[Federal Register Volume 84, Number 212 (Friday, November 1, 2019)]
[Notices]
[Pages 59126-59192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23856]
[[Page 59125]]
Vol. 84
Friday,
No. 212
November 1, 2019
Part V
National Credit Union Administration
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The NCUA Staff Draft 2020-2021 Budget Justification; Notice
Federal Register / Vol. 84 , No. 212 / Friday, November 1, 2019 /
Notices
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NATIONAL CREDIT UNION ADMINISTRATION
The NCUA Staff Draft 2020--2021 Budget Justification
AGENCY: National Credit Union Administration (NCUA).
ACTION: Notice.
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SUMMARY: The NCUA's draft, ``detailed business-type budget'' is being
made available for public review as required by federal statute. The
proposed resources will finance the agency's annual operations and
capital projects, both of which are necessary for the agency to
accomplish its mission. The briefing schedule and comment instructions
are included in the supplementary information section.
DATES: Requests to deliver a statement at the budget briefing must be
received on or before Tuesday, November 12, 2019. In order for the NCUA
to produce copies for public distribution at the budget briefing,
written statements and presentations for those scheduled to appear at
the budget briefing must be received on or before Monday, November 18,
2019.
Written comments without public presentation at the budget briefing
may be submitted by Monday, December 2, 2019.
ADDRESSES: You may submit comments by any of the following methods
(Please send comments by one method only):
Presentation at public budget briefing: submit requests to
deliver a statement at the briefing to ncua.gov">BudgetBriefing@ncua.gov by
Tuesday, November 12, 2019. Include your name, title, affiliation,
mailing address, email address, and telephone number. Copies of your
presentation must be submitted to the same email address by Monday,
November 18, 2019.
Written comments: submit comments to
ncua.gov">BudgetComments@ncua.gov by Monday, December 2, 2019. Include your name
and the following subject line ``Comments on the NCUA Draft 2020-2021
Budget Justification.''
Copies of the NCUA Draft 2020-2021 Budget Justification and
associated materials are also available on the NCUA website at https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx. Printed copies will be available at the November 20,
2019 budget briefing.
FOR FURTHER INFORMATION CONTACT: Rendell Jones, Chief Financial
Officer, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428 or telephone: (703) 518-6571.
SUPPLEMENTARY INFORMATION: The following itemized list details the
documents attached to this notice and made available for public review:
I. The NCUA Budget in Brief
II. Introduction and Strategic Context
III. Forecast and Enterprise Challenges
IV. Key Themes of the 2020-2021 Budget
V. Operating Budget
VI. Capital Budget
VII. Share Insurance Fund Administrative Budget
VIII. Financing The NCUA Programs
IX. Appendix A: Supplemental Budget Information
X: Appendix B: Capital Projects
Section 212 of the Economic Growth, Regulatory Relief, and Consumer
Protection Act (Pub. L. 115-174) amended 12 U.S.C. 1789(b)(1)(A) to
require the NCUA Board (Board) to ``make publicly available and publish
in the Federal Register a draft of the detailed business-type budget.''
Although 12 U.S.C. 1789(b)(1)(A) requires publication of a ``business-
type budget'' only for the agency operations arising under the Federal
Credit Union Act's subchapter on insurance activities, in the interest
of transparency the Board is providing the agency's entire staff draft
2020-2021 Budget Justification (budget) in this Notice.
The draft budget details the resources required to support NCUA's
mission as outlined in its 2018-2022 Strategic Plan. The draft budget
includes personnel and dollar estimates for three major budget
components: (1) The Operating Budget; (2) the Capital Budget; and (3)
the Share Insurance Fund Administrative Budget. The resources proposed
in the draft budget will be used to carry out the agency's annual
operations.
The NCUA staff will present its draft budget to the Board at a
budget briefing open to the public and scheduled for Wednesday,
November 20, 2019 from 10:00 a.m. to 12:00 p.m. Eastern. The budget
briefing will be held in the NCUA Board meeting room. A livestream of
the briefing also will be available through a link on ncua.gov.
If you wish to attend the briefing and deliver a statement, you
must email a request to ncua.gov">BudgetBriefing@ncua.gov by Tuesday, November
12, 2019. Your request must include your name, title, affiliation,
mailing address, email address, and telephone number. The NCUA will
work to accommodate as many public statements as possible at the
November 20, 2019 budget briefing. The Board Secretary will inform you
if you have been approved to make a presentation and how much time you
will be allotted. A written copy of your presentation must be delivered
to the Board Secretary via email at ncua.gov">BudgetBriefing@ncua.gov by Monday,
November 18, 2019.
Written comments on the draft budget will also be accepted by email
at ncua.gov">BudgetComments@ncua.gov until Monday, December 2, 2019. Include your
name and the following subject line with your comments: ``Comments on
the NCUA Draft 2020-2021 Budget Justification.''
All comments should provide specific, actionable recommendations
rather than general remarks. The Board will review and consider any
comments from the public prior to approving the budget.
By the National Credit Union Administration Board on October 28,
2019.
Gerard S. Poliquin,
Secretary of the Board.
I. The NCUA Budget in Brief
Proposed 2020 and 2021 Budgets
The National Credit Union Administration's (NCUA) 2018-2022
Strategic Plan sets forth the agency's goals and objectives that form
the basis for determining resource needs and allocations. The annual
budget provides the resources to execute the strategic plan, to
implement important initiatives, and to undertake the NCUA's major
programs: Examination and supervision, insurance, credit union
development, consumer financial protection, and asset management.
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The NCUA's 2020-2021 budget justification consists of three
separate budgets: The Operating Budget, the Capital Budget, and the
National Credit Union Share Insurance Fund Administrative Budget.
Combined, these three budgets total $347.7 million for 2020, which is
1.1 percent more than the 2020 funding level approved by the NCUA Board
in November 2018, and 3.9 percent more than the comparable 2019 Board-
approved budget.
A significant cost driver in the 2020 budget is the increase in
mandatory contributions all federal agencies must make to the Office of
Personnel Management (OPM) for the Federal Employee Retirement System
(FERS). Of the total 3.9 percent budget increase between 2019 and 2020,
1.6 percentage points of growth are directly attributable to the
increased cost of FERS contributions and 2.3 percentage points of
growth are the result of changes in agency operations.
The 2.3 percent growth in agency operations also includes absorbing
the equivalent of 0.8 percentage points of growth for costs avoided in
the Share Insurance Fund Administrative Budget. This means the actual
budget increase to fund the agency's operations is the equivalent of
1.5 percent growth.
Personnel levels for 2020 and 2021 reflect the agency's current
staffing requirements and proposed staffing enhancements related to
high-priority initiatives.
Operating Budget
The proposed 2020 Operating Budget is $316.2 million. Personnel
levels increase by three full-time equivalents (FTE) compared to the
2019 Board-approved budget.\1\
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\1\ The published 2019 FTE level approved by the Board on
November 15, 2018 was 1,173 for the Operating Budget. On July 18,
2019, the NCUA Board approved an additional four FTE. The revised
2020 Operating Budget proposes three more FTE, for a total of 1,180.
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The 2020 Operating Budget, when adjusted for inflation, represents
a real dollar increase of approximately $5.2 million, or 1.7 percent,
compared to the 2019 Board-approved budget. In nominal dollars, the
2019 Budget increases by $11.8 million, or 3.9 percent, over the 2019
Board-approved budget of $304.4 million. The Operating Budget estimate
for 2021 is $326 million and reflects no change to authorized
positions.
The following chart shows recent year-on-year trends for the NCUA
Operating Budget, in both real dollar and nominal terms:
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The following chart presents the major categories of spending
supported by the 2020 budget, while specific adjustments to the 2019
Board-approved budget are discussed in further detail, below:
[GRAPHIC] [TIFF OMITTED] TN01NO19.024
Total Staffing. The budget supports 1,185 FTE in total for 2020, of
which five are funded by the Share Insurance Fund Administrative
Budget. The Operating Budget funds 1,180 FTE in 2020, a net increase of
three FTEs from the 2019 levels approved by the Board. Additional staff
have been added to several offices as discussed later in this document.
Since 2018 and despite significant credit union asset growth, total
NCUA staffing has remained
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within a range of approximately five positions, as shown in the chart
below.
[GRAPHIC] [TIFF OMITTED] TN01NO19.025
Pay and Benefits. Pay and benefits increase by $8.5 million in
2020, or 3.8 percent, for a budget of $231.4 million. Over 50 percent
of the growth in pay and benefits--nearly $5 million--is the result of
OPM increasing the mandatory employer contribution for the FERS.
Required FERS payments to OPM increase from 13.7 percent of covered
employees' salaries to 16 percent, a change of 230 basis points. Nearly
all NCUA employees are covered by FERS, which includes a defined
pension benefit funded by both employee and employer contributions.
Because almost every federal agency is required to participate in FERS,
the employer share of contributions increases throughout the government
in 2020. Excluding additional FERS contributions from the 2020 budget,
total personnel compensation growth would be 1.6 percent instead of 3.8
percent, and total Operating Budget growth would be 2.2 percent instead
of 3.9 percent.
The remaining increase in pay and benefits accounts for the merit
and locality pay adjustments required by the NCUA's current collective
bargaining agreement, the three new positions proposed for 2020,
anticipated staff promotions, position changes, and increased costs for
other mandatory employer contributions such as health insurance and
retirement contributions.
Travel. The travel budget increases by $590,000 in 2020, or 2.2
percent, for a budget of $27.4 million. In 2020, the NCUA plans to
train its Credit Union Examiner workforce to conduct examinations using
the Modern Examination and Risk Identification Tool (MERIT) system,
which is planned for full implementation in the fourth quarter of 2020.
State credit union examiners will also be trained to use MERIT. The
Operating Budget includes approximately $1.0 million in one-time travel
costs associated with the 778 NCUA employees who will participate in
MERIT training meetings in 2020.
In general, the NCUA continues working to contain the growth of
travel costs by expanding offsite examination work and using
technology-driven training. Government-wide per diem rates published by
the General Services Administration (GSA) are expected to increase by
almost 1.3 percent in 2020, accounting for a share of the travel budget
growth. In addition, starting in 2019 GSA instituted a cost recovery
fee for airline tickets purchased at negotiated government rates, which
adds approximately $20,000 annually to the agency's cost of purchasing
airline tickets at government rates.
Rent, Communications, and Utilities. Rent, communications, and
utilities increase by $188,000 in 2020, or 2.3 percent, for a budget of
$8.2 million. This funding pays for telecommunications services, data
capacity contracts, and information technology network support. The
increase is primarily due to additional data capacity that will be
required as a result of implementing the new MERIT examination system,
which will be cloud-based and consume more data bandwidth than the
AIRES system it is replacing.
Administrative Expenses. Administrative expenses decrease by $2.8
million in 2020, or 31.9 percent, for a total budget of $5.9 million.
Decreases to the administrative expenses budget category largely result
from reclassifying $2.6 million in software licensing costs as
contracted services, not administrative expenses, in order to reflect
these costs consistently with other federal budgetary presentations.
Contracted Services. Contracted services expenses increase by $5.3
million in 2020 for a total budget of $43.3 million. However, as
discussed above, approximately $2.6 million of this increase results
from costs previously shown as administrative expenses being
reclassified as contracted services in order to reflect these costs
consistently with other federal budgetary presentations. The actual
increase in the contracted services budget is approximately $2.7
million, or 7 percent.
Contracted services funding pays for products and services acquired
in the commercial marketplace, and includes critical mission support
services such as information technology hardware and software support,
accounting and auditing services, and specialized subject matter
expertise. Certain information technology costs that were previously
reported as administrative expenses are now included as contracted
services, which accounts for a portion of this increase. Expected price
inflation for services to be purchased in 2020 accounts for the
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remainder of the growth in this category.
Capital Budget. The proposed 2020 Capital Budget is $25.1 million.
The 2020 Capital Budget is $6.5 million more than the 2020 funding
level approved by the Board in November 2018, and $3.1 million than the
2019 Board-approved budget.
The Capital Budget pays for continued investments in technology and
infrastructure projects. A major component of the Capital Budget is the
development of the first phases of the Enterprise Solution
Modernization (ESM) program, which includes a new technical platform
and security infrastructure, a central user interface for stakeholders
to transact business with the NCUA, integration of business
intelligence tools into the supervision function, and the MERIT
examination system, which will replace the agency's antiquated AIRES
examination software and will be used by both federal and state
examiners in almost all credit union examinations. The business
intelligence capabilities were slated for a later iteration of ESM, but
were added to the first phase when it was determined they could be
integrated into MERIT for the 2020 release. The NCUA's Information
Technology Prioritization Council recommended $20.9 million for IT
software development projects that continue to replace the NCUA's
decades-old and functionally obsolete information technology systems,
and $2.7 million in other IT investments for 2020. The NCUA's
facilities require $1.5 million in capital investments.
Share Insurance Fund Administrative Expenses. The proposed 2020
Share Insurance Fund Administrative budget is $6.5 million.
The 2020 Share Insurance Fund (SIF) Administrative Budget is $2.7
million less than the 2020 funding level approved by the Board in
November 2018, and $1.9 million less than the 2019 Board-approved
budget. The decrease in the SIF Administrative Budget is primarily
attributed to the Office of National Examinations and Supervision plan
to oversee credit union-run stress testing for the largest Credit
Unions using its own proprietary models in 2020. Direct charges within
this budget include administration of the NCUA Guaranteed Note (NGN)
program, state examiner training and laptop leases, as well as
financial audit support. The reduction in the SIF Administrative
Expenses budget reflects that costs related to the oversight of credit
union-run stress testing will be financed by the Operating Budget.
Budget Trends.
As shown in the chart below, the relative size of the NCUA budget
continues to decline when compared to balance sheets at federally
insured credit unions. This trend illustrates the greater operating
efficiencies the NCUA has attained in the last several years relative
to the size of the credit union system. Additionally, the NCUA has
improved its operating efficiencies more aggressively than other
financial industry regulators.
[GRAPHIC] [TIFF OMITTED] TN01NO19.026
It is also notable that the NCUA's operations have become more
efficient relative to the size of the credit union system because
consolidation in the industry has led to growth in the number of large
credit unions, specifically those with more than $10 billion in assets.
This results in additional complexity in the balance
[[Page 59131]]
sheets of such credit unions, and a corresponding increase in the
supervisory review required to ensure the safety and soundness of such
large institutions. The NCUA has responded to this increasing
complexity through several initiatives: Creation of the specialized
Office of National Examination and Supervision, development of in-house
capabilities to oversee large credit unions' stress testing, use of
specialist examiners with expertise in cybersecurity and capital
markets, and improved quality of examination reports through enhanced
quality review processes.
Federal Compliance Cost Burden
As a federal agency, the NCUA is required to devote significant
resources to numerous compliance activities required by federal law,
regulations, or, in some cases, Executive Orders. These requirements
dictate how many of the agency's activities are implemented, and
generally result in increasing costs. These compliance activities
require additional effort in areas such as information technology
acquisitions and management, human capital processes, financial
management processes and reporting, privacy compliance, and physical
and cyber security programs. While agency managers are responsible for
these activities, required compliance activities add additional layers
of review and procedures that make processes more challenging and
expensive.
Financial Management
Federal law, regulations, and government-wide guidance promulgated
by the Office of Management and Budget (OMB), the Government
Accountability Office (GAO), and the Department of the Treasury place
numerous requirements on federal agencies including the NCUA regarding
the management of public funds. Government-wide financial management
compliance requirements include: Financial statement audits, improper
payments, prompt payments, internal controls, procurement, audits,
enterprise risk management, strategic planning, and public reporting of
financial and other information.
Information Technology (IT)
There are numerous laws, regulations and required guidance
concerning information technology used by the federal government. Many
of the requirements cover IT security such as the Federal Information
Security Management Act. Other requirements cover records management,
paperwork reduction, information technology acquisition, cybersecurity
spending, and accessible technology and continuity.
Human Capital
Like other federal agencies, the NCUA is subject to an array of
human capital-related laws, regulations, and other mandatory guidance
issued by OPM, the Equal Employment Opportunity Commission, and OMB.
Human capital compliance requirements include procedures for engagement
related to hiring; management engagement with public unions and
collective bargaining; employee discipline and removal procedures;
required training for supervisors and employees; employee work-life and
benefits programs; equal employment opportunity and required diversity
and inclusion programs; and storage and retention of human resource
records. The NCUA is also required by law to ``maintain comparability
with other federal bank regulatory agencies'' when setting employee
salaries.
Security
The NCUA's security posture is driven by numerous legal and
regulatory requirements covering the full range of security functions.
The NCUA is required to comply with mandatory requirements for
personnel security; physical security; emergency management and
continuity; communications and information security; and insider threat
activities. In addition to meeting specific legislative mandates, as a
federal agency, the NCUA is required to follow guidance from, but not
limited to, the Office of the Director of National Intelligence, OPM,
and the Federal Emergency Management Agency.
General Compliance Activities
The NCUA also has other general compliance activities that cut
across numerous offices. For example, the NCUA expends resources
complying with the Privacy Act; Government in the Sunshine Act;
multiple laws and regulations related to government ethics standards;
and various reporting and other requirements set forth by the Federal
Credit Union Act and other statutes.
Federal retirement costs are an example of mandatory payments to
other federal agencies. As discussed earlier in this document, the cost
of mandatory contributions to OPM for most NCUA employees' retirement
system will increase from 13.7 to 16.0 percent of their salaries, based
on the OPM Board of Actuaries of the Civil Service Retirement System
recommendations. The budget impact of these additional retirement costs
in 2020 is an increase of approximately $5 million over 2019.
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BILLING CODE 7535-01-C
II. Introduction and Strategic Context
History
For more than 100 years, credit unions have provided financial
services to their members in the United States. Credit unions are
unique depository institutions created not for profit, but to serve
their members as credit cooperatives.
On June 26, 2019, the NCUA celebrated the 85th Anniversary of
President Franklin Roosevelt's signing of the Federal Credit Union Act.
The law was enacted during the Great Depression, in 1934, enabling
credit unions to be organized throughout the United States under
charters approved by the federal government. The purpose of the federal
law was to make credit available to Americans and promote thrift
through a national system of nonprofit, cooperative credit unions. In
the years since the passage of the Federal Credit Union Act, credit
unions have evolved and are larger and more complex today than those
first institutions. But, credit unions continue to provide needed
financial services to millions of Americans.
The NCUA is the independent federal agency established in 1970 by
the U.S. Congress to regulate, charter, and supervise federal credit
unions. With the backing of the full faith and credit of the United
States, the NCUA operates and manages the National Credit Union Share
Insurance Fund, insuring the deposits of the account holders in all
federal credit unions and the vast majority of state-chartered credit
unions. No credit union member has ever lost a penny of deposits
insured by the Share Insurance Fund.
Today, the NCUA is responsible for the regulation and supervision
of 5,308 federally insured credit unions \2\ with approximately 118.3
million members \3\ and more than $1.5 trillion \3\ in assets across
all states and U.S. territories.
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\2\ Source: The NCUA quarterly call report data, Q2 2019.
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Authority
Pursuant to the Federal Credit Union Act, authority for management
of the NCUA is vested in the NCUA Board. It is the Board's
responsibility to determine the resources necessary to carry out the
NCUA's responsibilities under the Act.\3\ The Board is authorized to
expend such funds and perform such other functions or acts as it deems
necessary or appropriate in accordance with the rules, regulations, or
policies it establishes.\4\
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\3\ See 12 U.S.C. 1752a(a).
\4\ See 12 U.S.C. 1766(i)(2).
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Upon determination of the budgeted annual expenses for the agency's
operations, the Board determines a fee schedule to assess federal
credit unions. The Board gives consideration to the ability of federal
credit unions to pay
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such a fee, and the necessity of the expenses the NCUA will incur in
carrying out its responsibilities in connection with federal credit
unions.\5\ Pursuant to the law, fees collected are deposited in the
agency's Operating Fund at the Treasury of the United States, and those
fees are expended by the Board to defray the cost of carrying out the
agency's operations, including the examination and supervision of
federal credit unions.\6\ In accordance with its authority \7\ to use
the Share Insurance Fund to carry out a portion of its
responsibilities, the Board approved an Overhead Transfer Rate
methodology, and authorized the Office of the Chief Financial Officer
to transfer resources from the Share Insurance Fund to the Operating
Fund to account for insurance-related expenses.
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\5\ See 12 U.S.C. 1755(a)-(b).
\6\ See 12 U.S.C. 1755(d).
\7\ See 12 U.S.C. 1783(a).
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Mission, Goals, and Strategy
The NCUA's 2020-2021 Budget Submission supports the agency's third
year implementing its 2018-2022 Strategic Plan to achieve its
priorities and improve program performance.
Throughout 2020 and 2021, the NCUA will continue fulfilling its
mission to ``provide, through regulation and supervision, a safe and
sound credit union system which promotes confidence in the national
system of cooperative credit,'' and its vision to ensure that the
``NCUA protects credit unions and consumers who own them through
effective supervision, regulation and insurance.'' This budget commits
the resources necessary to implement the NCUA's plans to identify key
challenges facing the credit union industry and leverage agency
strengths to help credit unions address those challenges.
The budget supports the NCUA's programs, which are focused on
achieving the agency's three strategic goals:
[ssquf] Ensure a safe and sound credit union system;
[ssquf] Provide a regulatory framework that is transparent,
efficient, and improves consumer access; and
[ssquf] Maximize organizational performance to enable mission
success.
Additional information about alignment of the budget to the NCUA's
strategic goals is in Appendix A.
In support of its first strategic goal--ensure a safe and sound
credit union system--the NCUA will continue to supervise federally
insured credit unions effectively and maintain a strong Share Insurance
Fund.
The NCUA's primary function is to identify credit union system
risks, determine the magnitude of those risks, and mitigate
unacceptable levels through the examination and supervision program.
The agency identifies supervision program priorities each year,
aligning budgeted resources to these priorities while addressing
emerging issues in order to minimize losses to the Share Insurance
Fund. Program priorities in 2020 include addressing broad market risks
and emerging cybersecurity threats that could threaten financial
stability generally, including the safety and soundness of the credit
union system.
Cybersecurity threats and other technology-related issues continue
to be of key interest and concern to the NCUA. Increasingly
sophisticated cyber-attacks pose a significant threat to credit unions,
financial regulators, and the broader financial services sector. The
availability, confidentiality, and integrity of credit union member
information remains a key supervisory priority for the NCUA. As such,
the 2020 budget includes resources to continue to improve and
standardize supervision related to information protection and
cybersecurity risks and threats.
The NCUA staff of credit union examiners are the agency's most
important assets for identifying and addressing risks before they
threaten members' deposits. To do their jobs effectively in this
complex and dynamic financial environment, the NCUA staff require the
advanced skills, training, and tools supported by the budget. The
multi-year ESM program will reach a major milestone in 2020 with the
release of the Modern Examination and Risk Identification Tool (MERIT),
the agency's modernized examination tool replacing the Automated
Integrated Regulatory Examination System (AIRES), to all credit union
examiners and state regulators. As the agency transitions to this new
tool, which will result in more efficient and effective supervision,
the NCUA must ensure its staff is prepared. The 2020 budget includes
resources to train and prepare the NCUA staff as they transition to
using MERIT.
To fulfill the NCUA's second strategic goal--provide a regulatory
framework that is transparent, efficient, and improves customer
access--the agency is committed to creating a more responsive system
that will encourage innovation, provide flexibility, and fulfill its
primary mission of protecting safety and soundness. The NCUA also seeks
to promote financial inclusion to better serve a changing population
and economy. The NCUA also seeks to ensure consumer compliance, and
financial protection. The budget allocates resources to agency programs
that keep regulations up to date and consistent with current law,
assist existing and prospective credit unions with expansion and new
chartering activities.
Accomplishing the third strategic goal--maximize organizational
performance to enable mission success--ensures the NCUA employees
achieve the agency's mission by supporting them through efficient and
effective business processes, modern and secure technology, and
suitable tools necessary to perform their duties. The budget makes
investments in improved tools and facilities for the NCUA staff, and
technological enhancements including new systems that will improve
operational effectiveness and efficiency. The budget also allocates
resources to developing better human capital planning and processes
including a new leadership development strategy and a focus on training
for the transition to MERIT.
Organization, Major Agency Programs, and Workforce
The NCUA operates its headquarters in Alexandria, Virginia, to
administer and oversee its major programs and support functions; its
Asset Management and Assistance Center (AMAC) in Austin, Texas, to
liquidate credit unions and recover assets; and three regional offices,
to carry out the agency's supervision and examination program.
In January 2019, the NCUA consolidated its five regional offices
into three--Eastern, Southern, and Western--as part of its on-going
effort to strengthen agency operations while increasing efficiency.
Reporting to these regional offices, the NCUA has credit union
examiners responsible for a portfolio of credit unions covering all 50
states, the District of Columbia, Guam, Puerto Rico, and the U.S.
Virgin Islands.
The NCUA organizational chart below reflects the agency's current
structure, and the map shows each region's geographical alignment:
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BILLING CODE 7535-01-C
The NCUA's regional offices will carry out the agency's 2020
examination program. The NCUA uses an extended examination cycle for
well-managed, low-risk federal credit unions with assets of less than
$1 billion. Additionally, the NCUA's examiners perform streamlined
examination procedures for financially and operationally sound credit
unions with assets less than $50 million. In addition, the Office of
National Examination and Supervision (ONES) will continue to examine
credit unions with assets that total over $10 billion that are located
throughout the United States. Based on 2019 second quarter call report
statistics, there are currently nine such credit unions with 18.0
million members, accounting for $256 billion in credit union assets.
In 2020 and 2021, the agency's workforce will undertake tasks in
all of the NCUA's major programs:
Supervision: The NCUA supervises federally insured credit unions
through examinations and regulatory enforcement including providing
guidance through various publications, taking administrative actions
and conserving, liquidating, or merging severely troubled institutions
as necessary to manage risk.
Insurance: The NCUA manages the $16 billion Share Insurance Fund,
which provides insurance to at least $250,000 for deposits held at
federally insured credit unions. The fund is capitalized by credit
unions and through retained earnings.
Credit Union Development: Through training, partnerships and
resource assistance, the NCUA fosters credit union development,
particularly the expansion of services to eligible members provided by
small, minority, newly chartered, and low-income designated credit
unions. The NCUA also charters new federal credit unions, as well as
approves modifications to existing charters and fields of membership.
Consumer Financial Protection: The NCUA protects consumers' rights
through effective enforcement of federal consumer financial protection
laws, regulations, and requirements. The NCUA also develops and
promotes financial education programs for credit unions to assist
members in making smarter financial decisions.
Asset Management: The NCUA conducts credit union liquidations and
performs management and recovery of assets through AMAC. This office
effectively and efficiently manages and disposes assets acquired from
liquidations.
The NCUA also performs stakeholder outreach and is involved in
numerous cross-agency initiatives. The NCUA conducts stakeholder
outreach to clearly understand the needs of the credit union system.
The NCUA seeks input from all of its stakeholders, including the
Administration, Congress, State Supervisory Authorities, credit union
members, credit unions, and their associations.
The NCUA collaborates with the other financial regulatory agencies
including through participation in several councils. Significant
councils include the Financial Stability Oversight Council (FSOC), the
Federal Financial Institutions Examination Council (FFIEC), and the
Financial and Banking Information Infrastructure Committee (FBIIC).
These councils and relationships help ensure consistent policy and
standards within the nation's financial system, where appropriate.
Budget Process--Strategy to Budget
The NCUA's budget process starts with a review of the agency's
goals and objectives set forth in the strategic plan. The strategic
plan is a framework that sets the agency's direction and guides
resource requests, ensuring the agency's resources and workforce are
allocated and aligned to agency priorities and initiatives.
Each regional and central office director at the NCUA develops an
initial budget request identifying the resources necessary for their
office to support the
[[Page 59137]]
NCUA's mission, strategic goals, and strategic objectives. These
budgets are developed to ensure each office's requirements are
individually justified and remain consistent with the agency's overall
strategic plan.
For regional offices, one of the primary inputs in the development
process is a comprehensive workload analysis that estimates the amount
of time necessary to conduct examinations and supervise federally
insured credit unions in order to carry out the NCUA's dual mission as
insurer and regulator. This analysis starts with a field-level review
of every federally insured credit union to estimate the number of
workload hours needed for the current year. The workload estimates are
then refined by regional managers and submitted to the NCUA central
office for the annual budget proposal. The workload analysis accounts
for the efforts of nearly seventy percent of the NCUA workforce and is
the foundation for budget requests from regional offices and ONES.
In addition to the workload analysis, from which central office
budget staff derive related personnel and travel cost estimates, each
of the NCUA offices submit estimates for fixed and recurring expenses,
such as rental payments for leased property, operations and maintenance
for owned facilities or equipment, supplies, telecommunications
services, major capital investments, and other administrative and
contracted services costs.
Because information technology investments impact all offices
within the agency, the NCUA has established an Information Technology
Prioritization Council (ITPC). The ITPC meets several times each year
to consider, analyze, and prioritize major information technology
investments to ensure they are aligned with the NCUA's strategic plan.
These focused reviews result in a mutually agreed-upon budget
recommendation to support the NCUA's top short-term and long-term
information technology needs and investment priorities.
Once compiled for the entire agency, all office budget submissions
undergo thorough reviews by the responsible regional and central office
directors, the Chief Financial Officer, and the NCUA's executive
leadership. Through a series of presentations and briefings by the
relevant office executives, the NCUA Executive Director formulates an
agency-wide budget recommendation for consideration by the Board.
In recent years, the Board has emphasized the need for increased
transparency of the NCUA's finances and its budgeting processes. In
response, the Office of the Chief Financial Officer has made draft
budgets available for public comment via the NCUA's website, and
solicited public comments before presenting final budget
recommendations for the Board's approval. Furthermore, the Economic
Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-
174, enacted May 24, 2018, requires in Section 212 that the NCUA ``make
publicly available and publish in the Federal Register a draft of the
detailed business-type budget.'' To fulfill this requirement, the Board
delegated to the Executive Director the authority to publish the draft
budget before submitting it for Board review.
This 2020-2021 budget justification document includes comparisons
to the Board approved 2019-2020 budget, and includes a summary
description of the major spending items in each budget category to
provide transparency and understanding of the use of budgeted
resources. Estimates are provided by major budget category, office, and
cost element.
The NCUA also posts supporting documentation for its budget request
on the NCUA website to assist the public in understanding its budget
development process. The budget request for 2020 represents the NCUA's
projections of operating and capital costs for the year, and is subject
to approval by the Board.
Commitment to Financial Stewardship
The NCUA funds its activities through operating fees levied on all
federal credit unions and through reimbursements from the Share
Insurance Fund, funded by both federal credit unions and federally
insured state-chartered credit unions. The Overhead Transfer Rate (OTR)
calculation determines the annual amount that the Share Insurance Fund
reimburses the Operating Fund to pay for the NCUA's insurance-related
activities. At the end of each calendar year, the NCUA's financial
transactions are subject to audit in accordance with Generally Accepted
Government Auditing Standards.\8\
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\8\ See 12 U.S.C. 1783(b) and 1789(b).
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The Board and the agency are committed to providing sound financial
stewardship. In recent years, the NCUA Chief Financial Officer, with
support and direction from the Executive Director and Board, has worked
to improve the NCUA's financial management, financial reporting, and
budget processes. In addition, through prudent management of the
Corporate System Resolution Program, the NCUA has paid nearly $900
million in dividends to eligible credit unions over the last two years.
The NCUA revised its financial presentations to conform to federal
budgetary concepts and increase transparency of the agency's planned
financial activity, starting with the 2018 budget. The 2020-2021 budget
continues this presentation. The NCUA is the only Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA) agency that
publishes a detailed, draft budget and solicits public comments on it
at a meeting with its Board and other agency leadership.
The NCUA continues to work diligently to strengthen its internal
controls for financial transactions, in accordance with sound financial
management policies and practices. Based on the results of the NCUA's
assessments conducted through the course of 2018, the agency provided
an unmodified Statement of Assurance (signed February 14, 2019) that
its management had established and maintained effective controls to
achieve the objectives of the Federal Managers Financial Integrity Act
(FMFIA) and Office of Management and Budget (OMB) Circular A-123.
Specifically, the NCUA supports the internal control objectives of
reporting, operations, and compliance, as well as its integration with
overarching risk management activities. Within the Office of the Chief
Financial Officer, the Internal Controls Assessment Team (ICAT)
continues to mature the agency-wide internal control program and
continues to strengthen the overall system of internal control, further
promote the importance of identifying risk, and ensure the agency has
identified appropriate responses to mitigate identified risks, in
accordance with the Government Accountability Office's Standards for
Internal Controls in the Federal Government (Green Book) requirements.
III. Forecast and Enterprise Challenges
Economic Outlook
The NCUA's mission is to provide, through regulation and
supervision, a safe and sound credit union system, which promotes
confidence in the national system of cooperative credit. The challenges
that the NCUA faces, and the resources the NCUA requires to fulfill its
mission, depend on a variety of factors that directly or indirectly
affect the health of the credit union system. The NCUA must anticipate,
to the extent possible, developments that will affect the system,
develop strategies, plans and processes to meet
[[Page 59138]]
both the current and anticipated needs, and assemble the resources,
including staff, necessary to ensure a safe and sound system.
One key determinant of credit union performance is the underlying
economic environment in which they must operate. In general, for the
past few years, the economy has supported solid financial system
performance. The economy continued to perform well in the first half of
2019. Real gross domestic product expanded by 2.6 percent at an annual
rate and, in July, the current economic expansion reached the 10-year
mark, making it the longest post-war expansion on record. Employment
has risen steadily for close to a decade and the unemployment rate at
mid-year was at a five-decade low. Inflation remained subdued.
With the support of a solid economic foundation, credit union
lending, membership growth, and credit quality remained strong through
the second quarter of 2019. Federally insured credit unions added 4.3
million members over the year, boosting credit union membership to
118.3 million in the second quarter of 2019. Credit union shares and
deposits rose 5.5 percent over the year ending in the second quarter to
$1.5 trillion. Total loans outstanding at federally insured credit
unions increased 6.4 percent to $1.1 trillion, and the system-wide loan
delinquency rate fell to 63 basis points from 67 basis points a year
earlier. The credit union system's return on average assets rose to 97
basis points, and the system's net worth ratio increased to 11.27
percent in the second quarter.
Although economic conditions were generally favorable heading into
the second half of 2019, a number of downside risks exist. Growth in
several major economies overseas showed signs of weakness. This has
generated a level of uncertainty, which weighs on business activity,
boosts financial market volatility, has pushed long-term interest rates
in the U.S. downward, and has contributed to the Federal Reserve's
decision to loosen monetary policy and lower their short-term policy
rate in two 25 basis point moves during the summer after four years of
tightening.
As of early October, long-term interest rates had fallen by about
160 basis points from their most recent peaks in late 2018, and short-
term rates had declined roughly 50 basis points. With long-term rates
falling more than short-term rates, the yield curve shifted down and
flattened.
In late May, the spread between the 10-year Treasury note and 3-
month Treasury bond turned negative; it remained negative through the
start of October. Yield curve inversion has preceded every recession in
the last 50 years, but the timing between initial inversion and the
onset of recession has varied, as shown in the chart. Most analysts
expect the current expansion to continue during the NCUA 2020-2021
budget horizon.
[GRAPHIC] [TIFF OMITTED] TN01NO19.031
Even though the number of negative risks to the economy has risen,
the near-term outlook for the U.S. economy remains positive. Forecasts
for the next two years call for somewhat slower--but still solid--
economic growth compared with 2018. Employment is projected to rise and
the unemployment rate--already below the level associated with full
employment--is expected to remain low. Tight labor market conditions
are projected to keep inflation near the Federal Reserve's 2.0 percent
target. Federal Reserve policymakers have lowered the federal funds
target rate by 50 basis points since July. Their most recent forecast,
released in September, suggests they could leave the federal funds rate
unchanged in a range of 1.75 percent and 2.00 percent through next
year, but there is a wide range of views on the appropriate path of
short-term interest rates going forward. Analysts are expecting the
federal funds target rate to decline by an additional 25 basis points
before the end of 2019 and are projecting that other short-term
interest rates--which largely determine the interest payments credit
unions make--will also move lower in the months
[[Page 59139]]
ahead. Longer-term rates--which largely determine the interest payments
credit unions receive--are expected to stabilize in the second half of
2019 and edge higher in 2020, as the recent flight to safety reverses.
Solid economic conditions should remain a positive force for credit
union lending, membership growth, and credit quality over the 2020-2021
budget horizon. In addition, the wider term spread implied by current
interest rate forecasts should translate into less pressure on credit
union net interest margins and net income going forward.
However, forecasts of the economic environment are far from
perfect. A recession would pose significant challenges to the credit
union system, leading to rising delinquencies, reduced loan demand,
and, potentially, an increase in shares as consumers move funds from
riskier investments into safer, insured credit union deposits. A
downturn in the economy would likely lead to lower interest rates as
well. Credit union balance sheets should be robust to a variety of rate
environments. The NCUA, like the credit unions themselves, needs to
plan and prepare for a range of economic outcomes that could affect
credit union performance and determine resource needs.
Other Risk Factors and Trends
In addition to risks associated with movements in the general
economy, the NCUA and credit unions will need to understand their
increasing exposure to, and address risks associated with, the
technological and structural changes facing the system. Over the
longer-term, increased concentration of loan portfolios, development of
alternative loan and deposit products, technology-driven changes in the
financial landscape, continued industry consolidation, and ongoing
demographic changes will continue to shape the environment facing
credit unions and will determine the resource needs of the NCUA.
Cybersecurity: Credit unions' increasing use of technology is
making the credit union system more vulnerable to cyber-attacks. The
prevalence of malware, ransomware, distributed denial of service (DDOS)
attacks, and other forms of cyber intrusion are creating challenges at
credit unions of all sizes, and will require ongoing measures for
containment. These trends are likely to continue, and even accelerate,
over the next two years.
Lending trends: Increasing concentrations in member business loans
and private student loans, in addition to other new types of lending by
credit unions, emphasize the need for long-term risk diversification
and effective risk management tools and practices, along with expertise
to properly manage increasing concentrations of risk.
Financial Landscape and Technology: New financial products that
mimic deposit and loan accounts, such as Apple Pay, Walmart pre-paid
cards and peer-to-peer lending, continue to emerge. These new products
pose a competitive challenge to credit unions and banks alike. Credit
unions also face a range of challenges from financial technology
(Fintech) companies in the areas of lending and the provision of other
services. For example, underwriting and lending may be automated at a
cost below levels associated with more traditional financial
institutions, but may not be subject to the same regulations and
safeguards that credit unions and other traditional financial
institutions face. The emergence and increasing importance of digital
currencies may pose both risks and opportunities for credit unions. As
these institutions and products gain popularity, credit unions may have
to be more active in marketing and rethink their business models.
Technological changes outside the financial sector may also lead to
changes in consumer behavior that indirectly affect credit unions. For
example, the increase in on-demand use of auto services and pay-as-you-
go, on-demand vehicle rental could reduce purchases of consumer-owned
vehicles. That could lead to a slowdown or reduction in the demand for
vehicle loans, now slightly more than a third of the credit union
system loan portfolio.
Membership trends: While overall credit union membership continues
to grow, roughly half of federally insured credit unions had fewer
members at the end of the second quarter of 2019 than a year earlier.
Demographic and field of membership changes are likely to continue
leading to declining membership at many credit unions. All credit
unions need to consider whether their product mix is consistent with
their members' needs and demographic profile.
Smaller credit unions' challenges and industry consolidation: Small
credit unions face challenges to their long-term viability for a
variety of reasons, including weak earnings, declining membership, high
loan delinquencies, and elevated non-interest expenses. If current
consolidation trends persist, there will be fewer credit unions in
operation and those that remain will be considerably larger and more
complex. As of June 30, 2019, there were 576 federally insured credit
unions with assets of at least $500 million, 29 percent more than just
five years earlier. These 576 credit unions accounted for 73 percent of
credit union members and 79 percent of credit union assets. Large
credit unions tend to offer more complex products, services and
investments. Increasingly complex institutions will pose management
challenges for the institutions themselves, as well as the NCUA;
consolidation means the risks posed by individual institutions will
become more significant to the Share Insurance Fund.
Enterprise Risk Management
The NCUA uses an Enterprise Risk Management (ERM) program to
evaluate various factors arising from its operations and activities
(both internal to the agency and external in the industry) that can
impact the agency's performance relative to its mission, vision, and
performance outcomes. Agency priority risks include both internal
considerations such as the agency's control framework, information
security posture, and external factors such as credit union
diversification risk. All of these risks can materially impact the
agency's ability to achieve its mission.
The NCUA's ERM Council provides oversight of the agency's
enterprise risk management activities. Through the ERM program,
established in 2015, the agency is identifying and managing risks that
could affect the achievement of its strategic objectives. In 2018 and
2019, the NCUA developed and implemented processes for analyzing and
responding to enterprise risks. The NCUA has conducted several risk
response assessments for priority areas including credit union business
diversification, credit union cybersecurity, agency controls, and
information security. These assessments help inform the agency's
activities, operations, and planning and budget processes. Overall, the
NCUA's ERM program promotes effective awareness and management of
risks, which, when combined with robust measurement and communication,
are central to cost-effective decision-making and risk optimization
within the agency.
The NCUA adopted its enterprise risk appetite statement in the
2018-2022 Strategic Plan, which is:
The NCUA is vigilant and has an overall judicious risk appetite.
The NCUA's primary goal is to ensure the safety and soundness of the
credit union system and the agency recognizes it is not desirable or
practical to avoid all risk. Acceptance of some risk is often
necessary to foster innovation and agility. This risk appetite will
guide the
[[Page 59140]]
NCUA's actions to achieve its strategic objectives in support of
providing, through regulation and supervision, a safe and sound
credit union system, which promotes confidence in the national
system of cooperative credit.
The agency's risk appetite helps align risks with opportunities
when making decisions and allocating resources to achieve the agency's
strategic goals and objectives. This enterprise risk appetite statement
is part of the NCUA's overall management approach and is supported by
detailed appetite statements for individual risk areas.
In practice, this means that the NCUA recognizes that risk is
unavoidable and sometimes inherent in carrying out the agency's
mandate. The NCUA is positioned to accept greater risks in some areas
than in others; however, when consolidated, the risk appetite
establishes boundaries for the entire agency and all of its programs.
Collaboration across programs and functions is a fundamental part of
ensuring the agency stays within its risk appetite boundaries, and the
NCUA will identify, assess, prioritize, respond to and monitor risks to
an acceptable level. This budget proposal for 2020-2021 incorporates
several specific programmatic changes that resulted from the NCUA's
enterprise risk management reviews, such as hiring new personnel
focused on cybersecurity, acquiring data loss prevention and other
network security tools, and strengthening analytical focus on emerging
financial risks within the credit union system.
IV. Key Themes of the 2020-2021 Budget
Overview
The budget supports the priorities and goals outlined in the
agency's annual performance plan and the 2018-2022 Strategic Plan. The
resources and new initiatives proposed in the budget support the NCUA's
mission to maintain a safe and sound credit union system.
The 2020-2021 budget carries forward a number of key ongoing
initiatives, which include: The Exam Flexibility Initiative; the
increased use of off-site examinations work and data analytics; the
modernization of information technology systems; regulatory reform
initiatives; and efforts to implement organizational efficiencies. Over
the course of the next five years, these efforts will result in a more
effective organization.
In the 2020-2021 budget, the NCUA will increase staffing in
critical areas necessary to operate as an effective federal financial
regulator capable of addressing emerging issues and continuing to
modernize the examination program. The NCUA employees are the agency's
most valuable resource for achieving its mission, and the agency is
committed to a workplace and a workforce with integrity,
accountability, transparency, inclusivity, and proficiency. We will
continue investing in the workforce through training and development,
helping employees develop the tools they need to do their work
effectively.
Employment-related costs are the single largest driver of the NCUA
budget; therefore, managing the size of the workforce is important from
a budgetary standpoint. Increases to the agency's staffing levels in
2020 address gaps in the agency's workforce that must be filled in
order to execute the agency's mission and foster an innovative,
responsive and sound credit union system that meets the needs of all
Americans. The NCUA continues to assess and balance its mission
workload needs with the financial costs the agency imposes on the
credit union system. Although the number of credit unions continues to
decline nationwide, the NCUA must also consider the increasing
complexity and growing asset base of the entire credit union system.
The efficiency and effectiveness of the agency's workforce is
dependent upon the resiliency of the NCUA's information technology
infrastructure and availability of technological applications. The NCUA
is committed to implementing new technology responsibly and delivering
secure, reliable and innovative technological solutions to support its
mission. This necessitates investments funded in the Capital Budget and
additional staff to provide the analytical tools and technology the
workforce needs to achieve the NCUA mission.
Enterprise Solution Modernization
In 2015, the NCUA conducted an assessment of the information
technology (IT) needs across the agency and developed a business case
for replacing its antiquated legacy systems. This assessment recognized
the full range of industry leading, cost-effective alternative
strategies, services, and products for implementing the agency's next
generation of IT information management, examination, supervisory, and
data collection solutions.
At that time, the NCUA acknowledged a technology revamp of this
magnitude as a high-risk endeavor, both in terms of cost and delivered
functionality. The risk stems from the number of systems impacted and
the unique nature of the NCUA's applications, many of which require a
high degree of customization. However, the agency required a major
modernization after many years of under-investment in software and
application development.
In November 2015, the NCUA Board approved a plan for modernizing
the agency's IT systems known as the Enterprise Solution Modernization
(ESM) program. The ESM program recognizes the following legacy systems,
capabilities and strategies need to be modernized:
[[Page 59141]]
[GRAPHIC] [TIFF OMITTED] TN01NO19.032
To better manage the complexity of the ESM Program, the NCUA
established three sub-programs to modernize the NCUA's technology
solutions and create an integrated examination and data environment
that facilitates a safe and sound credit union system:
[GRAPHIC] [TIFF OMITTED] TN01NO19.033
Given the age of the NCUA's legacy examination systems and their
importance to the mission of the agency, priority was given to the
following parts of the modernization effort in the first phase of ESM
development:
[cir] Better information security across the organization.
[cir] Technical platform and foundation for new applications.
[cir] AIRES replacement (Examination and Supervision Solution),
including financial analytics.
[cir] Central user interface for stakeholders to interact with the
NCUA.
[cir] Business Intelligence tools for enhanced analytical
capabilities (added later to the initial phase as explained below).
To deploy the Examination and Supervision Solution, it was first
necessary to stand up new agency infrastructure that supports the full
modernization program: The technology architecture, infrastructure, and
security posture required to operate modernized systems. The necessary
infrastructure was acquired and put in place in 2019. The ESS program
capabilities have been deployed in part in 2019 and will be rolled out
nationwide in 2020. The new examination solution, which is named the
Modern Examination and Risk Identification Tool (MERIT), was released
to the Office of National Examinations and Supervision in September
2019, while the release to the remaining Regional staff is scheduled
for the summer of 2020.
Though not originally included as part of the initial ESM plan, the
agency has incorporated a robust business intelligence solution into
the MERIT deployment, which advances the agency's analytic capabilities
during this phase. The need for better analytics is central to the
strategy to shift more exam work offsite.
In addition to better data analytics, MERIT provides numerous
improvements over the legacy AIRES examination system, including:
[cir] Implementation of better controlled access to examination
data across the organization.
[cir] Faster and well-organized ability to request and submit items
for the examination.
[cir] Collaboration and real-time information for examiners, team
members, and supervisors, including state supervisory authorities on
joint exams.
[[Page 59142]]
[cir] Opportunities for credit union users to manage examination
findings and view completed examination reports.
[cir] Business process improvements to achieve exam efficiencies,
including less data redundancy and relational support between scope
tasks, questionnaires, and findings.
Cost Estimates
The NCUA engaged an independent market research firm to estimate
the cost of the initial ESM phases, including MERIT. Their research
estimated a range in costs of $18.9 to $37.9 million.
From 2015 to 2019, the NCUA Board approved a total budget of $20.8
million for the MERIT program. This total included the modernized and
more secure IT infrastructure, central user interface, and the first
release of MERIT.
The total expected acquisition costs for this phase of ESM,
including actual costs through 2019 and the budget for 2020, is $36.6
million. This will provide additional needed functionality in the
second release of MERIT, including the loan and share download business
intelligence integration.
The NCUA awarded the Examination and Supervision Solution agile
development contract in 2018. For the first three-month discovery phase
of the contract, the NCUA and the systems integrator worked diligently
to translate the business process context and identify tool-based
implications and functional gaps. After discovery concluded, the NCUA
determined the full funding needed to meet developmental,
organizational change management, and scheduling requirements. As
discussed above, the funding total now includes the advanced business
intelligence capabilities.
Through September 2019, the NCUA accomplished the following:
[cir] Established the ESM technical program infrastructure
platform, including enhanced IT security.
[cir] Developed the central user interface known as NCUA Connect,
achieving a secure, single entry point into NCUA applications.
[cir] Deployed the new MERIT examination tool to ONES to support
examination and supervision of the largest credit unions.
[cir] Developed financial analytics with dashboards and
visualizations designed to assist the examiner in identifying risk.
The project is on schedule to meet the following performance
targets:
[cir] 2019: Conduct ONES examinations and supervision contacts for
all federal credit unions with assets greater than $10 billion and
joint exams with state regulators in federally insured state-chartered
credit unions with assets greater than $10 billion in Washington and
North Carolina using the MERIT solution, which commenced on October 7,
2019.
[cir] 2020: Deploy second release of MERIT for the majority of the
NCUA staff, state supervisory authorities, and credit unions in the
third quarter of 2020.
Cybersecurity Priorities
Cyber-attacks pose a threat to credit unions, financial regulators,
and the broader financial system. Advances in technology and increased
use of cyberspace for financial transactions means more opportunities
for cybersecurity threats and other technology-related issues. As a
result, cybersecurity is one of the top priorities of the NCUA Board.
In June 2019, Chairman Rodney E. Hood appointed a special advisor for
cybersecurity who not only will provide strategic counsel on
cybersecurity policy but will also engage with other federal financial
institution regulators and external stakeholders.
In 2018, the NCUA began implementing a new Automated Cybersecurity
Examination Tool (ACET) maturity assessment for credit unions with
assets greater than $1 billion. The focus of the ACET implementation
was to baseline individual credit unions' cybersecurity maturity
consistently while benchmarking the entirety of the sector. In 2019,
the maturity assessments were conducted on credit unions with assets
greater than $250 million; in 2020, the agency will conduct maturity
assessments on credit unions with assets between $100 million and $250
million. The NCUA continues to evaluate the feasibility for conducting
the maturity assessments on even smaller, less complex institutions.
Concurrently, the NCUA is developing a tailored examination program
based on the Information Technology Risk Examination (InTREx) solution
leveraged by the Federal Deposit Insurance Corporation, the Federal
Reserve Board and state regulators to ensure a harmonized, repeatable,
measurable and transparent process for examining the compliance, safety
and soundness of the credit unions' information security programs.
The examination procedures will be maintained within the NCUA MERIT
solution. The agency expects the results of both the maturity
assessment and the examination program to help focus and prioritize
cybersecurity for credit unions and make it an integral part of their
risk-management strategies.
The NCUA will further build upon its cybersecurity capabilities and
programs to continue helping credit unions and consumers protect
themselves. Specifically, the 2020 budget allocates resources to the
following cybersecurity-related activities:
[cir] Advancing consistency, transparency and accountability within
the cybersecurity examination and supervision program;
[cir] Expanding cybersecurity analytics to better inform
examination and supervision decisions;
[cir] Enhancing interoperability of the maturity assessment
capability for broad credit union system distribution and full
integration into the new examination system, MERIT;
[cir] Stimulating due diligence for supply chain and third-party
service provider management within the credit union sub-sector;
[cir] Assisting institutions with resources to improve operational
cybersecurity hygiene and resilience;
[cir] Performing skills assessments of credit union examiners and
taking steps to build skill set of examination staff in accordance with
the National Initiative of Cybersecurity Education (NICE) Framework;
[cir] Enhancing the professional expertise and knowledge management
of
[cir] agency specialists on cybersecurity and emerging technical
innovation in the delivery of financial services, cybersecurity trends
and risk/threat; and
[cir] Expanding collaboration and coordination with relevant
agencies towards a more harmonized examination and critical
infrastructure protection capability.
These initiatives--focused on supervisory program development,
training, industry analysis and exercises, combined with interagency
coordination and industry outreach--will require additional personnel.
The 2020 budget includes two new cybersecurity positions within the
Office of Examination and Insurance to improve the agency's ability to
be prepared for and respond to the broadening responsibilities tied to
cybersecurity and critical infrastructure protection.
The NCUA also places strong emphasis on ensuring the security of
the agency's systems and the controlled, unclassified information it
collects. The NCUA's Office of the Chief Information Officer is
continually taking steps to enhance the agency's information security
posture and ensure the NCUA's systems and information are protected
[[Page 59143]]
from compromise, including the work done as part of ESM. The 2020
budget allocates $500,000 to acquire and implement data loss prevention
(DLP) as part of the Information Technology (IT) Infrastructure,
Platform and Security Refresh Capital Initiative. DLP is a set of tools
and processes used to ensure that sensitive data is not lost, misused,
or accessed by unauthorized users.
Bank Secrecy Act Compliance
The NCUA continues to budget resources to comply with the statutory
mandate from Congress to enforce federal credit union compliance with
Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) laws and
regulations. Technological advancements may expose even the smallest
credit unions to potential illicit finance activities. The NCUA
examines federal credit union compliance with BSA during every
examination. Additionally, the NCUA assists state regulators by
conducting BSA examinations in federally insured, state-chartered
credit unions where state resources are limited.
In 2019, the NCUA's field staff began more in-depth reviews of
credit unions' BSA and AML policies, procedures, and processes to
assess compliance with new customer due diligence (31 CFR
1020.210(b)(5)) and beneficial ownership requirements (31 CFR 1010.230)
which became effective May 11, 2018.
The NCUA's BSA reviews are risk-focused and include procedures to
review an institution's compliance with the pillars of the BSA. These
procedures are based on the examination procedures in the FFIEC BSA/AML
Examination Manual the NCUA issues jointly with the other federal
financial institution regulators. The NCUA's examiners tailor
examinations based on the unique risk characteristics of each federal
credit union. Additional or more in depth reviews are performed for
those with higher risk activities; reviews at credit unions with lower
risk activities are scaled appropriately.
The NCUA coordinates regularly with our counterparts at the other
federal financial institution regulatory agencies, as well as the
Financial Crimes Enforcement Network (FinCEN). The NCUA actively
participates in the Bank Secrecy Act Advisory Group (BSAAG), the FFIEC
BSA/AML Working Group and an interagency working group to improve
effectiveness and streamline, where possible, regulations and
supervisory processes. The NCUA also partners with the other federal
financial institution regulators to issue joint BSA statements,
including the Joint Statement on Risk-Focused BSA/AML Supervision,
dated July 22, 2019. Interagency groups are currently updating the
Interagency Statement on Enforcement of BSA/AML Requirements,
originally issued in 2007, and the FFIEC BSA/AML Examination Manual,
last revised in 2014. The NCUA intends to continue collaborating with
our regulatory counterparts, including FinCEN.
In 2019, the NCUA issued Regulatory Alert 19-RA-02, Serving Hemp
Businesses, to update federally insured credit unions about changes in
federal law and regulation related to hemp. Specifically, the guidance
clarifies that credit unions may provide the customary range of
financial services for business accounts, including loans, to lawfully
operating hemp related businesses within their fields of membership,
and provides information to help credit unions better understand what
they should consider providing financial services to lawfully operating
hemp businesses.
Stakeholder Engagement
In 2020, the agency is allocating resources for engagement summits
with stakeholders. These events will include credit union officials,
staff, and volunteers in order to discuss many of the priorities the
agency has funded through this budget process. Topics of interest at
these summits may include financial inclusion, minority depository
institutions, cybersecurity or risk and risk mitigation strategies in
the current environment. The NCUA Board is committed to understanding
how these priority areas impact credit unions and engaging in a
thoughtful dialogue to determine whether there are additional actions
the NCUA should and shouldn't take to ensure credit unions are best
prepared to serve their members while doing so in a safe and sound
manner.
Examination Initiatives
The NCUA is focused on several additional examination modernization
efforts as outlined in the August 2018 Letter to Credit Unions: 18-CU-
01--``Examination Modernization Initiatives.'' This letter outlined
five initiatives to modernize the agency's examinations processes,
including the ESM program outlined above. Intended benefits of these
initiatives include:
[cir] More efficient and less burdensome examinations and
supervision
[cir] More consistent and accurate supervisory determinations
[cir] Enhanced coordination with State Supervisory Authorities
[cir] More secure, reliable, and flexible technology to support
future expansion capabilities
These modernization initiatives are interrelated and complement
each other. As these initiatives support and build upon each other,
they will ultimately result in a fully modernized examination and
supervision program with various incremental improvements along the
way. The budget allocates resources in support of these improvements.
Below is a more in-depth discussion of four of the initiatives. The
fifth initiative, the ESM program, is discussed in detail above.
ONES Data-Driven Supervision
This initiative began in 2018 as an effort to move to a continuous
supervision model for the large, natural-person credit unions
supervised by the ONES. This ongoing supervision program will use data-
driven analytics to monitor and identify credit union risk while
supporting the oversight of credit union-driven stress testing. The
NCUA's ONES travel costs are projected to decrease by 10 percent as a
result of implementing this program and the transition to the NCUA's
in-house oversight of credit union run stress-testing will allow the
NCUSIF to avoid $3 million in costs in 2020. The data-driven
supervision initiative may lead to analytical advancements that can be
adapted for supervising some or all other insured credit unions.
Shared NCUA-State Regulator Federally Insured, State-Chartered Credit
Unions Program
In 2017, the NCUA created the Joint NCUA-State Supervisor Working
Group (working group), which is tasked with improving coordination and
scheduling for joint exams, providing scheduling flexibility, and
reducing redundancy where possible. The group's goal is to minimize the
burden on federally insured, state-chartered credit unions resulting
from having a separate financial regulator and insurer.
In addition, the working group is evaluating the appropriateness
and feasibility of adopting an alternating-year examination approach
for federally insured, state-chartered credit unions. A pilot program
launched January 2019 and will allow the NCUA, state regulators, and
stakeholders to evaluate the benefits and challenges of an alternate-
year examination program. The pilot will last approximately three years
in order to collect enough information to evaluate one full
alternating-year exam cycle. The results of the pilot will provide
valuable insight into the advantages and risks of such an
[[Page 59144]]
approach prior to finalizing a decision about a permanent alternating-
year exam cycle.
To support joint examinations in federally insured, state-chartered
credit unions, the working group developed a new template framework for
improved coordination and cooperation between the NCUA regions and the
respective state regulators. The working group is also exploring ways
to minimize duplication and overlap through examination and procedure
improvements and greater use of technology. In addition, the working
group is evaluating other areas of potential duplication that can be
reduced or eliminated, such as loan participations, Credit Union
Service Organizations (CUSOs) and third party vendor reviews, and other
supervisory matters. The goal of these reviews is to better leverage
the work of each regulatory party in examining and supervising
federally insured, state-chartered credit unions.
Virtual Examination Program
In 2017, the NCUA Board approved the project and associated
resources to research methods to conduct offsite as many aspects of the
examination and supervision processes as possible. The virtual exam
project team is researching ways to harness new and emerging data,
advancements in analytical techniques, innovative technology, and
improvements in supervisory approaches. When approving the 2019 budget,
the NCUA Board approved using past years' unspent balances to complete
the research and discovery phase for virtualizing key elements of the
examination; this work will continue through 2020.
By identifying and adopting alternative methods to remotely analyze
much of the financial and operational condition of a credit union, with
equivalent or improved effectiveness relative to current examinations,
it may be possible to significantly reduce the frequency and scope of
onsite examinations. Onsite examination activities could potentially be
limited to periodic data quality and governance reviews, interventions
for material problems, and meetings or other examination activities
that need to be handled in person.
The virtual exam should lead to greater use of standardized
interaction protocols, advanced analytical capabilities, and more-
informed subject matter experts. This should result in more consistent
and accurate supervisory determinations, provide greater clarity and
consistency with respect to how the agency conducts supervisory
oversight, and reduce coordination challenges between agency and credit
union staff.
To be successful, it is likely examination staff will need to
analyze more information about the credit union being examined and
communicate more frequently with management at the credit union.
However, it is not the agency's intent to intervene in credit unions'
day-to-day operations or strategic planning.
The virtual examination team will deliver to the NCUA Board by the
end of 2020 a report discussing alternative methods identified to
remotely analyze aspects of the financial and operational condition of
a credit union.
Offsite Examination Procedures
Starting in 2016, the NCUA's Southern Region piloted a flexible
exam program--commonly called FLEX. The pilot program ran through 2018
and evaluated conducting certain existing exam procedures offsite. The
pilot assessed examiners working remotely on elements of examinations
of well-run credit unions with the technology and platforms to provide
electronic data securely.
In 2019, the NCUA adopted the best practices from the FLEX pilot
nationally. Now known as offsite examination procedures, the NCUA
updated its National Supervision Policy Manual to indicate the agency's
support for providing staff with the flexibility to conduct examination
work offsite when appropriate conditions are met. The NCUA continues to
develop plans to increase agency use of offsite procedures.
Regulatory Reform
The NCUA established a Regulatory Reform Task Force (Task Force) in
March 2017 to oversee implementation of the agency's regulatory reform
agenda. This is consistent with the spirit of Executive Order 13777 and
the Trump administration's regulatory reform agenda. Although the NCUA,
as an independent agency, is not required to comply with Executive
Order 13777, the agency chose to review all of the NCUA's regulations,
consistent with the spirit of initiative and the public benefit of
periodic regulatory review. The NCUA has undertaken a series of
regulatory changes as part of this effort, and continues to pursue a
regulatory reform agenda, including matters such as advertising, field
of membership, equity distribution, and securitization. The Task Force
published its final report in December 2018.
Reorganization/Restructuring
In July 2017, the NCUA's executive leadership committed to a
comprehensive plan that would invest in the agency's future, make
critical organizational alignment changes, and improve the NCUA's
efficiency, effectiveness, and focus on its core mission
responsibilities. The agency has completed the operational actions
related to its reform plan.
As a result of the NCUA's reform plan:
[cir] The NCUA created an office focused exclusively on credit
union service needs including new charters, credit union expansion, and
training--the Credit Union Resources and Expansion (CURE) Office.
[cir] Examination reports have been improved through enhanced
quality measures.
[cir] Two regional offices closed in January 2019 and leased office
space has been reduced.
[cir] AMAC's staffing has been reduced, and support functions are
now better aligned with the central office.
The NCUA continues to examine how to best balance meeting workforce
and technology needs while containing operating costs.
V. Operating Budget
Overview
The NCUA Operating Budget is the annual resource plan for the NCUA
to conduct activities prescribed by the Federal Credit Union Act of
1934. These activities include: (1) Chartering new federal credit
unions; (2) approving field of membership applications of federal
credit unions; (3) promulgating regulations and providing guidance; (4)
performing regulatory compliance and safety and soundness examinations;
(5) implementing and administering enforcement actions, such as
prohibition orders, orders to cease and desist, orders of
conservatorship and orders of liquidation; and (6) administering the
National Credit Union Share Insurance Fund.
Staffing
The staffing levels proposed for 2020 reflect the resource
requirements for steady state operations at the NCUA as it continues to
modernize the examination process to enhance the efficiency and
effectiveness of the supervisory process. Two new information systems
officers in the Office of Examinations and Insurance will support
expanded responsibilities for cybersecurity and critical infrastructure
protection. A third position will be created in the
[[Page 59145]]
Chairman's office to support the NCUA through strategic outreach and
engagement with stakeholders in the credit union system, including
credit union management, associations and leagues, and journalists who
cover the industry.
During the July 2019 mid-session review, the NCUA Board approved
four additional staff to support the agency's growing engagement with
the Administration, Congress, industry stakeholders, and the general
public. The newly authorized positions for the Office of External
Affairs and Communications include a Deputy Director, a Communications
Specialist, a Technical Writer and Editor, and a Program Analyst for
External Affairs. The full cost of these positions are included in the
2020 budget.
The 2020 budget supports a total agency staffing level of 1,185
personnel, of which 1,180 are funded in the Operating Budget. This is a
net increase of three positions, or 0.25 percent, compared to the
Board-approved level for 2019, as modified at the July 2019 Board
meeting. The new 2020 positions are described in greater detail below.
[GRAPHIC] [TIFF OMITTED] TN01NO19.034
In addition to the staff assigned to regional offices, most of the
staff in ONES are remote field staff who also travel to credit unions
as part of their examination responsibilities.
Request for New Staff in 2020
Information Systems Officers (+2 New Positions)
These new employees, requested in the Office of Examination and
Insurance, will be responsible for expanded cybersecurity
responsibilities that include: Management of interagency activities,
development of industry policy related to information security, and
improvement of credit union cybersecurity resilience. The goal of these
positions is to increase institutional knowledge of cybersecurity best
practices within the credit union
[[Page 59146]]
system and broaden skills within the NCUA to ensure a consistent and
professional approach during credit union supervision.
Senior Adviser to the Chairman for Communications and Engagement (+1
New Position)
This new employee will support the NCUA through strategic outreach
and engagement with stakeholders in the credit union system, including
credit union management, associations and leagues, and journalists who
cover the industry. This employee will also assist the NCUA Board by
keeping members up to date about challenges and changes within the
system.
Budget Category Descriptions and Major Changes
There are five major expenditure categories in the NCUA budget.
This section explains how these expenditures support the NCUA's
operations, and presents a transparent and comprehensive accounting of
the Operating Budget.
[GRAPHIC] [TIFF OMITTED] TN01NO19.035
Salaries and Benefits
The budget includes $231.4 million for employee salaries and
benefits in 2020. This change is an $8.5 million, or 3.8 percent,
increase from the 2019 Board-approved budget.
Salaries and benefits costs make up 73.2 percent of the total
budget. There are two primary drivers of increased costs in 2020 for
the Salaries and Benefits category:
[cir] Merit and locality pay increases for the NCUA's 1,180
personnel paid from the Operating Budget, in accordance with the
agency's current Collective Bargaining Agreement (CBA) and its merit-
based pay system. Salaries are estimated to increase 1.8 percent in
aggregate compared to 2019. This growth is lower than prior years due
to new employee starting salaries being set at the lower end of pay
ranges when turnover occurs and because of some staff reaching the
salary caps for their pay grades.
[cir] Contributions for employee retirement to the Federal Employee
[[Page 59147]]
Retirement System (FERS), which are unilaterally set by the Office of
Personnel Management, and which cannot be negotiated or changed by the
NCUA. Driven by the mandatory rate adjustment, the 2020 benefits costs
increase 9.0 percent compared to 2019.
These changes are described in more detail below.
In 2020, the NCUA's compensation levels will continue to ``maintain
comparability with other federal bank regulatory agencies,'' as
required by the Federal Credit Union Act.\9\ The Salaries and Benefits
category of the budget includes all employee pay raises for 2020, such
as merit and locality increases, and those for promotions,
reassignments, and other changes, as described below.
---------------------------------------------------------------------------
\9\ The Federal Credit Union Act states that, ``In setting and
adjusting the total amount of compensation and benefits for
employees of the Board, the Board shall seek to maintain
comparability with other [F]ederal bank regulatory agencies.'' See
12 U.S.C. 1766(j)(2).
---------------------------------------------------------------------------
Consistent with other federal pay systems, the NCUA's compensation
includes base pay and locality pay components. The NCUA staff will be
eligible to receive an average merit-based increase of 3.0 percent, and
an additional locality adjustment ranging from -1.0 percent to +3.0
percent, depending on the geographic location. The average increase in
locality pay is estimated to be 1.52 percent. Starting in 2018, the
NCUA discontinued the annual, general pay scale increase of 1.25
percent in accordance with the most-recent CBA negotiations.
The first-year cost of the new positions added in 2020 is estimated
to be $0.9 million. Specific increases to individual offices' salaries
and benefits budgets will vary based on current pay levels, position
changes, and promotions.
Personnel compensation at the NCUA varies among every office and
region depending on work experience, skills, years of service,
supervisory or non-supervisory responsibilities, and geographic
locations. In general, more than 85 percent of the NCUA workforce has
earned a bachelor's degree or higher, compared to approximately 35
percent of the private-sector workforce. This high level of educational
achievement ensures the NCUA workforce is able to fulfill its mission
effectively and efficiently, and attracting a well-qualified workforce
requires the agency to pay employees competitive salaries.
Individual employee compensation varies, depending on the cost of
living in the location where the employee is stationed. The federal
government sets locality pay standards, which are managed by the
President's Pay Agent--a council established to make recommendations on
federal pay. The council uses data from the Occupational Employment
Statistics program, collected by the Bureau of Labor Statistics, to
compare salaries in over 30 metropolitan areas, and establishes
recommendations for equitable adjustments to employee salaries to
account for cost-of-living differences between localities.
The OPM economic assumptions for actuarial valuation of the FERS
have increased significantly for 2020. All federal agencies are
expected to contribute 16.0 percent of FERS employees' salaries to the
OPM retirement system, an increase of 230 basis points compared to the
2019 level. This mandatary contribution is prescribed in the OPM
Benefits Administration Letter dated June 2019. The estimated impact on
the NCUA budget is an increase of approximately $5.0 million in
mandatory payments to OPM, or 1.6 percentage points of budgetary
growth, compared to 2019 levels.
The average health insurance costs for the Federal Employees Health
Benefits program for 2020 are consistent with historical actual
expenses. The employee salary and benefits category also includes costs
associated with other mandatory employer contributions such as Social
Security, Medicare, transportation subsidies, unemployment, and
workers' compensation.
The 2020 budget estimate for pay and benefits includes the
assumption of a 2.2 percent vacancy rate (roughly 26 full-time
positions) during the year. This aligns with the NCUA's recent
attrition rates and workforce management efforts to carefully review
every vacancy created in the agency in 2020 before a hiring notice is
published. The effect of this adjustment lowers the NCUA budget
estimate and results in reduced fees collected from credit unions.
The 2021 budget request for salaries and benefits is estimated at
$237.8 million, a $6.4 million increase from the 2020 level, which
accounts for merit and locality increases consistent with the CBA
(approximately $4.1 million), the full-year cost impact of new
positions (approximately $0.6 million), and associated increases in
benefits for all employees (approximately $1.7 million). The
assumptions used for compensation-related adjustments are based on the
CBA currently in force. The NCUA CBA will be renegotiated during 2020,
with any changes reflected in future budget cycles.
Travel
The 2020 budget includes $27.4 million for Travel. This change is a
$590,000, or 2.2 percent, increase to the 2019 Board-approved budget.
Travel comprises approximately nine percent of the overall 2020 budget.
The cumulative reduction of the credit union examiner positions
compared to past years, extended examination cycles, and increased use
of offsite examinations all help contain the NCUA's travel costs.
However, the General Services Administration (GSA) announced an
increase to standard lodging rates to $96 dollars in 2020, an increase
of four dollars, or four percent compared to 2019, which contributes to
the growth of estimated travel expenses in 2020. In addition, effective
with 2019, GSA will charge the NCUA fees for the city pair program that
provides discounted and flexible air passenger transportation services
to federal government travelers. Although the NCUA has always
participated in the mandatory program, prior year fee payments were not
applied to the NCUA. The annual cost of $20,000 to GSA for all the NCUA
employee travel fees may increase depending on future travel schedules.
The Travel cost category includes expenses for employees' airfare,
lodging, meals, auto rentals, reimbursements for privately owned
vehicle usage, and other travel-related expenses. These are necessary
expenses for examiners' onsite work in credit unions. Close to two-
thirds of the NCUA's workforce is comprised of field staff who spend a
significant part of their year traveling to conduct the examination and
supervision program.
The NCUA staff also travel for routine and specialized training. In
2020, the NCUA will conduct a series of training events to support the
nationwide roll-out of MERIT. The NCUA's planning staff conducted
extensive research to identify low-cost locations for these events. The
roll-out will be a labor intensive effort requiring up to six weeks of
travel for many of the NCUA's staff, and will provide hands-on training
for this new system, which will be officially deployed in the fourth
quarter of 2020. The estimated travel costs for MERIT-related training
funded in the 2020 Operating Budget is $1.0 million.
The NCUA plans to evaluate future cost avoidance for travel through
continued expansion of offsite examination work. In addition, agency
personnel will continue to utilize more virtual training options, where
appropriate, to help minimize travel expenses. The 2021 budget request
for
[[Page 59148]]
the travel is estimated to be $26.7 million, less than 2020 because of
the exclusion of one-time MERIT training costs.
Rent, Communications, and Utilities
The 2020 budget includes $8.2 million for Rent, Communications, and
Utilities. This is an $188,000 increase, or 2.3 percent more than the
2019 Board-approved budget. The Rent, Communications, and Utilities
category is the smallest component of the NCUA's budget and funds the
agency's telecommunications and information technology network
expenses, and facility rental costs.
The agency telecommunications budget for 2020 is $4.5 million and
accounts for most of the increase in this budget category. The
telecommunication charges include leased lines, domestic and
international voice (including mobile), and other network charges.
Telecommunication costs include the circuits and any associated usage
fees for providing voice or data telecommunications service between
data centers, office locations, the internet and any customer, supplier
or partner. The increased costs support trusted internet protocol
services due to higher data consumption and use of cloud-based
services.
Office building leases, meeting rentals, office utilities, and
postage expenses are also included in this budget category. Facility
costs total $2.1 million for 2020 and include the NCUA's annual payment
of $1.3 million to the Share Insurance Fund for its central office
note, which is scheduled to be fully repaid in 2023. The annual utility
costs for the central office and regional offices are estimated at
$483,000.
The 2020 budget also includes $1.1 million for event rental costs
for examiner meetings and other training events. This includes the one-
time costs of $220,000 for space rental for the MERIT training events
planned in 2020.
The 2021 budget request for the Rent, Communications, and Utilities
category is estimated to be $8.0 million, less than 2020 because of the
exclusion of one-time MERIT training costs.
Administrative Expenses
The 2020 budget includes $5.9 million for Administrative Expenses.
This is a decrease of $2.8 million, or 31.9 percent, compared to the
2019 Board-approved budget. Recurring costs in the Administrative
Expenses category include the annual reimbursement to the Federal
Financial Institutions Examination Council (FFIEC), employee relocation
expenses, recruitment and advertising, shipping, printing,
subscriptions, examiner training and meeting supplies, office
furniture, and employee supplies and materials.
Most of the decrease in the Administrative Expenses budget results
from realigning the costs of various service contracts, maintenance
fees, and end-user licensing for computer software and database
management applications to the Contracted Services budget.
Approximately $3.8 million, unchanged from 2019, will be permanently
included in Contract Services, which is consistent with standard
government reporting for software costs. This includes annual software
licenses and maintenance support fees for the call center managed by
the Office of Consumer Financial Protection.
As part of the FFIEC, the NCUA shares in costs for joint actions
and services that affect the financial services industry. The overall
decrease is $78,000 less than the 2019 budget levels since the state
examiner training costs will be reduced next year.
The 2020 budget includes $100,000 for employee relocation expenses,
although expected relocation expenses are estimated to be more. The
budget proposes using $900,000 of unspent balances from prior years to
pay for these additional costs, for a total relocation budget of
$1,000,000. This spending level reflects recent average annual
expenditures for employee relocations and is a $250,000 increase over
the 2019 Board-approved budget. Relocation costs are paid by the NCUA
to employees who are competitively selected for a promotion or new job
within the agency in a different geographic area than where they live.
Employee relocations have increased in quantity and cost per employee
in recent years, especially in 2019. The larger number of employee
relocations is partly the result of additional hiring and partly from
the effects of the 2018 NCUA reorganization. The increase in relocation
costs is also related to changes in the 2017 tax law that now treats
all relocation reimbursements as taxable income. Like other government
agencies and private sector employees, the NCUA must now reimburse
employees not just for their relocation expenses, but also for the
personal tax liability resulting from those payments.
Continuous business process improvements and financial controls
have decreased costs for printing, and other administrative costs,
which are estimated to be $112,000 less than in 2019.
The 2021 budget request for the Administrative Services category is
expected to increase by $250,000, or 4.2 percent, due to increases in
the employee relocation budget.
Contracted Services
The 2020 budget includes $43.3 million for Contracted Services.
This is a $5.3 million, or 13.8 percent, increase compared to the 2019
Board-approved budget. The Contracted Services budget category includes
costs incurred when products and services are acquired in the
commercial marketplace. Acquiring specific expertise or services from
contract providers is often the most cost-effective approach to fulfill
the NCUA's mission. Such services include critical mission support such
as information technology equipment and software development,
accounting and auditing services, and specialized subject matter
expertise that enable staff to focus on core mission execution.
The majority of funding in the Contracted Services category is
related to the NCUA's priority to implement a robust supervision
framework by identifying and resolving traditional risk concerns such
as interest rate risk, credit risk, and industry concentration risk, as
well as by addressing new and evolving operational risks such as
cybersecurity threats. Growth in the contracted services budget
category results primarily from new operations and maintenance costs
associated with ongoing capital investments, such as replacements for
the AIRES and CU Online. Other costs include core agency business
operation systems such as accounting and payroll processing, and
various recurring costs, as described in the seven major categories,
below:
[ssquf] Information Technology Operations and Maintenance (45 percent
of contracted services)
--IT network support services and help desk support
--Contractor program and web support and network and equipment
maintenance services
--Administration of software products such as Microsoft Office,
Share Point and audio visual services
[ssquf] Administrative Support and Other Services (14 percent of
contracted services)
--Examination and Supervision program support
--Technical support for examination and cybersecurity training
programs
--Equipment maintenance services
--Legal services and other expert consulting support
--Other administrative mission support services for the NCUA
central office
[[Page 59149]]
[ssquf] Accounting, Procurement, Payroll and Human Resources Systems
(10 percent of contracted services)
--Accounting and procurement systems and support
--Human resources, payroll, and employee services
--Equal employment opportunity and diversity programs
[ssquf] Building Operations, Maintenance, and Security (10 percent of
contracted services)
--Central office facility operations and maintenance
--Building security and continuity programs
--Personnel security and administrative programs
[ssquf] Information Technology Security (9 percent of contracted
services)
--Enhanced secure data storage and operations
--Information security programs
--Security system assessment services
[ssquf] Training (7 percent of contracted services)
--Examiner staff, technical and specialized training and
development
--Senior executive and mission support staff professional
development
[ssquf] Audit and Financial Management Support (5 percent of contracted
services)
--Annual audit support services
--Material loss reviews
--Investigation support services
--Financial management support services
The following pie chart illustrates the breakout of the seven
categories for the total 2020 contracted services budget of $43.3
million.
[GRAPHIC] [TIFF OMITTED] TN01NO19.036
Major programs within the contracted services category include:
[ssquf] Training requirements for the examiner workforce. The
NCUA's most important resource is its highly educated, experienced, and
skilled workforce. It is important that staff have the proper
knowledge, skills, and abilities to perform assigned duties and meet
emerging needs. Each year, Credit Union Examiners attend several levels
of training, including in core areas such as capital markets, consumer
compliance, and specialized lending. The training deliverables for 2020
include the MERIT training sessions discussed elsewhere in this
document, classes offered by the Federal Financial Institutions
Examination Council, new examiner classes, and subject matter expert
training sessions for the NCUA examiners.
Starting in 2020, the NCUA is reducing its financial support for
training for state examiners. Budgets for state examiner training at
the FFIEC have been reduced by approximately 50 percent.
Contracted service providers, in partnership with the NCUA subject
matter experts, will develop and design subject matter expert training
classes for examiners and conduct a triennial review of several modules
of the NCUA's core course curriculum. Additionally, contracted service
providers and central office staff will continue conducting
organizational development and teambuilding training to help support
new team operations as a result of the Agency reorganization.
[ssquf] The NCUA's information security program supports ongoing
efforts to strengthen cybersecurity and ensure compliance with the
Federal Information System Management Act.
[ssquf] Agency financial management services, human resources
technology support, and payroll services. The NCUA contracts for these
back-office support services with the U.S. Department of
Transportation's Enterprise Service Center (DOT/ESC) and the General
Services Administration. The NCUA's human resource system, HR Links,
also adopted by other federal agencies, is a shared solution that
automates routine human
[[Page 59150]]
resource tasks and improves time and attendance functionality.
[ssquf] Audit. The NCUA Office of Inspector General contracts with
an accounting firm to conduct the annual audit of the agency's four
permanent funds. The results of these audits are posted annually on the
NCUA website and also included as part of the agency's Annual Report.
A significant share of the budget for the Contracted Services
category finances on-going infrastructure support for the agency. For
example, the NCUA relies on recurring contracted services to maintain a
number of the agency's examination systems that will replace legacy
systems such as AIRES and CU Online. In future budgets, annual
Operation and Maintenance costs for the MERIT system will be included
in the Contract Services spending category. Several of the NCUA's core
information technology systems and processes also require additional
contract support in 2020, which result in increased budgets in the
Contracted Services category, as described below.
Within the budget for the Office of Chief Information Officer, an
additional $0.7 million is required primarily for the operations and
maintenance costs of capital projects delivered in 2019 and 2020, and
for other information technology hardware critical to ensure business
continuity.
Within the budget for the Office of Chief Financial Officer, the
annual fee paid to the Department of Transportation (DOT) for the
NCUA's financial management system is roughly the same as the 2019
level of $1.2 million.
Within the budget for the Office of Continuity and Security
Management, the Central Office building's physical access controls will
be replaced in 2020, which is expected to cost approximately $600,000.
In addition, mandatory reimbursement to the Office of Personnel
Management for background investigations will increase by an estimated
$125,000 in 2020.
The 2021 budget for Contracted Services is estimated to increase by
$4,000,000, or 9.3 percent, compared to 2020, largely due to the
operations and maintenance costs resulting from the delivery of capital
projects funded in prior years.
VI. Capital Budget
Overview
Annually, the NCUA uses a rigorous investment review process to
identify the agency's needs for information technology (IT), facility
improvements and repairs, and other multi-year capital investments. The
NCUA staff review the agency's inventory of owned facilities,
equipment, information technology systems, and information technology
hardware to determine what requires repair, major renovation, or
replacement. The staff then make recommendations for prioritized
investments to the Executive Director and the NCUA Board.
Routine repairs and lifecycle-driven property renovations are
necessary to properly maintain investments in the NCUA's central office
building in Alexandria, Virginia and the agency's owned office building
in Austin, Texas. The NCUA facility manager assesses the agency's
properties to determine the need for essential repairs, replacement of
building systems that have reached the end of their engineered lives,
or renovations required to support changes in the agency's
organizational structure or to address revisions to building standards
and codes.
IT systems and hardware are another significant capital expenditure
for modern organizations. The 2019 budget allowed the NCUA to deliver
and deploy a number of cybersecurity and governance tools, and the
first iteration of ESM with several projects included, such as the
first release of MERIT in 2019. The 2020 budget maintains the
investment in current and replacement IT systems.
The budget fully supports the NCUA's effort to modernize its IT
infrastructure and applications, including the full rollout of MERIT,
the NCUA's Examination and Supervision Solution (ESS) project, which
will replace the legacy Automated Integrated Regulatory Examination
System (AIRES) system. Other IT investments include ongoing
enhancements and upgrades to enhance decades-old legacy systems,
network servers, incident and vulnerability management systems to
enhance the agency's cybersecurity posture, and various hardware
investments to refresh agency networks and ensure staff have the tools
necessary to maintain and increase their productivity.
The NCUA's 2020 capital budget is $25.1 million. The capital budget
funds the NCUA's long-term investments. The Information Technology
Prioritization Council recommended $20.9 million for IT software
development projects and $2.7 million in other IT investments for 2020.
The NCUA facilities require $1.5 million in capital investments.
Detailed descriptions of all 2020 capital projects, including a
discussion of how each project helps the agency achieve its strategic
goals and objectives, are provided in Appendix B.
Summary of Capital Projects
Examination and Supervision Solution and Infrastructure Hosting ($15.8
Million)
The purpose of the Examination and Supervision Solution and
Infrastructure Hosting (ESS&IH) project is to implement a new,
flexible, technical foundation to enable current and future NCUA
business process modernization initiatives, and replace the NCUA's
legacy exam system, AIRES, with a new customized Commercial-Off-The-
Shelf (COTS) solution. In 2020, all NCUA examiners will be trained to
use the new MERIT system, with full implementation expected by the
fourth quarter.
Enterprise Central Data Repository ($1.1 Million)
The Enterprise Central Data Repository (ECDR) project will
implement a central data repository that will serve as the data
integration point for ESS, ONES's analytic tools, the NCUA's legacy
applications and the Data Collection Solution (DCS). The ECDR will
become an enterprise solution for the NCUA allowing the agency to
transition in a phased approach from the existing legacy databases to a
cloud-based data repository serving the agency's needs.
Enterprise Data Program ($0.45 Million)
The purpose of this project is the centralization, organization and
storage of the NCUA data. The primary goal is to enable the NCUA to
manage enterprise data as a strategic asset through its full lifecycle
(create/collect, manage/move, consume, dispose). The Enterprise Data
Program (EDP) will also facilitate the centralization and organization
of the NCUA's data with an authoritative source so analysis is more
accurate, simple and easily distributed across the agency.
Asset and Liabilities Management Application ($2.1 Million)
The purpose of the Asset and Liabilities Management (ALM)
application is for the NCUA to build internal analytical capabilities
to run supervisory stress testing in house and to conduct regular
quantitative risk assessments by procuring and configuring off-the-
shelf analytical tools, models and software used commonly in stress
testing and other risk management activities.
This effort delivers a complete solution that will focus on
modernizing the NCUA's supervision tools and approaches, identifying
material risks facing the covered credit unions, and
[[Page 59151]]
tailoring resources to the material risks and risk focused exams. This
effort will allow the NCUA to reduce the existing third party
contractor's role to only consultation.
Enterprise Learning Management System Replacement ($1.0 Million)
The purpose of the Enterprise Learning Management System (LMS)
Replacement project is to conduct market research, initiate an
acquisition, create a project management plan, and execute the
production and implementation of a cost-effective, cloud-based solution
and training services that provides the NCUA with the full-range of
eLearning functionality associated with a modern LMS. This will allow
for enhanced examiner utilization and accessibility driven by quality
content, ease of use and system reliability, role-based interface,
ability to view personalized pages by role, centralized content and,
adherence to federally mandated reporting requirements and records
management requirements.
Integrated Financial Management System Analysis ($0.4 Million)
The purpose of this project is to analyze financial system
improvements. The NCUA's current financial management system service
provider increased the fee it charges the NCUA in 2019 by 40 percent.
The NCUA plans to review various options to obtain better financial
management results in a cost-effective manner.
Enterprise Laptop Lease ($0.65 Million)
The purpose of the Enterprise Laptop Refresh project is to provide
the NCUA with a more efficient, mobile friendly, and secure tool to
help employees better perform their jobs at a reasonable cost.
Information Technology Infrastructure, Platform and Security Refresh
($2.0 Million)
The purpose of the Information Technology (IT) Infrastructure,
Platform and Security Refresh project is to refresh and/or replace
routers, switches virtual servers, wireless, virtual private network,
infrastructure appliances, end of life and end of service components in
order to ensure that the NCUA data is secure and operations are stable.
NCUA Website Development ($0.1 Million)
The purpose of the Web Services project is to serve the web-related
needs of the internal NCUA stakeholders and the public. The project
provides design, development, and maintenance of the agency's public
websites: NCUA.gov and MyCreditUnion.gov.
Central Office Renovations ($0.5 Million)
NCUA headquarters renovation project will improve overall space
utilization in the NCUA-owned Central Office. The goal of the project
is to improve operational efficiency while decreasing operating cost by
discontinuing commercial office leases and consolidating all
Washington-region operations within one owned building. The project
will increase the NCUA headquarters building capacity and some offices
currently on separate floors will be collocated onto one floor,
increasing operational efficiency.
Central Office Heating, Ventilation, and Air Conditioning (HVAC) System
Replacement ($0.75 Million)
The NCUA central office HVAC system replacement project will
recapitalize the HVAC system in the agency's central office building,
including all cooling towers, air handlers, boilers and HVAC
components. The current HVAC system is original to the facility, 24
years old and obsolete. The current system is at the end of its usable
life and it is not working efficiently.
Austin, Texas Office Building Modernization ($0.27 million)
In 2020, the NCUA will continue its multi-year improvement project
at the Austin, Texas office building. These capital improvements are
required for the facility to continue routine and safe operations, and
align with the lifecycle replacement required for critical
infrastructure.
VII. Share Insurance Fund Administrative Budget
Overview
The Share Insurance Fund Administrative budget funds direct costs
associated with authorized Share Insurance Fund activities. The direct
charges to the Share Insurance Fund include costs associated with the
NCUA Guaranteed Note (NGN) program and administrative costs, and
represent total estimated costs to the Share Insurance Fund.\10\ The
Share Insurance Fund Administrative budget funds five positions that
were formerly part of the Temporary Corporate Credit Union
Stabilization Fund (Stabilization Fund) budget.
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\10\ Note these direct costs are exclusive of any costs that are
shared with the Operating Fund through the Overhead Transfer Rate,
and with payments available upon requisition by the Board, without
fiscal year limitation, for insurance under section 1787 of this
title, and for providing assistance and making expenditures under
section 1788 of this title in connection with the liquidation or
threatened liquidation of insured credit unions as it may determine
to be proper.
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The cost of the NGN program and the Corporate System Resolution
Program, including costs associated with the administration of those
programs, are funded from the Share Insurance Fund Administrative
budget. These costs have no impact on the NCUA's current and future
Operating Fund budgets. The budget for the Share Insurance Fund also
includes funding for expenditures previously authorized as direct
expenses of the Share Insurance Fund for items such as state examiner
computer leases, training and financial audit support.
The 2020 Share Insurance Fund Administrative budget is estimated to
be $6.5 million, $1.9 million, or 23 percent, less than 2019. The
budget decrease is primarily driven by the removal of third-party
stress testing on large credit unions and the decrease in costs for
valuation services for the NGN program. These services enable the NCUA
to continue supporting the NGN program, which includes managing legacy
assets within the NGN trusts. Legacy assets consist of over 1,000
investment securities that are secured by residential mortgages and
other assets.
The 2021 requested budget supports similar workload and resources,
increasing $482,000, or 7.5 percent, compared to the 2020 funding
level.
Budget Category Descriptions and Major Changes
Salaries and Benefits
The employee pay and benefits expense category for the Share
Insurance Fund Administrative budget is estimated to be $1.47 million,
which represents an increase of $232,000 compared to 2019. This
increase is due to aligning the budget to actual payroll costs for
staff on board, as well as an increase to mandatory agency contribution
rates to the FERS retirement program. Personnel compensation is 23
percent of the total budget. The financial analysts on the NGN team
have specialized technical expertise to manage the remaining $6 billion
of legacy assets. Personnel costs are estimated in a manner similar to
the operating budget.
Travel
The estimated travel cost of $52,000 is less than one percent of
the overall 2019 budget and remains the same as the 2020 budget
estimate. These costs cover all of the travel expenses for the five
staff that manage and support the NGN
[[Page 59152]]
program. Two of the five staff are remote employees and are expected to
travel periodically to the NCUA's central office.
Administrative Training
Training expenses, which represent less than one percent of the
budget, are estimated to be remain at $27,000, based on projections of
employee professional development plans and specialized training
requirements.
Support for the NGN Program (Contract Support)
Contract costs to support the NGN program, which represent 42
percent of the budget, are estimated to be $2.7 million, a decrease of
$0.2 million from the 2019 level. Funding is needed to fulfill
Corporate System Resolution Program requirements and includes outside
professional services such as external valuation experts, financial
specialists, and accountants.
These experts assist the NCUA with the following services:
Consulting Services in the amount of $1.0 million support two NCUA
offices: Examination and Insurance and the Chief Financial Officer.
Services include quarterly management reviews of asset valuations, as
well as analyses of emerging issues. Contractors also provide support
for the annual financial audit process and improvements in internal
controls. Tasks include: Supporting complex accounting and financial
requirements for settlements, sale of legacy assets, parity payments,
changing valuation model assumptions, and other asset disposition
activities. Additionally, professional services are used to assist with
accounting, tax, financial reporting, and systems support for the
corporate Asset Management Estates.
Valuation Services in the amount of $0.9 million funds valuation
support for the NGN legacy assets. As supported by the NGN Oversight
Committee, resources are also needed to conduct special analyses,
including valuations for determining reasonable market prices for
securities to be sold by auction.
Software and Data Subscription Services in the amount of $0.8
million supports technical tools used to provide waterfall models,
calculations, and metrics for the structured investment products
underlying the NGN portfolio. The service provides coverage of all
relevant asset classes, waterfall models that are seasoned and tested
throughout the industry, and a broad array of calculations and metrics.
Financial data analytics play a critical role in the surveillance,
modeling, and pricing of the legacy assets that securitize the NGN
Trusts, as well as supporting the management reviews that the NCUA
performs on the cash flow projections. Now that some of the NGNs have
begun maturing, the NCUA has added data subscription services to
provide additional valuation as well as support for the legacy asset
disposition process.
Other annual subscriptions provide important services related to
surveillance of the portfolio of corporate bonds and mortgage-related
bonds. Independent credit research services include fundamental capital
structure research, credit analyses for surveillance of corporate bond
portfolio and monoline insurer exposure, and direct access to various
industry experts for discussion on specific credits.
Other Direct Expenses
Other direct expenses of the Share Insurance Fund are estimated to
be $2.2 million in 2020, a decrease of $1.9 million, or 47 percent,
compared to the 2019 budget level. NCUA is required to conduct annual
stress testing of certain large credit unions to ensure the credit
unions remain financially sound through challenging economic cycles. In
previous years the NCUA engaged BlackRock Solutions as its partner to
challenge the stress test results prepared by the covered credit
unions. Over a multi-year endeavor, the NCUA has procured the
personnel, data, and systems to conduct this analysis internally.
Accordingly, the NCUA has determined it will not engage BlackRock
Solutions for the 2020 stress test cycle and has removed this cost from
the budget. Had BlackRock been engaged for the 2020 cycle, the agency
would have incurred $3 million in costs.
The $0.7 million increase in the estimated costs for state examiner
training is driven by the MERIT travel and training requirement.
BILLING CODE 7535-01-P
[[Page 59153]]
[GRAPHIC] [TIFF OMITTED] TN01NO19.037
BILLING CODE 7535-01-C
The NCUA website has a dedicated section that provides financial
reports for the Share Insurance Fund, \11\ and a separate page that
explains the NCUA Guaranteed Notes Program and provides comprehensive
reporting and analysis on the legacy assets.\12\
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\11\ See: https://www.ncua.gov/services/Pages/share-insurance/reports.aspx.
\12\ See: https://www.ncua.gov/regulation-supervision/Pages/guaranteed-notes.aspx.
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VIII. Financing the NCUA Programs
Overview
As part of the annual budgetary process, the NCUA remains mindful
that its operating funding comes directly from federal and state
chartered credit unions. The agency strives to ensure that any
allocation of these funds follows a thorough review of the necessity of
the expenditures and whether programs are operating in an efficient,
effective, transparent, and fully accountable manner.
To achieve its statutory mission, the NCUA incurs various expenses,
including those involved in examining
[[Page 59154]]
and supervising federally insured credit unions. The NCUA Board adopts
an Operating Budget, including the Capital Budget, in the fall of each
year to fund the vast majority of the costs of operating the
agency.\13\ The Federal Credit Union Act authorizes two primary sources
to fund the Operating Budget:
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\13\ Some costs are directly charged to the Share Insurance Fund
when appropriate to do so. For example, costs for training and
equipment provided to State Supervisory Authorities are directly
charged to the Share Insurance Fund.
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(1) Requisitions from the Share Insurance Fund ``for such
administrative and other expenses incurred in carrying out the purposes
of [Title II of the Act] as [the Board] may determine to be proper'';
\14\ and
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\14\ 12 U.S.C. 1783(a).
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(2) ``fees and assessments (including income earned on insurance
deposits) levied on insured credit unions under [the Act].'' \15\ Among
the fees levied under the Act are annual Operating Fees, which are
required for federal credit unions under 12 U.S.C. 1755 ``and may be
expended by the Board to defray the expenses incurred in carrying out
the provisions of [the Act,] including the examination and supervision
of [federal credit unions].''
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\15\ 12 U.S.C. 1766(j)(3). Other sources of income for the
Operating Budget have included interest income, funds from
publication sales, parking fee income, and rental income.
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Taken together, these dual authorities effectively require the
Board to determine which expenses are appropriately paid from each
source while giving the Board broad discretion in allocating expenses.
In 1972, the Government Accountability Office recommended the NCUA
adopt a method for properly allocating Operating Budget costs--that is,
the portion of the NCUA's budget funded by requisitions from the Share
Insurance Fund and the portion covered by Operating Fees paid by
federal credit unions.\16\ The NCUA has since used an allocation
methodology, known as the Overhead Transfer Rate (OTR), to determine
how much of the Operating Budget to fund with a requisition from the
Share Insurance Fund.
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\16\ http://www.gao.gov/assets/210/203181.pdf.
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To allocate agency expenses between these two primary funding
sources, the NCUA uses the OTR methodology. The OTR is the formula the
NCUA uses to allocate insurance-related expenses to the Share Insurance
Fund under Title II. Almost all other operating expenses are collected
through annual Operating Fees paid by federal credit unions.\17\
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\17\ Annual Operating Fees must ``be determined according to a
schedule, or schedules, or other method determined by the NCUA Board
to be appropriate, which gives due consideration to the expenses of
the [NCUA] in carrying out its responsibilities under the [Act] and
to the ability of [FCUs] to pay the fee.'' 12 U.S.C. 1755(b).
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Two statutory provisions directly limit the Board's discretion with
respect to Share Insurance Fund requisitions for the NCUA's Operating
Budget and, hence, the OTR. First, expenses funded from the Share
Insurance Fund must carry out the purposes of Title II of the Act,
which relate to share insurance.\18\ Second, the NCUA may not fund its
entire Operating Budget through charges to the Share Insurance
Fund.\19\ The NCUA has not imposed additional policy or regulatory
limitations on its discretion for determining the OTR.
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\18\ 12 U.S.C. 1783(a).
\19\ The Act in 12 U.S.C. 1755(a) states, ``[i]n accordance with
rules prescribed by the Board, each [federal credit union] shall pay
to the [NCUA] an annual operating fee which may be composed of one
or more charges identified as to the function or functions for which
assessed.'' See also 12 U.S.C. 1766(j)(3).
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Overhead Transfer Rate (OTR)
The NCUA Board approved the current methodology for calculating the
OTR at its November 2017 open meeting.\20\ The OTR is designed to cover
the NCUA's costs of examining and supervising the risk to the Share
Insurance Fund posed by all federally insured credit unions, as well as
the costs of administering the fund. The OTR represents the percentage
of the agency's operating budget paid for by a transfer from the Share
Insurance Fund. Federally insured credit unions are not billed for, and
do not have to remit, the OTR amount; instead, it is transferred
directly to the Operating Fund from the Share Insurance Fund. This
transfer, therefore, represents a cost to all federally insured credit
unions.
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\20\ 82 FR 55644 (Nov. 22, 2017).
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The OTR formula is based on the following underlying principles to
allocate agency operating costs:
1. Time spent examining and supervising federal credit unions is
allocated as 50 percent insurance related.\21\
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\21\ The 50 percent allocation mathematically emulates an
examination and supervision program design where the NCUA would
alternate examinations, and/or conduct joint examinations, between
its insurance function and its prudential regulator function if they
were separate units within the NCUA. It reflects an equal sharing of
supervisory responsibilities between the NCUA's dual roles as
charterer/prudential regulator and insurer given both roles have a
vested interest in the safety and soundness of federal credit
unions. It is consistent with the alternating examinations the FDIC
and state regulators conduct for insured state-chartered banks as
mandated by Congress. Further, it reflects that the NCUA is
responsible for managing risk to the Share Insurance Fund and
therefore should not rely solely on examinations and supervision
conducted by the prudential regulator.
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2. All time and costs the NCUA spends supervising or evaluating the
risks posed by federally insured, state-chartered credit unions or
other entities that the NCUA does not charter or regulate (for example,
third-party vendors and CUSOs) are allocated as 100 percent insurance
related.\22\
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\22\ The NCUA does not charter state-chartered credit unions nor
serve as their prudential regulator. The NCUA's role with respect to
federally insured state-chartered credit unions is as insurer.
Therefore, all examination and supervision work and other agency
costs attributable to insured state-chartered credit unions is
allocated as 100 percent insurance related.
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3. Time and costs related to the NCUA's role as charterer and
enforcer of consumer protection and other non-insurance based laws
governing the operation of credit unions (like field of membership
requirements) are allocated as 0 percent insurance related.\23\
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\23\ As the federal agency with the responsibility to charter
federal credit unions and enforce non-insurance related laws
governing how credit unions operate in the marketplace, the NCUA
resources allocated to these functions are properly assigned to its
role as charterer/prudential regulator.
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4. Time and costs related to the NCUA's role in administering
federal share insurance and the Share Insurance Fund are allocated as
100 percent insurance related.\24\
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\24\ The NCUA conducts liquidations of credit unions, insured
share payouts, and other resolution activities in its role as
insurer. Also, activities related to share insurance, such as
answering consumer inquiries about insurance coverage, are a
function of the NCUA's role as insurer.
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These four principles are applied to the activities and costs of
the agency, which results in the portion of the agency's Operating
Budget that is transferred from the Share Insurance Fund. Based on the
Board-approved methodology, the OTR for 2020 is modestly higher than
2019, and estimated to be 61.3 percent. Thus, 61.3 percent of the total
Operating Budget is estimated to be paid out of the Share Insurance
Fund. The remaining 38.7 percent of the Operating Budget is estimated
to be paid for through the Operating Fee. The explicit and implicit
distribution of total Operating Budget costs for federal credit unions
and federally insured, state-chartered credit unions is as follows:
[[Page 59155]]
------------------------------------------------------------------------
Federally insured,
Est. share of the operating Federal credit state-chartered
budget covered by: unions (percent) credit unions
(percent)
------------------------------------------------------------------------
Federal Credit Union 38.7 0.0
Operating Fee..............
OTR x Percent of Insured 31.3 (61.3 x 51.1) 30.0 (61.3 x 48.9)
Shares.....................
-------------------------------------------
Total................... 70.0 30.0
------------------------------------------------------------------------
In terms of accounting for funds transferred from the Share
Insurance Fund to the Operating Fund, the OTR is applied to actual
expenses incurred each month. Therefore, the rate calculated by the OTR
formula is multiplied by each month's actual operating expenses and
charged to the Share Insurance Fund. Because of this monthly
reconciliation to actual operating expenditures, when the NCUA's
expenditures are less than budgeted, the amount charged to the Share
Insurance Fund is also less--and those lower expenditures benefit both
federally chartered and state charted credit unions.
The following chart illustrates the share of the Operating Budget
paid by federal credit unions (FCUs, 70.0%) and federally insured,
state-chartered credit unions (FISCUs, 30.0%).
[GRAPHIC] [TIFF OMITTED] TN01NO19.038
The Board delegated authority to the Chief Financial Officer to
administer the methodology approved by the Board for calculating the
Operating Fees, and to set the fee schedule as calculated per the
approved methodology outlined in this section. There is no change to
the underlying approved Operating Fee methodology for 2020; the change
in the assessments for 2020 are due to changes in the OTR rate and to
indexing the fee schedule for projected asset growth.
For 2020, based on the OTR methodology discussed above, the
resulting share of the budget that is funded from the Operating Fee is
$144.8 million. This equates to 0.0181 percent of the estimated federal
credit union assets for December 2019. The overall increase for the
operating fee is 1.2 percent over 2019.
The Operating Fee will be assessed to federal credit unions based
on estimated year-end assets. Credit unions with assets less than $1
million will not be assessed an Operating Fee. To set the assessment
scale for 2020, federal credit union asset growth will be projected
through December 31, 2019. Based on the June 30, 2019, Call Report
data, annual growth is projected to be 5.6 percent at year end. The
asset level dividing points will be increased by this same projected
growth rate. Assets are indexed annually to preserve the same relative
relationship of the scale to applicable asset base.
To establish the rate applicable to each asset level, the factors
outlined in the table below result in an average Operating Fee rate
increase of 1.2 percent for natural person federal credit unions. The
corporate federal credit union rate scale remains unchanged from prior
years.
To illustrate the rate impact for federal credit unions with assets
under $1.5 billion, the fee increases from $269.4 per million dollars
of assets, to $272.7 per one million dollars of assets. This is an
increase of $3.3 per million dollars of assets, or 1.2 percent.
Federal credit union assets between $1.5 billion and $4.8 billion
would be assessed at a rate of $79.48 per million, and assets above
$4.8 billion would be
[[Page 59156]]
assessed at $26.54 per million. As noted above, these tiers were
indexed to the 5.6 percent projected asset growth, and the rates are
increased by 1.2 percent.
The following tables illustrate the methodology and calculations
used to develop the Operating Fee.
BILLING CODE 7535-01-P
[GRAPHIC] [TIFF OMITTED] TN01NO19.039
[[Page 59157]]
[GRAPHIC] [TIFF OMITTED] TN01NO19.040
IX. Appendix A: Supplemental Budget Information
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[[Page 59165]]
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[[Page 59166]]
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[[Page 59167]]
X. Appendix B. Capital Projects
[GRAPHIC] [TIFF OMITTED] TN01NO19.051
[[Page 59168]]
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[[Page 59169]]
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[[Page 59172]]
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[[Page 59173]]
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[[Page 59174]]
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[[Page 59175]]
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[[Page 59179]]
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[[Page 59180]]
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[[Page 59181]]
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[[Page 59183]]
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[[Page 59184]]
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[[Page 59185]]
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[[Page 59186]]
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[[Page 59187]]
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[[Page 59188]]
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[[Page 59189]]
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[[Page 59190]]
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[[Page 59191]]
[GRAPHIC] [TIFF OMITTED] TN01NO19.082
[[Page 59192]]
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[FR Doc. 2019-23856 Filed 10-31-19; 8:45 am]
BILLING CODE 7535-01-C