Fed does not succeed in appellate court, it would be forced to craft new interchange rules. While the debit interchange cap only applies to the four credit unions with more than $10 billion in assets, the competition provision applies to all credit unions. Leon’s decision would require card issuers to double the current number of payment networks represented on their cards from two to four. Sounds spendy to me.
The Fed has been very consistent in its projections that it won’t raise the Fed Funds rate until 2015. However, when it comes to making decisions about loan and deposit pricing, liquidity preparation, investment portfolios and loan growth goals, credit unions must project well into the future. What will happen after the Fed tapers its economic stimulus and raises rates? Your position could have a big effect on your balance sheet.
Of course, economic projections are uncertain every year. But in this current environment, we’re only one terrorist attack or market event away from another recession. And it doesn’t take much to find economic experts who are predicting radically different outcomes. Former Goldman Sachs Asset Management Chairman and BRIC originator Jim O’Neill recently said he thinks emerging markets have cooled and the United States will see a global economic surge. Boy, wouldn’t that be nice? But plenty of others have their doubts. And if Congress doesn’t raise the debt ceiling, it would have devastating consequences for credit unions that serve federal agencies, not to mention the financial market chaos that could ensue.
Before the end of the year, we could see new final CUSO rule that could greatly increase the compliance burden on credit unions that wholly own one or more CUSOs. We are also likely to see a proposed rule that would increase net worth requirements according to risk, with the current 7% well-capitalized requirement only applying to plain vanilla shops. Certainly that would impact your need to generate net income and could force a reduction in assets, depending upon how quickly such a rule would take effect.
Sounds like it’s going to be a busy four months.