ALEXANDRIA, Va.-NCUA announced at its third annual Budget Briefing and Public Forum Oct. 10 that it was planning for a 2.99% increase in the agency's budget for 2004. The 2004 budget is projected at $150.4 million, up $4.37 million over this year. In the 2005 budget, NCUA Executive Director Len Skiles said, expect a 2% increase to $153 million. NCUA has been holding these public briefings in the interest of openness of its spending of credit union funds and gaining the credit union community's perspective. This is the earliest the forum has been held, at the behest of the credit union trade associations, to allow more time for public comment. Written comments are due to the agency by Nov. 10. The agency will vote on the budget at its Nov. 20 meeting, as well as where to set the overhead transfer rate, the amount of the budget that is paid for out of the insurance fund. The OTR is set every three years and currently stands at 62%. All three trade associations testifying during the budget hearing tied the OTR into their budget discussions, which NCUA has sought to separate in their minds. After the chairman opened the meeting, Skiles gave attendees a run down of the agency's budget. He explained that the credit union environment is constantly changing and credit unions are becoming more complex. Credit unions' assets are growing dramatically while the total number of credit unions is shrinking. NCUA is always trying to improve its service to credit unions and add new programs, he said. “In other words, our budget process, I'm sure, is very similar to your experience,” Skiles said. “It is not an easy process, but, just as you do, we strive to develop a defensible and supportable budget that will allow us to accomplish mission objectives and also allow for unexpected contingencies.” NCUA: Cost-Cutting Moves Working In an effort to reduce the agency's budget, NCUA began closing one of its offices and moving another this year, which is expected to be completed by April of next year. The realignment is on target at this point without the agency having to resort to RIFs-Reductions in Force. By closing the Chicago office, the agency is saving $338,000 in rent in 2004. The move from Concord, Calif. to Tempe, Ariz comes at a savings of $99,000, in addition to the drop in the geographic pay scale from 36% to less than 5%. NCUA also grasped an opportunity to renegotiate its Atlanta office space, with two years left on the lease and a plummeting market in the area, for an additional 1,000 square feet of needed office space at a savings of $85,000. Full-time equivalents (employees) at the agency will be reduced by 7.47 in the coming year to 964 and, by 2005, NCUA will be down to 959 FTEs. “By far,” the most important key to these reductions has been the extended examination cycle, Skiles said. Each FTE reduction saves the agency an average of $111,000 a year in pay and benefits, he explained. “One of the questions I get is `am I replacing FTEs with contractors?' No,” Skiles replies. Currently, the agency is 45 FTEs below what it allotted itself in the 2003 budget. He added that he has authorized the regions to begin hiring. But, contract work expenses are up $2.91 million or 42.92%. Skiles said this is partially due to $890,000 in labor relations management direct costs (consulting, hiring new FTEs, training for supervisors, and travel) resulting from the possibility of NCUA employees unionizing. Currently, the vote by the bargaining unit, sponsored by the National Treasury Employees Union, has been stalled because NCUA is challenging the eligibility of examiners as part of the potential union. If you add in lost productivity, Skiles said, the labor relations management costs are pushed well over $1 million. Other contract work scheduled for next year includes repairs to NCUA's 10-year old headquarters building in Alexandria, Va. The agency will not be giving the lump sum payment to its employees this year as it has in the past two. In 2002 and 2003, NCUA paid its employees half of their pay raises in a lump sum at the time of the increase and half was added to their regular salary throughout the year. This allowed the agency to save money by basing the pay raise percentage on a lesser amount of money since the lump sum payment was not included in employees' base pay. NCUA should actually save $516,000 in 2004 without the lump sum payment. The agency has authorized a 4.1% average merit pay increase, equivalent to what has been authorized for the federal government. However, on the benefits side, the agency is facing a government-mandated 15% increase. More and more employees (76%) are coming in under the new retirement plan, which is more costly to administer. This combination is leading to an increase of 3.46% or $756,000. Also, 2004 is a regional training conference year (held on even years), which has historically boosted the agency's budget. “It's a very valuable training mechanism at this agency,” Skiles said. NCUA is also looking at whether it should increase its cash balance to operating expenses. The funds are used to keep the agency running until the federal credit unions pay their operating fee assessments in April, which leaves the agency with just one month in reserves. “There have been times we're wondering if we need to borrow from the fund to keep operating,” Skiles explained, which is a bad position for NCUA to be in. Typically, he said four to six months of reserves are recommended. While not attacking this need, Kansas Credit Union Association President and CEO Marla Marsh, testifying on behalf of CUNA agreed. “We ask that the NCUA Board articulate to credit unions its policy on what reserving level the agency seeks to maintain and why,” she said. NAFCU was in agreement. As is traditional for NAFCU, the organization did express its disapproval at the agency's staffing level, which it feels is on the high side. NAFCU President and CEO Fred Becker pointed out that from 1990 to present, the number of credit unions has dropped 31% and problem credit unions are down 70%, while NCUA's budget (adjusted for inflation) has increased 56%. In that same period, FTEs climbed-in a roller coaster manner over the interim-from 913 to 971. While recognizing that there should not be a one-to-one correlation, NAFCU's CEO said there should be some correlation. For example, Becker pointed to the 45 vacancies, representing 4.64% of NCUA employees, at the agency. “While understanding the agency's desire to retain these positions pending the ongoing regional closure and realignment, we would urge that the agency carefully examine its vacancies and assess whether or not they should be filled following the completion of these activities,” he said. He also urged the agency to establish a salary cap equal to the vice president's pay as the other federal financial regulatory agencies have. A popular ancillary topic of discussion at the meeting was the OTR. League President Marsh commented, “A basic debate continues in the credit union movement of what are agency `insurance-related activities' and how much of the NCUA budget costs are justifiably paid by the Share Insurance Fund.We believe that there can be some constructive dialogue on ways to truly recognize the role of the state regulators in helping to carrying out NCUA's safety and soundness mission under Title II of the Federal Credit Union Act.” Whatever the action on the OTR, Marsh said, CUNA suggested the rate be set annually in the future for “greater transparency.” In its written testimony, NAFCU also advocated that it be “fair and equitable to all federally insured credit unions,” reminding NCUA that federal credit unions will pay 71.5% ($104.4 million) of the agency's budget. NASCUS, like CUNA, advocated annual setting of the OTR. The organization's testimony at the briefing was strictly on the subject of the OTR. NASCUS Chair Roger Little, deputy commissioner of the credit union division of the Michigan Office of Financial and Insurance Services requested that the agency have a study conducted of its organizational structure to separate the regulator and insurance duties. “The current overhead transfer process is a symptom of a more basic problem, that being the lack of appropriate separation between the often-contradictory functions of the agency. The current organizational structure, in our opinion, does not carry out either congressional intent nor does it reflex current agency strategic goals and outcomes,” he said. “We do not have state or private insurance in Michigan, and, therefore, I do not have an insurance fund to administer,” Little continued. “I can assure you, however, that the safety and soundness of Michigan credit unions is my department's pre-eminent concern as a financial institutions regulator. For NCUA's budget to allocate almost all safety and soundness examination costs to the insurance fund is, in our view, tantamount to saying that as a regulator of federal credit unions NCUA is unconcerned with anything beyond their compliance with federal law.” He charged that federally insured state chartered credit unions subsidize the cost of their federal brethren's regulation: “We do not believe that is right, nor do we believe it is fair.” [email protected]