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The economic shift has played havoc with state governments, everywhere. The latest figures suggest that states will see a shortfall of $40 billion in revenue by yearend 2002 and the outlook is no better for 2003. In fact, according to a recent report released by the National Conference of State Legislators (NCSL), states face a “dramatically deteriorating fiscal condition.” According to NCSL, as of April 2002, 43 states reported budget gaps collectively totaling $27.3 billion. By June 30th, that number had grown to $35.9 billion and by 2003 is predicted to grow to almost $60 billion. Twelve states reported budget gaps in excess of 10% of their general fund, 26 states collected less revenue in 2002 than in 2001, 16 states were forced to raise their taxes by more than 1% and 25 states expect their 2003 balances to fall. Unlike the Federal Government, most states are constitutionally prohibited from deficit spending. The result is that, faced with a potential revenue shortfall of $40 billion this year and a prospective revenue shortfall of $60 billion next year, state governments are taking draconian steps to close the budget gaps. Twenty-nine states have implemented targeted or across the board cuts or placed freezes on capital expenditures, salary increases, froze hiring, prohibited state agencies from filling vacancies and froze travel, even if it is already budgeted. As if to drive these points home, several state regulators attending this year’s NASCUS Conference are doing so at their own expense. When NASCUS completed its 2001 profile of state agencies it found that no state regulatory agencies were funded from the general tax revenue of the state. All the regulatory agencies reported they 1) charged an examination fee to recover agency costs; 2) charged annual assessments to recover expenses; or combined those two approaches to recover the costs of running the agency. While that is the outcome everyone expected, it turns out that self funding of the agency is of little consolation. It seems that everywhere, state credit union regulatory agencies report being directed to “fall in line” and cut expenditures just as if they were supported by general tax revenue. When we talk with credit union agency heads we learn that state revenue officers seem to understand the distinction. We also learn, though, that legislators and state administrators are unwilling to treat self-funding agencies differently because that affects the morale of other state employees and the public’s perception about their government. It turns out that is important because everyone understands it may be necessary to increase taxes or curtail tax decreases. So the cost cutting is absolutely going to continue – even though everyone seems to understand cutting back on expenditures by state financial institutions regulators is shortsighted at a time of economic downturn. Yes, every credit union CEO is doing a great job of managing their credit union – and that is evidenced by the astounding number of CAMEL ones and CAMEL twos reported across the system. The reality is, though, that in times of unsettling economic shifts like these, credit unions can experience unexpected events that require more supervisory resources than ever expected. If you doubt that, just look at the implications that followed last week’s announcement that Consolidated Freight would file for bankruptcy protection. And without a doubt, if these trends and the resulting constraints continue unabated, at risk are the high standards of supervision and examination that the state system has created during this last decade. Sadly, the drivers are beyond our direct control, or so it seems. But are they beyond our control or have we just done a miserable job of managing this whole thing? First, we can’t really say that this turn of events is unexpected. We’ve seen this unfold before, just as recently as the early 1990s. So, if we know what to expect when there is a deep economic downturn why didn’t we make it a priority during the last decade to ensure that self funded regulatory agencies don’t fall under spending caps and freezes that effect tax funded agencies? Probably it’s because our state supervisory system effectively weathered these storms in the past. Our state agency heads masterfully worked with the system and because of their skills nothing fell through the cracks-albeit the cracks were short termed by today’s expectations. And we are a proud bunch. We proclaim that our credit unions don’t use a dime of taxpayer money to fund their regulatory systems. So we are not comfortable entering the money fray. In my view, too much is at stake to let the status quo continue. The state credit union system is riding at an all time high. It is looked to as the “charter of choice” by many and the array of innovations that are again coming from the state system are beginning to pay dividends to credit union members everywhere, regardless of their credit union’s charter. Freezes, hiring caps, training cuts and travel cuts can’t be allowed to cloud our renewed and revitalized state credit union system. They just can’t. So what do we do? Foremost, NASCUS Council members and our members of the Foundation for the Preservation of Dual Chartering and our Regulator members have to partner to begin to make this a pivotal issue within the credit union system. This must become a topic at chapter meetings and at league meetings. It must be on the agendas of credit union advisory boards. And state regulators must begin to broach the topic with the governors and with the chairs of state appropriations committees. We must make the case that self-funded regulatory agencies must not fall under spending caps and freezes that affect tax funded agencies. That kind of ground plowing is the first step, but ultimately the topic must find its way to committee agendas of league government relations committees because the real political clout and the real political acumen rest there. And when it gets there, NASCUS Credit Union Council members must be the ones who agree to become proficient and proactive message carriers to help ensure that other credit union leaders and the state’s public policy makers see the wisdom of making a distinction between self-funded and tax funded regulatory agencies. Oh and if you haven’t thought about it. This topic is ready made for a partnership between state banks and state credit unions. What’s that adage? Oh yeah, “politics makes strange bedfellows.”

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