NCUA BOARD APPROVES SLIGHTLY MODIFIED BUDGET FOR 2024 WITH STILL SIZABLE STAFFING INCREASES AS NUMBER OF CREDIT UNIONS CONTINUE TO GO DOWN

The NCUA Board approved by a unanimous vote last Thursday the agency’s 2024 operating budget and projected their 2025 budget at the same time.

While the 2025 budget will be actually finalized at the end of 2024 and therefore is not binding on the Board in any way, the 2024 budget is quite telling as to the direction the agency is headed – toward more stringent exams, bigger exam teams, longer exam stays and more focus on consumer protection with such specialized exams as fair lending and cyber security.

The proposed 2024 budget, as we outlined in our November 21 Client Update, contained an 11% increase in the NCUA operating budget for 2024 and the projection of the need for an additional 9.6% increase in 2025.

There was a total of 28 new employees included in the proposed budget (the most new hires in a single year since the Chairman Norm D’Amours era at the agency in the 1990s),

Most observers felt that this requested budget which would increase the agency’s operating budget from $344 million in 2023 to $374 million in 2024 would pass with few changes because it was expected that Tanya Otsuka, the Biden administration nominated  Democrat successor to the expiring term of Republican NCUA Board Member Rodney Hood, would have been confirmed by the US Senate and sitting on the NCUA Board as a solid second vote for Chairman Harper’s desired 11% proposed budget increase for the upcoming year.

Since Ms. Otsuka has not yet been confirmed by the Senate, Chairman Harper needed the support of the two Republican members of the NCUA Board (Board Member Hood and Vice-Chairman Hauptman) in order to pass the budget, it would be expected that some compromise would have to take place and the amount of the budget increase be mitigated in some way.

Well, there was some downward movement in the final NCUA budget approved by the Board – but not as much as many would have expected with Chairman Harper having to negotiate with two Republican colleagues to get the budget approved.

The final NCUA operating budget resulted in an increase of 8.8% from, as referenced earlier, $344 million in 2023 to $374 million in 2024.  The number of new NCUA staff was reduced only slightly from 28 new hires to 27.  This increase in staffing was about half (13 new FTE positions) in the field examination arena and the remainder in the NCUA administrative staff divided among multiple departments at the agency.

The NCUA budget, of course, is funded not by the American taxpayer but by credit unions regulated and insured by NCUA.  The overhead transfer rate (OTR) will be 61.7% in 2024.  This means that 61.7% of the NCUA budget will be funded directly from the share insurance fund itself which is funded by both federal and state chartered credit unions with NCUSIF insurance, and the other 38.3% will be funded by an operating fee assessed to federal credit unions only.

Therefore, other than applying some unspent 2023 dollars and a minimal reduction in travel costs as a result of more off-site examination work, there was not much substance in the reduction of the proposed budget increase from the earlier proposed 11% and the 8.8% increase finally approved by the unanimous vote of the Board.

In other words, there was not a lot of substantive compromise from the proposed budget.  Chairman Harper essentially got his budget and staffing increases almost as proposed.

As he would have likely been able to get that increase at the mid-year budget review process after Ms. Otsuka has joined the Board upon her confirmation (which should happen at either a last minute 2023 Senate session or early in 2024), it is worthy of note that the two Republican board members that supported this budget were not particularly negotiating from a position of strength as it related to this 2024 budget.

However, many credit unions, leagues and trade associations expected more of a reduction – at least as it relates to the continued increase in staff even as the number of credit unions continues to go down by about 150 each year through merger – in the personnel arena in the final 2024 budget.

This did not occur as NCUA will increase by 27 new employees in 2024 rather than the 28 originally proposed.  The agency’s staffing is now at 1247 with approximately 4800 credit unions to regulate and insure, compared to 1023 employees when I left NCUA in 2004 with over 12,500 credit unions on the regulatory and insurance rolls.

As pointed out in our November 21 Client Update, when coupled with the announced increases in credit unions with a rating of CAMELS 3, 4 and 5, there becomes a reasonable presumption that credit union losses are possible – although not certain – to go up in the next 12-24 months, you can expect to see more and more discussion at NCUA Board meetings and when board members go out on the speaking trail about the “increased stress on the share insurance fund.”

Worth watching is the likelihood that the answer to more agency expenses being charged to the share insurance fund at the same time more stringent exams are resulting in lower CAMELS rating may ultimately bring about an effort at the NCUA Board level to raise the normal operating level of the NCUSIF from 1.37% to perhaps what Chairman Harper has publicly stated several times that he believes it should be at 1.5%. With at least two votes in support, the NCUA Board can increase that normal operating level and impose a one-time premium to get the equity level to 1.5%.

As we have previously stated, any NCUSIF premium would result in fewer dollars for credit union lending, investment, technology, service delivery, etc.  After all, when a million goes to Washington for the NCUSIF fund and to increase its equity level after dramatic agency spending increases and perhaps a spate of losses from troubled credit unions, that is a million that will not be spent on technology to compete, lending to members or enhanced service delivery.

The timing is not good for a premium as interest rates have impacted yields, enhanced examination findings have imposed more required actions in response to exams, increased regulation from NCUA and CFPB is coming down the pike monthly, non-interest income is under assault, employee costs are skyrocketing, auto lending is challenged and mortgage lending is down.  Still, we see the combination of increasing agency budgets and more stringent exams bringing about more CAMELS ratings being lowered as a formula for a potential premium increase in either late 2024 or 2025.

This is part of the reason why the NCUA budget matters.  It almost always gives you an indication of where the agency is headed in the coming year and even years to come.

As always, we will continue to take our clients beneath the surface and provide you with the “inside baseball” that will hopefully help you strategically watch the issues and better understand them as they develop.

Until next time.

Dennis Dollar