The 2017–2018 NCUA budget is an historic budget. It is more transparent and it was developed earlier than any previous NCUA budget.
It also provided more opportunities for stakeholders to provide input than any previous NCUA budget. We not only held a public budget briefing, but we also provided detailed information on the draft budget several weeks before the briefing so that stakeholders could offer informed comments on it. We also accepted comments from people who were unable to attend, both before and for eight days after the briefing.
It is also a non-partisan budget. I want to publicly thank my colleague, Board Member McWatters, and his staff for their contributions, both to the budget itself, and to the process under which it was considered. This was a genuine partnership and an example of how government should work.
It also represents a change in direction. The final 2017 budget will be down 1.6 percent from the previously approved 2017 budget. That is a modest reduction, but it is a change in direction. And it continues to provide a meaningful two-year projection of agency expenditures, thus allowing both the agency and stakeholders to better plan for the future.
While being responsive to legitimate concerns, it maintains the principle of regulatory independence. We listened to the comments and made additional reductions from the staff’s recommended budget, particularly in the areas of staffing, travel and training, but we did not agree to meat-cleaver cuts that would have jeopardized our ability to supervise and examine and maintain the safety and soundness of the system. We also increased transparency by releasing additional information on our contracting decisions, and by correcting line-item labels that understandably confused commenters like Mr. Gordon Sam.
We have literally set and raised the bar for transparency and budget dialogue for federal financial services regulators. No one else comes close to providing this level of transparency or input.
It also incorporates major changes to our supervision and examination process recommended by our Exam Flexibility Initiative. These changes will enable us to better deploy our resources—particularly our examiners—where there are problems, while at the same time providing meaningful regulatory relief to well-managed and well-run credit unions with less than $1 billion in assets, and better coordination with our state supervisory partners.
While the Exam Flexibility Initiative changes will result in an extended exam cycle for most credit unions, I want to reiterate that they do not change our statutory obligation to protect the safety and soundness of the system and the Share Insurance Fund. Accordingly, one of the initiative’s provisions that applies to all federally insured credit unions, regardless of their charter, is that the agency reserves the right embedded in the Federal Credit Union Act to examine any federally insured credit union at any time.
There is no guarantee or right to an extended exam cycle—the system is simply designed to be flexible. When an exam or supervisory contact is needed, it will be conducted.
I would be remiss if I did not thank Region IV Director Keith Morton for his leadership in setting-up and running our Exam Flexibility Initiative under a very short timeline. He delivered a high-quality product on budget and on schedule, under incredible time pressure. And he did so while still finding time to consult with a wide range of stakeholders of all sizes and charter types, all over the country, with a wide range of business plans and priorities, as well as with our state supervisory partners. Thank you, Keith, for a job well done.
The budget also incorporates the ambitious Enterprise Solutions Modernization program under our new Business Innovation Director Kelly Lay. This is a large part of our capital budget and it is critical to our efforts to provide best-in-class supervision and examination. It includes a long-overdue update of our Automated Integrated Regulatory Examination System, better known as AIRES, and the deployment of a secure portal to transfer information between credit unions and their federal and state supervisors in a way that protects both proprietary information and members’ personally identifiable information. It also includes the development of better business-analytics tools and dashboards to provide both our staff and credit unions the information they need, when they need it and in a way that is easy to understand.
The budget also includes a handful of new positions, primarily to comply with new federal records management requirements and to provide our Office of Consumer Financial Protection and Access with additional staff to process applications under our revised field-of-membership rules and to provide enhanced customer service to credit unions.
I only have two regrets about the process we have been through. My first regret is that despite an unprecedented level of transparency and openness by the agency, so few people participated in the process. Beyond the seven participants in our budget briefing, only three additional groups or individuals commented at all. Not one of the approximately 6,000 natural person credit union CEOs commented outside of the briefing. In addition, very few people even took the time to look at the extensive budget information our staff compiled and posted on the agency’s website.
This, frankly, reinforces my belief that while trade associations like to use our budget as a punching bag to demonstrate what strong advocates they are, actual CEOs and directors understand that they have more pressing issues that actually affect their work of serving their members.
I think that is because they understand that while over time the nominal amount of the budget has increased—as everything else in life does over time—as a percentage of their costs, it has actually decreased. More than a decade ago, Call Report data shows that cumulative credit union expenditures for examination and insurance, including for state supervision, were equal to only nine-tenths of one percent of their budget expenditures. Today, they are even less, only eight-tenths of one percent. In other words, the cost of the NCUA budget to their total expenditures has been totally flat for 15 years.
And by way of comparison, Call Report data also reveal that total expenditures for examination and insurance are less than credit union expenditures for travel and conferences.
My second regret is that some people believe the agency’s budget and staffing should be directly related only to either the number of credit unions we examine or the number of problem credit unions. They don’t seem to understand that credit union complexity matters, and that it is increasing. Nor do they understand that our mission is not asset disposition. We have an asset disposition office, but it is only a small part of what we do—it is not our reason for being. Our mission is to prevent credit unions from getting into trouble in the first place, not just to clean up after the ones that do get in trouble.
Like a fire department that puts out fires, we get public attention when we conserve and liquidate credit unions. But, the real value we provide is preventing conservatorships and liquidations in the first place, just as the larger value of a fire department is in developing and enforcing fire codes that prevent fires, and in preventing what we in the financial world call contagion, fires spreading from one house to another.
This also explains why comparisons between NCUA’s budget over the last decade and the FDIC’s budget over the same time period are apples-to-pineapples comparisons. The FDIC had to liquidate and conserve far more institutions with far more assets than we did. That meant their budget for liquidations, conservatorships and asset liquidations skyrocketed at a time when ours increased much more modestly.
Our entire multi-billion-dollar NCUA Guaranteed Notes and corporate system resolution program is run with only five staff. Because we didn’t have the run-up in expenses the FDIC had, we also don’t have the same run-down. Comparisons that look only at the run-down, without taking into consideration the run-up, are just disingenuous.
In summary, this is a budget I believe we can all be proud of. It is transparent. We listened. We made adjustments where appropriate. We also made additional disclosures where appropriate. We incorporated major changes in staffing and in our examination and supervision program. We are modernizing our systems, and we are addressing specific concerns, like the need to examine institutions that lack internal controls we haven’t examined in five years or more, the need to comply with new federal records laws, and the need to process new field-of-membership requests in a timely fashion.
Again, we would not be where we are today without the support of Board Member McWatters and his Senior Policy Advisor Sarah Vega, who have been active participants since day one. In addition, I want to thank our CFO Rendell Jones and his staff for their tremendous support. They have worked long and hard preparing the new budget and the new disclosures, as well as preparing for the budget briefing and reading, analyzing and responding to stakeholders’ budget comments. Their workload has increased tremendously over the last several years.
I also want to thank Executive Director Mark Treichel and Deputy Director John Kutchey, who had to begin budget development earlier than they ever had before. I also want to thank all of the regional and central office directors who helped Mark and John build the budget, revised it to incorporate the recommendations of the Exam Flexibility Initiative, and provided detailed back-up information for both the regular budget and the capital budget.
This was a team effort. Most importantly it is a demonstration that despite the predictions of naysayers, NCUA is the little agency that could. In a town that is deeply divided, men and women of good will put their differences aside and developed and passed a two-year budget that is good for the agency, good for stakeholders, good for credit union members and good for U.S. taxpayers.