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The NCUA Staff Draft 2021-2022 Budget Justification

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National Credit Union Administration (NCUA).




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.


Requests to deliver a statement at the budget briefing must be received on or before November 20, 2020. Written statements and presentations for those scheduled to appear at the budget briefing must be received on or before 5 p.m. Eastern, November 30, 2020.

Written comments without public presentation at the budget briefing may be submitted by December 11, 2020.


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 by November 20, 2020. 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 5 p.m. Eastern, November 30, 2020.
  • Written comments: Submit comments to by December 11, 2020. Include your name and the following subject line “Comments on the NCUA Draft 2021-2022 Budget Justification.”

Copies of the NCUA Draft 2021-2022 Budget Justification and associated materials are also available on the NCUA website at​About/​Pages/​budget-strategic-planning/​supplementary-materials.aspx.

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Eugene H. Schied, Chief Financial Officer, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428 or telephone: (703) 518-6571.

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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 2021-2022 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 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 2021-2022 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, December 2, 2020 from 10:00 a.m. to 12:00 p.m. Eastern. Due to the COVID-19 Pandemic, the budget briefing will be open to the public via live webcast only. Visit the agency's homepage ( and access the provided webcast link.

If you wish to participate in the briefing and deliver a statement, you must email a request to by November 20, 2020. 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 December 2, 2020 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 by 5 p.m. Eastern, November 30, 2020.

Written comments on the draft budget will also be accepted by email at until December 11, 2020. Include your name and the following subject line with your comments: “Comments on the NCUA Draft 2021-2022 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.

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By the National Credit Union Administration Board on November 13, 2020.

Melane Conyers-Ausbrooks,

Secretary of the Board.

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I. The NCUA Budget in Brief

Staff Draft 2021 and 2022 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 2021-2022 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 $342.5 million for 2021, which is 4.9 percent less than the 2021 funding level approved by the NCUA Board in December 2019 as part of the two-year 2020-2021 budget, and 1.4 percent less than the comparable level funded by the Board for 2020.

Three significant factors drive the 2021 budget lower than the 2020 level.

1. The NCUA anticipates the continuation of remote/off-site examinations into the first few months of 2021, as the result of on-going concerns about the COVID-19 pandemic, and that examinations-related and other travel will begin to resume as we continue through 2021. Accordingly, travel spending estimates in the 2021 budget are reduced by approximately 25 percent.

2. The NCUA reduced its 2021 budget for travel by an additional 25 percent because it proposes to use surplus funds that resulted from reduced travel in 2020. Combined with the first factor, these reductions account for approximately $12 million in travel-related budget that would otherwise have been included in the 2021 Operating Budget. Had the travel budget for 2021 included this $12 million, the Operating Budget would have increased by approximately 3.7 percent.

3. A final factor driving lower overall spending in 2021 is the reduction in the Capital Budget, largely driven by the completion of the latest phase of the MERIT project.

Staffing levels for 2021 and 2022 reflect the agency's current staffing requirements and proposed staffing enhancements related to high-priority initiatives.

This document is a draft, staff-level budget proposal, made available to the NCUA Board members and the public for their consideration and comment. The contents of this document represent staff-level recommendations for 2021 NCUA funding and have not been endorsed or adopted by the NCUA Board. The NCUA plans to hold a public meeting on December 2, 2020 at 10:00 a.m. to review the budget document and receive comments from members of the public. Final adoption of the budget by the NCUA Board, including any changes to the staff draft that may result from public comments or Board member recommendations, is anticipated at the December Board meeting.

Operating Budget

The proposed 2021 Operating Budget is $315.6 million. Staffing levels are requested to increase by five full-time equivalents (FTE) compared to the 2020 Board-approved budget.[1]

The 2021 Operating Budget, decreases approximately $0.3 million, or 0.1 percent, compared to the 2020 Board-approved budget. The Operating Budget estimate for 2022 is $341.8 million and reflects no change to authorized positions from the 2021 proposed level.

The following chart presents the major categories of spending supported by the 2021 budget, while specific adjustments to the 2020 Board-approved budget are discussed in further detail, below:

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Total Staffing. The budget supports 1,191 FTE in total for 2021, of which five are funded by the Share Insurance Fund Administrative Budget. The Operating Budget funds 1,186 FTE in 2021, a net increase of five FTEs from the 2020 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 within a relatively narrow range, as shown in the chart below.

Pay and Benefits. Pay and benefits increase by $9.6 million in 2021, or 4.1 percent, for a budget of $240.9 million. A substantial amount of the growth in pay and benefits—nearly $2.3 million—is the result of OPM increasing the mandatory employer contribution for the Federal Employee Retirement System (FERS). Required FERS payments to OPM increase from 16 percent of covered employees' salaries to 17.3 percent, a change of 130 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 2021.

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 five new positions proposed for 2021, anticipated staff promotions, position changes, and increased costs for other mandatory employer contributions such as health insurance.Start Printed Page 74093

Travel. The travel budget decreases by $13.9 million in 2021, or 50.7 percent, for a budget of $13.5 million. Included in this total and as discussed above, the NCUA reduced the 2021 travel budget by approximately $12 million because the agency expects travel in the first quarter of the year will remain at minimal levels due to the COVID-19 pandemic, and because the agency plans to use surplus 2020 travel funds to pay for a portion of 2021 travel costs. In addition, the cost of training the examiner workforce to use the new MERIT system was already funded in 2020; most training was rescheduled for 2021 but do not require additional resources to carry out.

The NCUA continues working to contain travel costs by expanding offsite examination work and using technology-driven training. In future budgets, the NCUA will determine how such adjustments to its examination approach will help mitigate travel costs.

Rent, Communications, and Utilities. The budget for rent, communications, and utilities decreases by $1,038,000 in 2021, or 12.6 percent, for a budget of $7.2 million. This funding pays for space-related costs, telecommunications services, data capacity contracts, and information technology network support. The decrease in 2021 is primarily due to the termination of a lease for office space in Alexandria VA and the elimination of payments for the NCUA Central Office Building note from the Share Insurance Fund, which would be retired by paying off all principal balances using surplus 2020 travel funds.

Administrative Expenses. Administrative expenses increase $0.6 million in 2021, or 9.8 percent, for a total budget of $6.2 million. The increase to the administrative expenses budget category largely results from including in the 2021 budget the anticipated costs of employee relocations. In 2020, employee relocation costs were paid from surplus salaries and benefits funds available at the end of 2019.

Contracted Services. Contracted services expenses increase by $4.5 million in 2021, an increase of 10.3 percent compared to 2020, for a total budget of $47.8 million. The increase in spending for contract services primarily results from the operating and maintenance costs that will result from deployment of the MERIT system.

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.

Capital Budget

The proposed 2021 Capital Budget is $18.8 million.

The 2021 Capital Budget is $6.4 million less than the 2021 funding level approved by the Board in December 2019, and $6.2 million less than the 2020 Board-approved budget.

The Capital Budget pays for continued investments in critical technology and infrastructure projects. For the past several years, major component of the Capital Budget has been 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 MERIT system is scheduled for deployment to all examiners in 2021, and MERIT costs will transition to operating and maintenance budgets. The NCUA's Information Technology Prioritization Council recommended $12 million for IT software development projects that continue to replace the NCUA's decades-old and functionally obsolete information technology systems, and $5.6 million in other IT investments for 2021. The NCUA's facilities require $1.25 million in capital investments.

Share Insurance Fund Administrative Expenses

The proposed 2021 Share Insurance Fund Administrative budget is $8.1 million.

The 2021 Share Insurance Fund (SIF) Administrative Budget is $1.2 million more than the 2021 funding level approved by the Board in December 2019, and $1.6 million more than the 2020 Board-approved budget. The increase in the SIF Administrative Budget is primarily attributed to the costs associated with tools and technology used by the Office of National Examinations and Supervision to oversee credit union-run stress testing for the largest Credit Unions using its own proprietary models. The cost to develop such models was included in past years' capital budgets and the tools and technology were deployed in 2020; the 2021 operating and maintenance costs for ONES tools is now included in the SIF Administrative Budget. Direct charges within this budget include administration of the NCUA Guaranteed Note (NGN) program, state examiner training and laptop leases for state examiners, as well as financial audit and internal control support for the Share Insurance Fund.

2020 Operating Budget—Use of Budget Surplus Resulting From COVID-19 Operating Adjustments

Various public health restrictions instituted in response to the COVID-19 pandemic resulted in much lower-than-planned spending on NCUA employee travel in 2020, as the NCUA pivoted to remote and offsite examinations and work. The NCUA currently estimates that the agency will end 2020 having under-spent the Board-approved budget by approximately $18.3 million, mostly due to a reduction in travel as well as other operating expenses.

The NCUA's response to the coronavirus pandemic has also led to a number of unplanned and unbudgeted expenses, particularly for information technology and operational support activities. As of the publication of this draft budget, the NCUA has reallocated $3.6 million of the projected travel surplus for the liquidation of a portion of NCUA's liabilities associated with disbursements to employees for leave earned in 2020, reducing the anticipated end of year balance for employee leave, as well as increased expenses for items such as remote communications and supply reimbursements due to required off-site work, information technology licensing and equipment costs, cleaning supplies, and facility cleaning and maintenance. These items were discussed as part of the mid-session budget briefing presented at the July 2020 Board meeting. The mid-session estimate was for a $13 million budget surplus from travel, offset by an estimated $5.8 million in increases to other spending categories. The revised surplus estimate is now $18.3 million, and the amount that has been reallocated is $3.6 million.

Deducting the $3.6 million that has been reallocated from the $18.3 million, leaves a balance of $14.7 million, which—subject to approval by the NCUA Board—is being proposed for use in the following way:

  • $5.8 million of the budget surplus for 2020 would be made available in 2021, to offset 2021's travel budget. For 2021, the NCUA is currently forecasting a need for about 75% of its annual travel budget, due to the anticipated ongoing travel and on-site work restrictions related to COVID. In addition to the $13.5 million included in this 2021 budget, an additional $5.8 million Start Printed Page 74094would be made available from the 2020 surplus, to fund travel at about 75% of the typical need.
  • $2.6 million of the budget surplus would be used to pay for COVID-related expenses in 2020 and 2021, which are largely of a one-time nature and are not anticipated to result in a long-term expense to the agency. This includes:

○ The increase data capacity for computer networks, revised data reporting, conference calling services, and virtual meeting software, all of which spiked due to the remote/off-site work situation.

○ Modifications to facilities operations and maintenance, including improvements to air handling and filtration systems; anticipated increases in facility cleaning and cleaning supplies; and medical consultant support to assess operating status and issues.

○ An assessment of virtual exams in light of the shift to remote and off-site examination and supervision in 2020 as a result of COVID-19, to evaluate opportunities and long-term changes to the supervision program.

  • $3.7 million of the surplus would be used to retire the note owed by the Operating Budget to the Share Insurance Fund for the Central Office building at 1775 Duke Street, Alexandria, VA. When the NCUA purchased the building, it was financed by the Share Insurance Fund, and the Operating Fund makes annual principal and interest payments. This action would retire the note three years ahead of schedule, fully repaying the Share Insurance Fund. This will reduce the Operating Budget by about $1.3 million in annual principal payments scheduled for 2021 through 2023, and also avoid additional interest payments for the remaining three years of the loan.
  • $2.6 million for the final phase of facilities modernization at the Central Office. This project was originally planned in the original 2021 Capital Budget for $3.0 million. Over the past three years, the NCUA has been modernizing and updating the Central Office, much of which has not been updated in over 20 years. The project also supports security upgrades at the Central and regional offices. Accelerating the funding would enable much of the work to be done while a number of staff continue to work remotely, and will allow NCUA to terminate the lease it has at 1900 Duke Street rather than keep it for 2021, avoiding a cost of approximately $600,000. Therefore, in total, the use of the surplus for this project reduces the overall 2021 budget by $3.6 million.

Budget Trends

As shown in the chart below, the relative size of the NCUA budget (dotted line) continues to decline when compared to balance sheets at federally insured credit unions (solid line). 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 (dotted line compared to dashed line).

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. This Start Printed Page 74095results in additional complexity in the balance 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 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

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 the associated costs. These compliance activities affect the level of resources needed 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 can add additional processes and procedures.

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 and Equal Opportunity

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.


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, the Department of Defense, 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 16.0 to 17.3 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 2021 is an increase of approximately $2.3 million over 2020.

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II. Introduction and Strategic Context


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.

President Franklin Roosevelt signed the Federal Credit Union Act into law in 1934 during the Great Depression, enabling credit unions to be organized throughout the United States under charters approved by the federal government. The law's goal 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.

As of June 2020, the NCUA is responsible for the regulation and supervision of 5,164 federally insured credit unions, which have approximately 122.3 million members and more than $1.75 trillion in assets across all states and U.S. territories.[2]


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 Start Printed Page 74098under 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]

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 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] In July 2020, the Board approved for publication in the Federal Register proposed changes to its regulation and methodology for determining the fees due from federal credit unions, and has invited public comment on the proposals.[6]

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.[7] In accordance with its authority [8] 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.

Mission, Goals, and Strategy

The NCUA's 2021-2022 Budget Submission supports the agency's fourth year implementing its 2018-2022 Strategic Plan to achieve its priorities and improve program performance.

Throughout 2021 and 2022, 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:

  • Ensure a safe and sound credit union system;
  • Provide a regulatory framework that is transparent, efficient, and improves consumer access; and
  • 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 2021 include ongoing efforts to:

  • Ensure compliance with Bank Secrecy Act and Anti-Money Laundering laws and regulations;
  • examine credit union operations for compliance with applicable consumer financial protection regulations;
  • review credit union policies and the use of loan workout strategies, risk management practices, and new strategies implemented to assist borrowers impacted by the COVID-19 pandemic, including new programs authorized through the CARES Act;
  • ensure that credit unions have evaluated and effectively manage the economic impact of COVID-19 on their credit risk, capital position, and overall financial stability;
  • evaluating critical security controls for credit union information systems in response to emerging cyber-attacks, which are a persistent threat to the financial sector;
  • assess credit unions' exposure and planning related to a transition away from LIBOR; and,
  • review liquidity risk management and planning in all credit unions.

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 Enterprise Solution Modernization (ESM) program will reach a major milestone in 2021 with the deployment 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 to use it. Training originally scheduled and paid for in the 2020 budget has been postponed to 2021 because of COVID-19 related travel restrictions.

To fulfill the NCUA's second strategic goal—provide a regulatory framework that is transparent, efficient, and improves customer access—the agency continues its efforts to review its regulations in a manner that encourages innovation, provides flexibility, and fulfills its primary mission of protecting safety and soundness. The budget allocates resources to agency programs that keep regulations up to date and consistent with current law, and that assist existing and prospective credit unions with expansion and new chartering activities. The NCUA also seeks to promote financial inclusion through its Advancing Communities through Credit, Education, Stability, and Support (ACCESS) initiative to better serve a changing population and economy while simultaneously ensuring compliance with consumer and financial protections.

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.Start Printed Page 74099

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. 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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The NCUA's regional offices will carry out the agency's 2021 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 corporate credit unions and large consumer credit unions with assets that total over $10 billion. Consumer credit unions fall within ONES' purview based on assets reported on the first quarter call report for the preceding year. Therefore, based on 2020 first quarter call report statistics, in 2021 ONES will examine and supervise 11 consumer credit unions with 21.5 million members, accounting for $324.5 billion in credit union assets. For the 2022 examination cycle, an additional seven credit unions are projected to cross the $10 billion threshold and under existing regulations fall within the supervisory purview of ONES.

In 2021 and 2022, 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 $17.7 billion [9] Share Insurance Fund, which provides insurance to at least $250,000 for shares 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.Start Printed Page 74101

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 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 budget 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 2021-2022 budget justification document includes comparisons to the Board approved 2020-2021 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 2021 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, which is 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.[10]

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.

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 2021-2022 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 2019, the agency provided an unmodified Statement of Assurance (signed February 14, 2020) 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.

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 Start Printed Page 74102industry) 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, analyzing, and managing risks that could affect the achievement of its strategic objectives. In 2020, the NCUA utilized ERM principles to respond to the operational challenges and opportunities created by the COVID-19 pandemic. In 2021, the NCUA plans to continue its efforts to mature its ERM program, analyze high-priority enterprise risks using its assessment framework, and refresh its inventory of enterprise risks.

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. This holistic evaluation of how the agency pursues its goals and objectives is guided by the agency's appetite for risk and considers resource availability or limitations. The NCUA believes that for many strategic decisions about its programs, ERM offers a better framework for evaluating both the quantitative and qualitative aspects of enterprise-level decisions than the types of cost-benefit analyses used for regulatory development. In addition, the agency's risk appetite helps the NCUA's employees align risks with opportunities when making decisions and allocating resources to achieve the agency's strategic goals and objectives.

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 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.

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 2021-2022 incorporates several programmatic investments that resulted from the NCUA's enterprise risk management reviews, such as acquiring data loss prevention and other network security tools, strengthening analytical focus on emerging financial risks within the credit union system, and assessing process and technology improvements that could improve the NCUA's financial management and reporting functions.

III. Forecast and Enterprise Challenges

Economic Outlook

The economic environment is a key determinant of credit union performance. After several years of solid growth, the economy entered a recession at the start of 2020. The significant pull-back in spending that occurred as a result of COVID-19 and government efforts to slow its spread (including business closures and stay-at-home orders) led to an unprecedented drop in real gross domestic product (GDP) and a sharp increase in the unemployment rate from a five-decade low of 3.5 percent in February 2020, to a post-war high of 14.7 percent in April 2020. The Federal Government responded quickly, establishing loan programs for affected businesses and providing financial relief to households as well as enhanced benefit payments to unemployed workers. Federal Reserve policymakers cut short-term interest rates, increased the Federal Reserve's asset holdings, and established a number of lending programs to support financial conditions and the flow of credit to households, businesses, and state and local governments. Interest rates across the maturity spectrum fell to historically low levels.

Despite the severity of the downturn, credit unions in the aggregate turned in a relatively solid performance in the first half of 2020. Federally-insured credit unions added 4.0 million members over the year, boosting credit union membership to 122.3 million in the second quarter of 2020. Credit union assets rose by 15.1 percent to $1.75 trillion. Total loans outstanding at federally insured credit unions increased 6.6 percent to $1.14 trillion, and the system-wide delinquency rate declined 5 basis points to 58 basis points. Credit union shares and deposits increased by 16.5 percent over the year to $1.49 trillion in the second quarter of 2020, reflecting the boost to income from CARES Act payments to individuals and the sharp, economy-wide increase in personal saving.

The credit union system's net worth increased by 6.8 percent over the year to $182.9 billion in the second quarter of 2020. The jump in assets led to a drop in the credit union system's composite net worth ratio but, at 10.46 percent, the credit union system remained well-capitalized. The overall liquidity position of credit unions improved. Cash and short-term investments as a percentage of assets rose from 13 percent in the second quarter of 2019 to 18 percent in the second quarter of 2020, reflecting a 55 percent increase in cash and short-term investments.

By late spring, economic conditions had started to improve. Employment began to rise again in May and by September the unemployment rate had fallen to 7.9 percent. A consensus of forecasters [11] expects the recovery in labor markets and the broader economy to continue. Real GDP is projected to grow 3.9 percent in 2021, following an anticipated 4.0 percent drop in 2020. However, given the depth of the recession—which is on track to be the most severe downturn since the Great Depression—forecasters do not expect the economy to return to its pre-recession, late 2019 peak before the end of 2021. Forecasters expect the labor market recovery will take longer. Although employment is expected to rise and the unemployment rate will continue to decline, the unemployment rate is not forecast to return to pre-recession levels during the 2021-2022 budget window. The unemployment rate is projected to average 6.3% in the fourth quarter of 2021 and 5.5% at the end of 2022.

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In light of these expectations, Federal Reserve policymakers anticipate that it could be appropriate to hold the federal funds target rate in its current range of 0 to 0.25 percent until at least 2023.[12] Analysts expect other short-term interest rates, which largely determine the interest payments credit unions make, will remain near their current low levels through 2021 and move modestly higher in 2022. Longer-term rates, which largely determine the interest payments credit unions receive, are expected to edge higher later this year and continue to rise as economic conditions improve.

Even if the economy continues to expand as expected, the recent downturn will likely affect credit union performance through the end of the budget period. For example, a sustained, high level of unemployment could reduce loan demand, particularly for non-mortgage consumer loans, and affect credit quality. System-wide delinquency rates, which remained low through the second quarter, could begin to rise as the forbearance programs put in place during the spring come to an end. Credit union shares could remain elevated as consumers eschew riskier investments and opt to keep their funds in insured credit union deposits. A prolonged period of low interest rates also poses risks, particularly to credit unions that rely primarily on investment income for funding their operations.

While the recovery in economic activity and labor markets is widely expected to continue, there is a high risk of a worse-than-expected outcome. Much will depend on the path of the coronavirus in the months ahead. If COVID-19 cases rise to levels that necessitate another wave of temporary business closures and other measures that hinder economic activity, the recovery could falter, leading to more job losses and higher unemployment. Weaker-than-expected economic conditions or another downturn would keep interest rates low or cause them to decline, particularly at the long end of the yield curve, and pose more significant challenges for the credit union system. The NCUA, like credit unions, 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 and trends 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 dependency on technology is making the credit union system vulnerable to emerging cyber-enabled risks and threats. The prevalence of social engineering, malware/ransomware, distributed denial of service (DDOS) attacks, and other forms of cyber-attacks are creating challenges at credit unions of all sizes, and will require ongoing measures for rapid detection, protection, response and recovery. These trends are likely to continue, and even accelerate, over the foreseeable future.

Lending trends: Increasing concentrations in select loan types and the introduction of 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 Start Printed Page 74104Apple Pay and peer-to-peer lending, 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 2020 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. If current consolidation trends persist, there will be fewer credit unions in operation in future years and those that remain will be considerably larger and more complex. As of June 30, 2020, there were 627 federally insured credit unions with assets of at least $500 million, 34 percent more than just five years earlier. These 627 credit unions accounted for 76 percent of credit union members and 81 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.

IV. Key Themes of the 2021-2022 Budget


The budget supports the priorities and goals outlined in the agency's strategic plan and its annual performance plan. The resources and initiatives proposed in the budget support the NCUA's mission to maintain a safe and sound credit union system.

The COVID-19 pandemic, which onset early in 2020, remains a dominant consideration for the 2021-2022 agency priorities and its budget. The spread of COVID-19 has presented a multitude of challenges to the credit union industry and the NCUA, from the economic downturn and its impacts on individuals, business and institutions, to legislation such as the CARES act, to how the NCUA operates, to new cybersecurity concerns. The impacts of COVID-19 are most readily apparent in the 2021-22 budget due to the shift to remote/off-site supervision and work, which reduces travel expenses but also increases certain other expenses such as information technology.

The 2021-2022 budget includes funding for the NCUA to increase permanent staffing in critical areas necessary to operate as an effective federal financial regulator capable of addressing emerging issues. Importantly, the agency has made efforts through 2020 to fill examination-related positions, so that NCUA is best prepared to address the economic impacts from the ongoing COVID-19 situation. 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.

The 2021-2022 budget also invests in a number of agency priorities, including: The Advancing Communities through Credit, Education, Stability, and Support, or ACCESS, initiative focused on financial inclusion; increased use of off-site examinations work and data analytics through the Virtual Examination project; deployment of the MERIT system to all examiners; ongoing implementation of examination priorities updated in response to the COVID-19 pandemic; regulatory reform initiatives; and efforts to implement organizational efficiencies. The NCUA expects these efforts will result in a more effective organization.

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.

Financial Inclusion

At its heart, financial inclusion means expanding access to safe and affordable financial services for unbanked and underserved people and communities as well as broadening employment and business opportunities. The financial services industry—of which credit unions are an important part—plays a key role in helping families achieve financial freedom by building generational wealth; helping entrepreneurs to get their small businesses off the ground; and helping to create jobs and strengthen communities. The NCUA has a role to play in making sure that credit unions can support overlooked or underserved areas.

The NCUA recently announced its Advancing Communities through Credit, Education, Stability, and Support, or ACCESS, initiative, which will bring together agency leaders to develop policies and programs that support financial inclusion within the NCUA and more broadly throughout the credit union system.[13] The NCUA has dedicated resources from across the agency offices to ensure an inclusive and open-minded approach to refreshing and modernizing regulations, policies, and processes.

Addressing the various aspects of inclusion, the agency will look at the unique role credit unions can fill by providing access to unbanked and underserved individuals and communities, how credit unions can remain competitive within the financial services industry, and what steps can be taken to modernize the rules and processes for chartering new credit unions to provide consumers with services that meet their needs.

Virtual Examination Project

In 2017, the NCUA Board approved the Virtual Examination project and Start Printed Page 74105provided funding to research methods to conduct offsite as many aspects of the examination and supervision processes as possible. The Virtual Examination project team is researching ways to harness new and emerging data, advancements in analytical techniques, innovative technology, and improvements in supervisory approaches. Additionally, the COVID-19 pandemic necessitated a switch to an offsite examination posture, and the project team plans to build upon its work to date by integrating lessons learned during the pandemic in planning for enhanced offsite procedures.

By identifying and adopting alternative methods to remotely analyze the financial and operational condition of a credit union, while maintaining or improving 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. To be successful, examination staff will likely need to analyze more information about the credit union being examined and to communicate more frequently with management at the credit union. However, by conducting this analytic work offsite, the NCUA expects to have less impact on credit unions' day-to-day operations.

The NCUA believes that effective Virtual Examinations should lead to greater use of standardized interaction protocols, advanced analytical capabilities, and better-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.

The virtual examination team will deliver to the NCUA Board by the end of 2020 an initial report discussing alternative methods identified to remotely analyze aspects of the financial and operational condition of a credit union.

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:

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:

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The NCUA 2021-2022 budget includes funding to complete the roll-out of the first Examination and Supervision Solution project as well as to initiate the first project under the Data Collection and Sharing Solution sub program.

Examination and Supervision Solution

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:

○ Better information security across the organization.

○ Technical platform and foundation for new applications.

○ AIRES replacement (Examination and Supervision Solution), including financial analytics.

○ Central user interface for stakeholders to interact with the NCUA.

○ 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 new examination solution, which is named the Modern Examination and Risk Identification Tool (MERIT), was released as a pilot to the Office of National Examinations and Supervision (ONES) and the State Supervisory Authorities (SSA) in North Carolina and Washington in September 2019. The ESS program capabilities were further developed and were on schedule to be released to all users in the summer of 2020. However, the training rollout was delayed because of the coronavirus pandemic. Instead, the agency deployed the second release to current pilot users in July 2020 and began an extended pilot in September 2020 for additional users from the NCUA's three Regional offices, the Wisconsin SSA, select corporate credit unions, and natural person credit unions of various asset sizes. The NCUA now plans to conduct training for its examiner workforce and other users in 2021, with deployment to all remaining system users in the third quarter of 2021.

Enhancing NCUA's analytic capabilities is an important objective of the ESM program. As the MERIT development progressed, the agency identified an opportunity to incorporate a robust business intelligence solution Start Printed Page 74107into the MERIT deployment. Though not originally included as part of the initial MERIT project plan, this addition advances the agency's analytic capabilities and 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:

○ Better controlled access to examination data across the organization.

○ Ability to request and submit items for the examination in an organized manner that is easily accessible to members of an exam team.

○ Collaboration and real-time information for examiners, team members, and supervisors, including state supervisory authorities on joint exams.

○ Opportunities for credit union users to manage examination findings and view completed examination reports.

○ Business process improvements to achieve exam efficiencies, including less data redundancy and relational support between scope tasks, questionnaires, and findings.

From 2015 to 2020, the NCUA has spent approximately $40.2 million on the ESM program, which includes the costs for ESS and MERIT. This total includes spending on program planning, a modernized and more secure IT infrastructure, the MERIT central user interface, and multiple releases of MERIT and associated examination systems.

Through September 2020, the NCUA accomplished the following:

○ Established the ESM technical program infrastructure platform, including enhanced IT security.

○ Developed the central user interface known as NCUA Connect, achieving a secure, single entry point into NCUA applications.

○ Deployed the new MERIT examination tool to pilot users to support examination and supervision activities.

○ Deployed the Admin Portal which provides confirmed, delegated credit union and SSA administrative users the ability to add and manage user access to NCUA Connect for their organization.

○ Deployed the Data Exchange Application to ingest credit union member loan and share data requested during the examination and supervision process.

○ Developed financial analytics and new loan and share analytics with dashboards and visualizations designed to assist the examiner in identifying risk.

The NCUA's 2021 budget includes $14.6 million for MERIT, split between the operating, capital and SIF administrative expenses budgets. Of this total, $14.3 million in the operating and capital budgets will support technical and system platform upgrades, surge support for functionality enhancements prior to the broad user rollout, and ongoing operations and maintenance enhancements, fixes, and technological upgrades for the deployed system. An additional $0.3 million for MERIT is in the SIF administrative expenses budget, reflecting the cost of making MERIT available for those state supervisory agencies that use it.

The project is on schedule and met its 2019 performance target for deployment to and use by ONES and State regulators in Washington and North Carolina to carry out examinations and supervision contacts for all relevant federal credit unions with assets greater than $10 billion. Due to the economic, travel, and social disruptions caused by the coronavirus pandemic, the NCUA has delayed the MERIT training rollout for all NCUA examiners originally planned for the third quarter of 2020. The MERIT project's performance goal for 2021 is:

Finalize deployment and training of NCUA and SSA users on MERIT and associated examination systems to begin the transition from AIRES to MERIT by December 31, 2021.

Data Collection and Sharing Solution

With the Examination and Supervision Solution project transitioning to an operations and maintenance state in 2021, the NCUA will next prioritize work on the Data Collection and Sharing (DCS) Solution initiative. The NCUA vision of the DCS project is to replace legacy systems and to streamline workflow processes. Activities to date have included the development and validation of high-level requirements with all NCUA stakeholders.

During the next phase of DCS development, the NCUA will refine the validated requirements for use in an analysis of alternatives (AoA) study. The AoA study will provide a roadmap for acquiring and implementing a solution or set of solutions. The AoA will recommend the best approach for a phased rollout strategy needed to implement DCS capabilities and the replacement of legacy systems. This analysis will also be used to support DCS acquisition planning efforts.

Supervisory Priorities and COVID-19 Response

In July 2020,[14] the NCUA updated its annual supervisory priorities to address economic conditions that had emerged as a result of the COVID-19 pandemic, as well as various statutory and regulatory changes that occurred. Within these revised priorities, the NCUA is focusing its examination activities on areas that pose elevated risk to the credit union industry and the National Credit Union Share Insurance Fund. Additional information about the NCUA's response to the pandemic is available on the agency's COVID-19 web page.[15]

Coronavirus Aid, Relief and Economic Security Act

President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) into law on March 27, 2020. The NCUA has added the CARES Act as a supervisory priority to reflect the importance of the provisions outlined in the Act. NCUA examiners will review credit unions' good faith efforts to comply with the CARES Act and will take appropriate action, when necessary, to ensure credit unions meet their obligations under the new law.

Multiple CARES Act provisions directly affect credit unions, including those that:

  • Provide greater access to liquidity, and improve the general financial stability of member credit unions through changes to the Central Liquidity Facility;
  • Suspend the requirement to categorize certain loan modifications related to the COVID-19 pandemic as troubled debt restructurings (TDRs);
  • Authorize the Small Business Administration to create the Paycheck Protection Program, a loan guarantee program to assist eligible businesses;
  • Change requirements for reporting loan modifications related to the COVID-19 pandemic to the credit reporting agencies;
  • Prohibit foreclosures on all single family, federally backed mortgage loans between March 18, 2020 and May 17, 2020. Fannie Mae, Freddie Mac, FHA, VA and USDA subsequently extended the prohibition to June 30, 2020. The foreclosure moratorium expiration for mortgages purchased by Fannie Mae and Freddie Mac currently extends until August 31, 2020;Start Printed Page 74108
  • Provide up to a 360-day forbearance for borrowers with a single-family, federally backed mortgage loan that experience a financial hardship related to the COVID-19 pandemic; and
  • Provide up to a 90-day forbearance for borrowers with a multifamily, federally backed mortgage loan that experience a financial hardship related to the COVID-19 pandemic.

Bank Secrecy Act Compliance/Anti-Money Laundering

The NCUA continues to budget resources to comply with the statutory mandate from Congress to enforce 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 as needed by conducting BSA examinations in federally insured, state-chartered credit unions.

The NCUA will continue communicating with credit unions, engaging with law enforcement, and collaborating with the other banking regulators on several initiatives associated with this supervisory priority, including:

  • Publishing additional updates to the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual;
  • Establishing interagency work-streams to define AML compliance program effectiveness;
  • Updating the interagency statement on enforcement of BSA/AML requirements;
  • Publishing guidance regarding politically exposed persons; and
  • Offering clarification and suggestions to improve Suspicious Activity Report (SAR) and Currency Transaction Report (CTR) filings.

The NCUA will also continue focusing on proper filing of SARs and CTRs, as well as reviews of bi-weekly 314(a) information requests from FinCEN. Law enforcement, intelligence, and counterterrorism officials depend on prompt reporting of any 314(a) matches and the vital information provided through timely and informative SARs and CTRs. Officials use this information regularly to identify and thwart illicit and terrorist financing activities, and to prosecute and convict guilty parties. Credit union efforts in this area help fight crime and keep America safe.

Consumer Financial Protection

The COVID-19 pandemic continues to affect consumers and could result in increased consumer compliance risk in certain areas; consumer financial protection, therefore, remains an NCUA supervisory priority. The NCUA will continue to examine for compliance with applicable consumer financial protection regulations during every examination as established in agency's 2020 Letters to Credit Unions about 2020 Supervisory Priorities,[16] which included:

  • Electronic Fund Transfer Act (Regulation E). Examiners will evaluate electronic fund transfer policies and procedures and review initial account disclosures as well as Regulation E's error resolution procedures for when consumers assert an error.
  • Fair Credit Reporting Act. Examiners will review credit reporting policies and procedures and the accuracy of reporting to credit bureaus, particularly the date of first delinquency.
  • Gramm-Leach-Bliley (Privacy Act). Examiners will continue to evaluate credit union protection of non-public personal information about consumers.
  • Small dollar lending (including payday alternative loans). Examiners will test for compliance with the NCUA Payday Alternative Lending rules and interest rate cap. Examiners will determine whether a credit union's short-term, small-dollar loan programs that are not NCUA Payday Alternative Lending comply with regulatory requirements.
  • Truth in Lending Act (Regulation Z). Examiners will evaluate credit union practices concerning annual percentage rates and late charges. This includes evaluating whether finance charges and annual percentage rates are accurately disclosed and late fees are levied appropriately.
  • Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The MLA and SCRA have been supervisory priorities for the NCUA since 2017. For credit unions that have not received a recent review, examiners will review credit union compliance with the MLA and SCRA.

The NCUA's consumer compliance reviews will now also emphasize review of the following regulatory changes enacted since the start of the COVID-19 pandemic:

  • Electronic Fund Transfer Act (Regulation E). Examiners will evaluate credit union practices concerning the Regulation E, Remittance Transfer Rule changes to the safe harbor threshold and disclosures of rates and costs associated with remittance transfers.
  • Truth in Lending Act (Regulation Z). Examiners will also evaluate credit union practices concerning the changes made in response to the COVID-19 pandemic to the Truth in Lending-Real Estate Settlement Procedures Act (TRID) rule and Regulation Z Rescission rules that permit members to waive the waiting periods under both rules.

Credit Risk Management and Allowance for Loan and Lease Losses

The NCUA's January 2020 Letter to Credit Unions, 20-CU-01, 2020 Supervisory Priorities,[17] prioritized review of a credit union's loan underwriting standards and procedures, and exposure to elevated concentration risks as outlined in NCUA Letter to Credit Unions, 10-CU-03, Concentration Risk.[18] In response to the economic impact of the COVID-19 pandemic and subsequent regulatory and statutory changes, the NCUA is shifting its emphasis to reviewing actions taken by credit unions to assist borrowers facing financial hardship. The NCUA will also review the adequacy of loan and lease losses (ALLL) accounts to address the pro-cyclical effects of economic downturns.

NCUA examiners will review credit union policies and the use of loan workout strategies, risk management practices, and new strategies implemented to assist borrowers impacted by the COVID-19 pandemic, including new programs authorized through the CARES Act. In particular, examiners will evaluate a credit union's controls, reporting, and tracking of these programs. Examiners will also ensure credit unions have evaluated and are effectively managing the impact of COVID-19 on their credit risk, capital position, and overall financial stability.

In addition, credit unions' risk-monitoring practices should be commensurate with the level of complexity and nature of their lending activities, provide for safe and sound lending practices, and ensure compliance with consumer protections and regulatory reporting requirements.

Further, due to the recent developments in economic conditions and the Financial Accounting Standards Board's (FASB) decision to delay its Start Printed Page 74109requirement to comply with the current expected credit losses (CECL) standard until January 2023, NCUA examiners will not be assessing credit unions' efforts to transition to the CECL standard until further notice. The NCUA encourages credit unions to continue to assess their needs and evaluate methodologies for the eventual implementation of the CECL standard.

Credit unions must still maintain an ALLL account in accordance with FASB Accounting Standards Codification (ASC) Subtopic 450-20 (loss contingencies) and/or ASC 310-10 (loan impairment). NCUA examiners will be evaluating the adequacy of credit unions' ALLL accounts by reviewing:

  • ALLL policies and procedures;
  • Documentation of an ALLL reserving methodology, including modeling assumptions;
  • Adherence to generally accepted accounting principles; and
  • Independent reviews of credit union reserving methodology and documentation practices by the Supervisory Committee or by an internal or external auditor.

Information Systems and Assurance (Cybersecurity)

Emerging cyber-attacks continue to pose a persistent threat to the financial sector, including credit unions, financial regulators, and the broader financial system. Advances in financial technology, an increased remote workforce, and increased use of mobile technology and 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.

The NCUA has transitioned its priority from performing Automated Cybersecurity Examination Tool (ACET) cybersecurity maturity assessments, to evaluating critical security controls. The NCUA is piloting an Information Technology Risk Examination solution for Credit Unions (InTREx-CU). InTREx-CU harmonizes the IT and Cybersecurity examination procedures shared by the Federal Deposit Insurance Corporation, the Federal Reserve System, and some state financial regulators to ensure consistent approaches are applied to community financial institutions. The InTREx-CU will be deployed to identify gaps in security safeguards, allowing examiners and credit unions to identify and remediate potential high-risk areas through the identification of critical information security program deficiencies as represented by an array of critical security controls and practices.

The NCUA has also published information for credit unions on the increased cybersecurity threats resulting from the COVID-19 pandemic and additional resources for protecting their members. For more information, visit the NCUA's Cybersecurity Resources [19] website and the Cybersecurity, Frauds, and Scams section on the NCUA's Frequently Asked Questions for Federally Insured Credit Unions.[20]

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 from compromise, including the work done as part of ESM.

LIBOR Transition Planning

In a March 23, 2020, statement, the United Kingdom's Financial Conduct Authority maintained its central assumption that firms cannot rely on LIBOR being published after the end of 2021. This should remain the target date for all credit unions to meet.

Credit unions offer, own, and are counterparties to LIBOR-based products and contracts, including loans, investments, derivatives, deposits, and borrowings. These may be subject to increased legal, financial, and operational risks once the reference rate is no longer available. On July 1, 2020, the FFIEC issued a Joint Statement on Managing the LIBOR Transition [21] that highlights the risks that will result from the transition away from LIBOR and encourages supervised institutions to continue their efforts to transition to alternative reference rates.

Planning for the LIBOR transition is an important operational and safety and soundness consideration for credit unions with material exposures. Examiners will continue assessing credit unions' exposure and planning related to a transition away from LIBOR. For credit unions with exposure to LIBOR, examiners will continue to conduct reviews using the NCUA's LIBOR Assessment Workbook.[22]

Liquidity Risk

The NCUA's January 2020 Letter to Credit Unions, 20-CU-01, 2020 Supervisory Priorities,[23] included assessments of liquidity risk management as a supervisory priority, noting that on average, credit union balance sheets generally exhibit lower levels of on-balance sheet liquidity due to strong loan growth. At that time, the NCUA was focusing liquidity reviews to address the following, in credit unions with low-levels of on-balance sheet liquidity:

  • The potential effects of changing interest rates on the market value of assets and borrowing capacity;
  • Scenario analysis for liquidity risk modeling, including possible member share migrations (for example, shifts from core deposits into more rate-sensitive accounts). Also, scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds); and
  • The appropriateness of contingency funding plans to address any potential liquidity shortfalls.

The economic impact of the COVID-19 pandemic may result in additional stress on credit union balance sheets, potentially requiring robust liquidity management over the course of 2020 and into 2021. As a result, examiners will continue to review liquidity risk management and planning in all credit unions, and will place emphasis on:

  • The effects of loan payment forbearance, loan delinquencies, projected credit losses and loan modifications on liquidity and cash flow forecasting;
  • Scenario analysis for changes in cash flow projections for an appropriate range of relevant factors (for example, changing prepayment speeds);
  • Scenario analysis for liquidity risk modeling, including changes in share compositions and volumes;
  • The potential effects of low interest rates and the decline of credit quality on the market value of assets, funding costs and borrowing capacity; and
  • The adequacy of contingency funding plans to address any potential liquidity shortfalls.

Impact of COVID-19 on NCUA Operations

Since March 16, 2020, the NCUA has been operating in a remote work posture in response to the COVID-19 pandemic. Start Printed Page 74110The NCUA has drafted a resumption plan to enable a safe and orderly return to onsite work.

The draft NCUA resumption plan is currently designed as a three-phased approach to restoring those on-site activities that have been suspended during the pandemic. Since the NCUA has been successful in maintaining all essential functions and activities under its remote posture, any decision to move to a new phase and resume some or all suspended activity will be made with caution, and supported by metrics and advice from public health professionals.

The NCUA anticipates that as specific phases of the resumption plan are activated, these activations will take place on a county or local level, specific to the on-the-ground conditions reported by government authorities. As such, different portions of the NCUA workforce may operate under different resumption phases based upon local health conditions.

The NCUA has also implemented enhanced cleaning procedures at all of the NCUA's facilities to ensure all NCUA owned or leased worksites are operated in a manner consistent with health guidance from the Centers for Disease Control.

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.

The NCUA's Regulatory Reform Task Force published its final report in December 2018. Since that time, the NCUA established an annual performance indicator to measure the regulatory reviews it completes on a yearly basis. The NCUA's current performance target for regulatory review is to complete review of one third of the agency's regulations on an annual basis.

V. Operating Budget


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.


The staffing levels proposed for 2021 reflect the resource requirements that support the NCUA's continued efforts to modernize the examination process and enhance the efficiency and effectiveness of the supervisory process.

In March 2020, the NCUA Board approved one position to support the agency's new Office of Ethics Counsel to support agency compliance with relevant ethics laws and regulations, to promote accountability and ethical conduct, and ensure the success of the NCUA's ethics programs. The full cost of this new position is included in the 2021 budget.

The 2021 budget supports a total agency staffing level of 1,191 full-time equivalents (FTE), of which 1,186 are funded in the Operating Budget. This is a net increase of five FTE, or 0.4 percent, compared to the Board-approved level for 2020. The new 2021 FTE are described in greater detail below.[24]

Start Printed Page 74111

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 2021—+5 FTE

The staff draft budget includes funding for an increase or adjustment to NCUA staffing that equates to five FTEs. This funding covers the following 3 specific positions:

Consumer Compliance Program Officer—+1 FTE

This new position, within the Office of Consumer Financial Protection will develop tiered examination procedures up to and including FFIEC-approved examination procedures, lead consumer financial protection compliance reviews conducted at credit unions with higher compliance risk profiles, and assist in developing training materials for examiners and credit unions.

Financial Literacy Specialist—+1 FTE

This new position, within the Office of Consumer Financial Protection, will support and encourage financial inclusion throughout the credit union industry with informative financial literacy outreach activities. The NCUA currently employs one Program Officer in the Office of Consumer Financial Protection to implement the agency's Financial Literacy and Outreach programs. The new position will support this Program Officer and help collaborate and contribute to the National Strategy on Financial Literacy, and the U.S. Department of the Treasury's Financial Literacy and Education Commission (FLEC).

Senior Credit Specialist—+1 FTE

This new position, within the Office of Examination and Insurance, will provide enhanced risk mitigation and program support for the credit risk area. Credit risk, and credit unions' lending functions in particular, represents the largest portion of the credit union system's business and continues to grow increasingly diverse and complex. The NCUA currently has several specialists who analyze the growing complexity of the commercial, residential mortgage, Start Printed Page 74112and consumer lending markets. This additional position will ensure that the Office of Examination and Insurance identifies the increased risks and program needs of the credit union system by focusing on emergent credit risks, developing guidance and program policies needed to effectively implement risk management, and executing increasingly complex analytic portfolios.

The staff draft budget and the related FTE authorization also includes two additional FTEs to account for the potential need for additional support (additional positions and/or changes to position grades) for the Central Liquidity Facility, the Board Secretary function, and financial innovation. Options are still being developed by the NCUA staff related to the resource needs and associated priorities of these functions for the Board to consider.

Additionally, within the overall existing 2020 staffing level of 1,186 FTE, the NCUA is adjusting its staffing plan to accomplish the following in 2021:

  • Office of National Examinations and Supervision (ONES): To support the additional large consumer credit unions that will come under ONES supervision: One national supervision technician, one national lending specialist, one national supervision analyst, one financial data analyst, and one national information systems officer.
  • Office of the Chief Information Officer: One data cloud infrastructure specialist and one network specialist to support the increasing demands and complexity of the agency's information technology systems and networks.
  • Office of Examinations and Insurance: One additional risk officer to support anticipated increase in risk management actions.

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 overview of the Operating Budget.

Actual expenses for the Operating Fund are reported monthly in the Operating Fund Financial Highlights posted on the NCUA website. Share Insurance Fund Financial Reports and Statements, which are also posted to the NCUA website, detail reimbursements Start Printed Page 74113made to the Operating Fund for NCUA expenses.

Salaries and Benefits

The budget includes $240.9 million for employee salaries and benefits in 2021. This change is a $9.6 million, or 4.1 percent, increase from the 2020 Board-approved budget.

Salaries and benefits costs make up 76.3 percent of the total budget. There are two primary drivers of increased costs in 2021 for the Salaries and Benefits category:

Merit and locality pay increases for the NCUA's employees are paid in accordance with the agency's current Collective Bargaining Agreement (CBA) and its merit-based pay system. Salaries are estimated to increase 3.4 percent in aggregate compared to 2020.

Contributions for employee retirement to the Federal Employee Retirement System (FERS), which are unilaterally set by the Office of Personnel Management, cannot be negotiated or changed by the NCUA. Driven largely by the mandatory FERS rate adjustment, total NCUA benefits costs increase 6.0 percent in 2021 compared to 2020.

These changes are described in more detail below.

In 2021, the NCUA's compensation levels will continue to “maintain comparability with other federal bank regulatory agencies,” as required by the Federal Credit Union Act.[25] The Salaries and Benefits category of the budget includes all employee pay raises for 2021, such as merit and locality increases, and those for promotions, reassignments, and other changes, as described below.

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 1.3 percent to 1.7 percent, depending on the geographic location.

The first-year cost of the new positions added in 2021 is estimated to be $1.0 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 2021. All federal agencies are expected to contribute 17.3 percent of FERS employees' salaries to the OPM retirement system, an increase of 130 basis points compared to the 2020 level. This mandatary contribution is prescribed in the OPM Benefits Administration Letter dated May 2020. The estimated impact on the NCUA budget is an increase of approximately $2.3 million in mandatory payments to OPM, or approximately 0.7 percentage points of overall budgetary growth, compared to 2020 levels.

The average health insurance costs for the Federal Employees Health Benefits (FEHBP) program for 2021 are consistent with historical actual expenses and the OPM estimate that the government share of FEHBP premiums will increase 3.0 percent in 2021. 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.

In past years, the NCUA adjusted its budget downward by an expected vacancy rate for positions that are not filled during the year because of a time lag between employee separations and hiring new staff. Since 2018, the NCUA has lowered its vacancy rate by more than 50 percent, and continues to closely monitor the hiring and attrition trends within its workforce. In anticipation of the need for a full complement of staff in 2021, and because of ongoing acceleration in the agency's hiring cycle time, the proposed 2021 budget does not include a vacancy adjustment.

The 2022 budget request for salaries and benefits is estimated at $249.4 million, a $8.5 million increase from the 2021 level, which accounts for merit and locality increases consistent with the CBA (approximately $5.6 million), the full-year cost impact of new positions (approximately $1.0 million), and associated increases in benefits for all employees (approximately $1.9 million). The assumptions used for compensation-related adjustments are based on the CBA currently in force.


The 2021 budget includes $13.5 million for Travel. This change is a 50.7 percent decrease to the 2020 Board-approved budget.

There are two reasons for the significant reduction in the 2021 travel budget. First, the NCUA expects that pandemic-related travel restrictions will continue through the first quarter of 2021, and adjusted the budget downward as a result. Second, and subject to approval by the NCUA Board, the agency will use approximately $6 million of unspent 2020 travel funds to offset the 2021 travel budget. Historically, the travel budget comprises approximately nine percent of the overall NCUA budget, however the share of travel in the 2021 budget will be only 4.3 percent.

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 had planned to conduct a series of training events to support the nationwide roll-out of MERIT; however, these training events were postponed to 2021 due to pandemic-related travel restrictions. Amounts budgeted for MERIT training in 2020 will be used to pay for the events' costs in 2021. The NCUA roll-out will be a labor intensive effort requiring travel for many of the NCUA's staff, and will provide hands-on training for this new system, which Start Printed Page 74114will be officially deployed in the fourth quarter of 2021.

During the COVID-19 pandemic, the agency and its employees successfully transitioned to an offsite examination posture, developing new procedures and processes to continue examination and supervisory work. In 2021, the NCUA will continue evaluating how it can conduct examinations remotely and offsite, which should result in future cost avoidance for travel. In addition, agency personnel will continue to utilize more virtual training options, where appropriate, to help minimize travel expenses.

The 2022 budget request for travel is estimated to be $24.3 million, or an 80.4 percent increase over the 2021 level. This increase results from returning to a full year of scheduled travel and from using up the unspent 2020 travel balances in 2021.

Rent, Communications, and Utilities

The 2021 budget includes $7.2 million for Rent, Communications, and Utilities. This is a $1.0 million, decrease, or 12.6 percent less than the 2020 Board-approved budget. The Rent, Communications, and Utilities budget funds the agency's telecommunications and information technology network expenses, and facility rental costs.

The NCUA used approximately $3.7 million of unspent 2020 travel funds to pay the balance of a loan taken from the Share Insurance Fund for construction of the NCUA's Central Office building. This reduces the Rent, Communications, and Utilities budget by approximately $1.3 million per year through 2023.

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 2021 budget includes costs to support the NCUA's bandwidth at the NCUA disaster recovery sites, procurement of additional circuits and express routes for Microsoft365 implementation, and transition to the GSA-managed Enterprise Infrastructure Solutions (EIS). EIS is the federal government's contract for enterprise telecommunications and networking solutions. By transitioning to EIS, the NCUA will benefit from the comprehensive solution EIS provides to address all aspects of federal agency IT telecommunications, and infrastructure requirements.

Office building leases, meeting rentals, office utilities, and postage expenses are also included in this budget category. Facility costs are approximately $700,000 in 2021 for office space rental for the Western Region, insurance, and ancillary costs for the NCUA Central Office. The annual utility costs for the Central Office and regional offices are estimated at $383,000.

The 2021 budget also includes $627,000 for event rental costs for examiner meetings and other training events. This is a decrease of approximately $500,000 compared to 2020 since the costs of MERIT-related training were already incurred in 2020 but the classes were rescheduled to 2021 because of the COVID-19 pandemic.

The 2022 budget request for the Rent, Communications, and Utilities category is estimated to be $8.4 million, an increase of $1.2 million over the 2021 level, which includes an additional $740,000 for telecommunications transitions and $500,000 for space rentals for a national conference.

Administrative Expenses

The 2021 budget includes $6.2 million for Administrative Expenses. This is an increase of $552,000, or 9.8 percent, compared to the 2020 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.

As part of the FFIEC, the NCUA shares in costs for joint actions and services that affect the financial services industry. The FFIEC costs increased by almost $200,000 from 2020 to 2021.

The 2020 budget did not include funds for employee relocation but instead used approximately $1,000,000 of unspent balances from prior years to pay for 2020 employee relocation costs. The 2021 budget includes an increase of $750,000 for employee relocations compared to the 2020 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.

The 2022 budget request for Administrative Services is projected to be the same as the 2021 recommended level.

Contracted Services

The 2021 budget includes $47.8 million for Contracted Services. This is a $4.5 million, or 10.3 percent, increase compared to the 2020 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 supports the NCUA's robust supervision framework, and includes funding for tools used to identify and resolve 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 capital investments, such as the Examinations and Supervision Solution, or MERIT system. 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:

  • Information Technology Operations and Maintenance (48 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

  • Administrative Support and Other Services (13 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

  • Accounting, Procurement, Payroll and Human Resources Systems (10 percent of contracted services)

○ Accounting and procurement systems and supportStart Printed Page 74115

○ Human resources, payroll, and employee services

○ Equal employment opportunity and diversity programs

  • Building Operations, Maintenance, and Security (8 percent of contracted services)

○ Central office facility operations and maintenance

○ Building security and continuity programs

○ Personnel security and administrative programs

  • Information Technology Security (9 percent of contracted services)

○ Enhanced secure data storage and operations

○ Information security programs

○ Security system assessment services

  • Training (7 percent of contracted services)

○ Examiner staff, technical and specialized training and development

○ Senior executive and mission support staff professional development

  • Audit and Financial Management Support (4 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 2021 contracted services budget of $47.8 million.

Major programs within the contracted services category include:

  • 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 complete a variety of training classes to ensure their skills and industry knowledge are kept up to date, including in core areas such as capital markets, consumer compliance, and specialized lending. Major training deliverables for 2021 include the rescheduled MERIT training sessions discussed elsewhere in this document, classes offered by the Federal Financial Institutions Examination Council, updated examiner classes, and subject matter expert training sessions for the NCUA examiners. Contracted service providers, in partnership with the NCUA subject matter experts, will develop and design training classes for examiners and continue work on the triennial review of the NCUA's Subject Matter Examiner (SME) course curriculum. The NCUA plans to implement a new Talent Management System in 2021, and will simultaneously update some of the current online course content. Additionally, contracted service providers and central office staff will continue conducting organizational development, leadership and teambuilding training.
  • The NCUA's information security program supports ongoing efforts to strengthen the agency's cybersecurity and ensure its compliance with the Federal Information System Management Act.
  • 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 resource tasks and improves time and attendance functionality.
  • 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 Start Printed Page 74116and 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. The 2021 budget includes the first year of funding for that annual Operation and Maintenance costs for the MERIT system, which will replace the legacy AIRES examination system. Several other of the NCUA's core information technology systems and processes also require additional contract support in 2021, which result in increased budgets in the Contracted Services category, as described below.

Within the budget for the Office of Chief Information Officer (OCIO), an additional $3.8 million is required primarily for the operations and maintenance costs of capital projects, including the MERIT system.

Funding for the contract services that support the NCUA's website—approximately $1.5 million—has been moved from the Office of the Chief Information Officer to the Office of External Affairs and Communications in the 2021 budget. With the rollout of MERIT and new digital training courses for employees, website-related Americans with Disabilities Act compliance requests are expected to increase in 2021.

Within the Office of Examination and Insurance, contract reductions of $500,000 are associated with technical accounting and security consultant support purchased in 2020 but not required in 2021.

The 2021 contracted serviced budget includes $250,000 for the NCUA's ACCESS initiative, which will bring together agency leaders to develop policies and programs that support financial inclusion within the NCUA and more broadly throughout the credit union system. By building on our successes, ACCESS will expand existing efforts to address the financial services and financial literacy needs of underserved and diverse communities, as well as expand opportunities for employment.

The 2022 budget for Contracted Services is estimated to increase by $5.6 million, or 11.8 percent, compared to 2021, largely due to the operations and maintenance costs resulting from the delivery of capital projects funded in prior years.

VI. Capital Budget


Annually, the NCUA carries out 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, IT systems, and IT hardware to determine what requires repair, major renovation, or replacement. The staff then make recommendations for prioritized investments to the NCUA Board.

IT systems and hardware are another significant capital expenditure for modern organizations. The 2021 budget continues the NCUA's multi-year 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, systems to ensure 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.

Routine repairs and lifecycle-driven property renovations are also 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.

The NCUA's 2021 capital budget is $18.8 million. The capital budget funds the NCUA's long-term investments. The Information Technology Prioritization Council recommended $12.0 million for IT software development projects and $5.6 million in other IT investments for 2021. The NCUA facilities require $1.3 million in capital investments.

Detailed descriptions of all 2021 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 ($7.4 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 that will allow the NCUA's examiners and supervisors to be more efficient, consistent, and Start Printed Page 74117effective. In 2021, all NCUA examiners will be trained to use the new MERIT system, with full implementation expected by the end of the year. After the MERIT system is fully deployed to the examiner workforce, the NCUA expects to include the system's on-going operating and maintenance costs in the operating budget.

Enterprise Central Data Repository ($1.6 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 ($0.4 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.

NCUA Website Development ($0.1 Million)

The purpose of the website Development project is to serve the web-related needs of the internal NCUA stakeholders and the public. The project provides on-going improvements to the website, such as an improved user experience, and provides support for design, development, and maintenance of the agency's public websites: and

Performance Management System Replacement ($0.2 Million)

A replacement system is needed to enable employees to complete all phases of NCUA's performance management program. The system will standardize the workflows and management of employees' performance plans, facilitating employee performance plan issuance, plan acknowledgement, progress review acknowledgment, and the issuance of a final year-end evaluation for all NCUA employees.

Continuous Diagnostic Mitigation ($0.9 Million)

The objective of the Continuous Diagnostics and Mitigation (CDM) project is to enhance the overall security posture of NCUA with capabilities to monitor vulnerabilities and threats in near real-time. This is achieved by implementing capabilities and technical controls to identify what is on the network, who is on the network, what is happening on the network, and to protect data in use, transit, and at rest. This increased situational awareness will allow NCUA to prioritize actions to mitigate or accept cybersecurity risks based on the potential impact to the NCUA mission.

Microsoft Office M365 Implementation ($1.5 Million)

The goal of the M365 Implementation project is to empower the NCUA's employees by delivering the most advanced innovations in management, collaboration, enterprise security, and business analytics through cloud services. Once implemented, M365 will reduce security risks as well as reduce the cost and effort to maintain and manage software nearing the end of its service life.

Enterprise Laptop Lease ($0.8 Million)

The purpose of the Enterprise Laptop Lease project is to ensure the NCUA workforce has an efficient, mobile friendly, and secure computer that helps employees better perform their jobs at a reasonable cost. Because of the priority deployment of the MERIT system in 2021, the NCUA plans to purchase its current fleet of laptops at the end of the current lease in 2021. The NCUA now plans to replace its laptops in 2022.

Information Technology Infrastructure, Platform and Security Refresh ($3.9 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 infrastructure, 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.

Refresh VoIP Phone System ($1.0 Million)

The purpose of the Refresh Voice over internet Protocol (VoIP) Phone System project is to fully replace NCUA's telephone system (infrastructure, platform, and endpoints) to ensure voice communications capabilities in order to ensure that business continuity and operations are stable. NCUA VoIP voice components include Session Initiation Protocol (SIP), call control, external and internal call routing, local and long-distance call plans, international calling plans and VoIP desk/soft phone. In addition, NCUA plans to integrate the VoIP infrastructure with the M365 project to optimize the workforce's collaboration experience.

Central Office Heating, Ventilation, and Air Conditioning (HVAC) System Replacement ($0.5 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, 27 years old, at the end of its useful life, not working efficiently, and obsolete. The 2021 budget provides funding to complete the multi-year HVAC replacement project.

Austin, Texas Office Building Modernization ($0.8 Million)

In 2021, 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


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 other administrative costs, and represent the total estimated direct costs to the Share Insurance Fund.[26] The Share Insurance Fund Administrative budget funds five positions that were formerly part of the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund) budget.

The cost of the NGN program and the Corporate System Resolution Program, including costs associated with the Start Printed Page 74118administration 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 2021 Share Insurance Fund Administrative budget is estimated to be $8.1 million, $1.6 million, or 26 percent, more than 2020.

The 2021 budget increase is primarily driven by the addition of operations and maintenance costs for technology systems and data used by the NCUA to validate stress testing at large credit unions, and the addition of the costs of making MERIT, the new examination solution and replacement to AIRES, available to those state supervisory agencies that use it.

The 2022 requested budget supports similar workload and resources, but is projected to decrease by $218,000 or, or 2.7 percent, compared to the 2021 funding level because the one-time nature of the cost of providing the MERIT system to state supervisory authorities.

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 $1.5 million, which represents an increase of $30,000 compared to 2020. 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 18 percent of the total budget. The financial analysts on the NGN team have specialized technical expertise to manage the remaining $5 billion of legacy assets the NCUA will control in 2021. Personnel costs are estimated in a manner similar to the operating budget.


The estimated travel cost of $52,000 is less than one percent of the overall 2021 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 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 overall 2021 budget, are estimated to remain at $27,000, identical to the 2020 level, 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 31 percent of the overall 2021 budget, are estimated to be $2.5 million, a decrease of $0.2 million from the 2020 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 $0.9 million to 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 $1.0 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 $0.6 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 the NGNs are maturing, the NCUA requires 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 mono-line 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 $4.0 million in 2021, an increase of $1.8 million, or 82 percent, compared to the 2020 budget level.

The NCUA is required to validate annual stress testing conducted by certain large credit unions to help ensure these credit unions can remain financially sound through challenging economic cycles. Over a multi-year endeavor, the NCUA has developed and implemented its Assets and Liabilities Management (ALM) system, which in part allows the NCUA to build internal analytical capabilities and run supervisory stress testing analyses. The NCUA also uses the ALM system and associated data to conduct regular quantitative risk assessments. Development of the ALM system was funded from the NCUA capital budget in 2020 and prior years, but now that the system is in use, $1.4 million for operations and maintenance costs will be funded from the SIF budget in 2021 and future budgets.

The 2021 budget also includes $0.3 million that will be spent to make the MERIT examination and supervision system available to State Supervisory Authorities that oversee state-chartered credit unions. This is expected to be a one-time cost for specific technology development.

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VII. Financing the NCUA Programs


When formulating the annual budget, the NCUA is mindful that its operating funding comes directly from federal and state chartered credit unions. The agency strives to ensure that any use or allocation of these funds follows a thorough review that evaluates 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 and supervising federally insured credit unions. The NCUA Board adopts an Operating Budget, which includes the Capital Budget, in the fall of each year to fund the vast majority of the costs of operating the agency.[27] The Federal Credit Union Act authorizes two primary sources to fund the Operating Budget:

(1) Requisitions from the Share Insurance Fund “for such administrative and other expenses incurred in carrying out the purposes of Start Printed Page 74120[Title II of the Act] as [the Board] may determine to be proper”; [28] and

(2) “fees and assessments (including income earned on insurance deposits) levied on insured credit unions under [the Act].” [29]

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].”

Taken together, these 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.[30] 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.

The NCUA uses the OTR methodology to allocate agency expenses between these two primary funding sources. Specifically, 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 funded through collecting annual Operating Fees paid by federal credit unions.[31]

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.[32] Second, the NCUA may not fund its entire Operating Budget through charges to the Share Insurance Fund.[33] The NCUA has not imposed additional policy or regulatory limitations on its discretion for determining the OTR.

Overhead Transfer Rate (OTR)

The NCUA conducts a comprehensive workload analysis annually. This analysis 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. These estimates are informed by the overall parameters of the NCUA's examination program, as most recently updated by the Exam Flexibility Initiative approved by the Board.[34] The workload estimates are then refined by regional managers and submitted to the NCUA central office for the annual budget proposal. The OTR methodology accounts for the costs of the NCUA, not the costs of state regulators. Therefore, there are no calculations made for state examiner hours.

There have not been any major changes to the parameters of the examination program since the current OTR methodology went into effect.[35] The minor variations in the OTR since 2018 are the result of routine, small fluctuations in the variables that affect the OTR, including normal fluctuations in the workload budget from one calendar year to the next.

The NCUA Board approved the current methodology for calculating the OTR at its November 2017 open meeting.[36] In 2020, the Board published [37] in the Federal Register a request for comment regarding the OTR methodology, but did not propose any changes to the current methodology. 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.

The OTR formula uses 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.[38]

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.[39]

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.[40]

4. Time and costs related to the NCUA's role in administering federal share insurance and the Share Insurance Start Printed Page 74121Fund are allocated as 100 percent insurance related.[41]

These four principles are applied to the activities and costs of the agency to determine the portion of the agency's budget that is funded by the Share Insurance Fund. Based on the Board-approved methodology, the OTR for 2021 is one percentage point higher than 2020, and estimated to be 62.3 percent. Thus, 62.3 percent of the total Operating Budget is estimated to be paid out of the Share Insurance Fund. The remaining 37.7 percent of the Operating Budget is estimated be paid for by Operating Fees collected from federal credit unions. The explicit and implicit distribution of total Operating Budget costs for federal credit unions and federally insured, state-chartered credit unions is outlined in the table below:

Concurrent with its request for comment regarding the OTR methodology, the Board also published proposed changes to the methodology used to compute the NCUA's Operating Fee [42] . Included as part of the proposed changes, the Board proposed applying the OTR to the NCUA's Capital Budget in the same manner as it applies the OTR to the Operating Budget. The Board is reviewing public comments received about this proposal before making a final decision about the applicability of the OTR to the Capital Budget.

By applying the four principles in a manner that incorporates all Operating and Capital Budget activities, the OTR for 2021 is estimated to be 62.3 percent, the same result as applying the four principles to the Operating Budget alone.

To determine the 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 expenditures and the product of that calculation is transferred from the Share Insurance Fund to the Operating Fund. This monthly reconciliation to actual operating expenditures captures the variance between actual and budgeted amounts, so 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 chartered credit unions.

The use of insured shares in calculating the OTR was eliminated from the OTR methodology adopted by the Board in 2017. However, insured shares are used for informational purposes to reflect the fundamental economics with respect to how the implicit costs of the OTR are borne by federal and state-chartered credit unions. Use of insured shares is consistent with the mutual nature of the Share Insurance Fund and part of the statutory scheme related to Share Insurance Fund deposits, premiums and dividends.[43] The number, size, and health of federal and state credit unions affects the NCUA's workload budget, which in turn is one of the variables in the OTR methodology.

The primary driver of the increase in the estimated 2021 OTR is the increase in examination and supervision time for federally insured state-chartered credit unions. Calendar year 2021 marks the end of the first, five-year cycle associated with the Exam Flexibility Initiative that extended the NCUA exam time for eligible institutions. The increase in budgeted time for FISCU examination and supervision for 2021 is due to program obligations associated with examination scheduling and scope requirements. Normal fluctuations in the workload budget from one calendar year to the next are also variables that tend to influence the change in the calculated OTR compared to previous years. Workload budget variables include, but are not limited to, changes in CAMEL ratings, the number and size of credit unions that meet the annual exam and extended exam eligibility criteria, credit unions with emerging risk indicators, variations in individual state regulator programs, and fluctuations in the timing of examinations related to a particular calendar year.

CUSOs are at times subject to review during the examination of a federally insured credit union. The OTR methodology captures CUSO-related time within the scope of the examination and supervision of federally insured credit unions under Principle 1 for federal credit unions and Principle 2 for federally insured state-chartered credit unions.

The time designated for separate, stand-alone reviews of CUSOs and third-party vendors is accounted for separately in the NCUA's workload budget and is covered by Principle 2 only. The Board has no direct regulatory authority with respect to CUSOs and there is no support to allocate time specifically designated for CUSO and third-party vendor reviews as anything other than the NCUA's role as insurer. The stand-alone review of CUSOs and third-party vendors is to identify and address risk to federally insured credit unions. These reviews are not intended to identify whether credit unions are complying with the lending and investment limitations with CUSOs. That is determined as part of the examination of the credit union.

The following chart illustrates the share of the Operating Budget paid by federal credit unions (FCUs, 69%) and federally insured, state-chartered credit unions (FISCUs, 31%).

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Operating Fee

The Board delegated authority to the Chief Financial Officer to administer the methodology approved by the Board for calculating the Operating Fee, and to set the fee schedule as calculated per the approved methodology. In 2020, the Board published [44] in the Federal Register several proposed changes to the Operating Fee methodology, and requested public comments about those changes. This section illustrates how the Operating Fee is calculated using the current, Board-approved Operating Fee methodology and also shows how the Operating Fee would be calculated if the Board adopts all of the changes it has proposed to the methodology.

Current Board-Approved Methodology

Based on the estimated 2021 OTR and the current methodology for computing the Operating Fee, the share of the 2021 budget funded by the Operating Fee is $136.8 million. This equates to 0.0149 percent of projected federal credit union assets for December 2020. The overall decrease for the Operating Fee is estimated at 17.7 percent below the 2020 level under the current methodology, as shown on the table on page 64.

The Operating Fee is assessed on federal credit unions based on projected year-end assets under the current methodology. Credit unions with assets less than $1 million are not assessed an Operating Fee. To set the assessment scale for 2021, federal credit union asset growth is projected through December 31, 2020. Based on the June 30, 2020 Call Report data, annual growth is projected to be 14.3 percent at year end. The asset level dividing points would be increased by this same projected growth rate. Under the current methodology, assets are indexed annually by the projected annual growth in total federal credit union assets, which preserves the same relative relationship of the scale to the applicable asset base.

Proposed Changes to Operating Fee Methodology

In 2020, the NCUA Board proposed changes to the methodology it uses to determine how it apportions the Operating Fees and requested public comment about the changes. Specifically, the Board proposed: (1) Clarifying the treatment of capital project budgets when calculating the operating fees; (2) clarifying the treatment of miscellaneous revenues when calculating the operating fees; and (3) modifying the approach for calculating the annual inflationary adjustments to the thresholds for the operating fee rate tiers.

In a separate notice,[45] the Board also proposed amending its rule for determining total assets used as the basis for calculating the Operating Fee by (1) excluding Paycheck Protection Program (PPP) loans from the computation of a credit union's total assets and (2) using the average of the four quarters' call report data available at the time the Board approves the annual budget to compute total assets instead of using the projected fourth quarter total assets.

Based on the proposed changes to the Operating Fee methodology and the proposed changes for determining credit unions' total assets, the share of the 2021 budget funded by the Operating Fee would be $125.3 million. This equates to 0.0147 percent of the estimated average of federal credit union assets for the quarters ending on September 30, 2020. The overall decrease for the Operating Fee would be 19.4 percent less than 2020, as shown on the table on page 64. The Board is reviewing comments from the public about the proposals, as well as responses to questions the Board asked of the public about the Operating Fee rate scale, and may revise the Operating Fee rule, methodology, or rate scale based on these comments.

Under the proposed changes to the determination of total assets, the Operating Fee would be assessed on federal credit unions based on the average of total assets reported in the fourth quarter 2019 and the first three quarters of 2020, net of any reported PPP loans. Credit unions with assets less than $1 million would not be assessed an Operating Fee.

To set the assessment scale for 2021, total growth in federal credit union assets would be calculated as the change between the average of the four most-current quarters (i.e., the fourth quarter of 2019 and the first three quarters of 2020 in the case of the 2021 budget) and the previous four quarters (i.e., the fourth quarter of 2018 and the first three quarters of 2019), which is estimated to Start Printed Page 74123be 11.9 percent.[46] Under the proposed methodology, asset level dividing points would be increased by this same growth rate in order to preserve the same relative relationship of the scale to the applicable asset base.

Operating Fee Scale

To illustrate the rate for each asset tier for which Operating Fees are charged, the tables below show the effect of the average 17.7 percent decrease in the Operating Fee for natural person federal credit unions under the current Board-approved methodology and the 19.4 percent decrease in the Operating Fee for natural person credit unions under the proposed changes to the methodology. The corporate federal credit union rate scale remains unchanged from prior years.

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IX. Appendix A: Supplemental Budget Information

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X. Appendix B: Capital Projects

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1.  The published 2020 FTE level approved by the Board was 1,180 for the Operating Budget. In March 2020, the NCUA Board approved one additional FTE. The revised 2021 Operating Budget proposes five more FTE, for a total of 1,186.

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2.  Source: The NCUA quarterly call report data, Q2 2020.

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10.  See 12 U.S.C. 1783(b) and 1789(b).

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11.  Estimates and projections in this paragraph are based on forecasts submitted on October 5 and 6, 2020 and published in Blue Chip Economic Indicators, October 10, 2020.

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12.  Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, under their individual assumptions of projected appropriate monetary policy, September 16, 2020 available at:​monetarypolicy/​files/​fomcprojtabl20200916.pdf.

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24.  Full-time equivalent (FTE) employment is the total number of regular straight-time hours (i.e., not including comp time or holiday hours) worked by employees divided by the number of compensable hours applicable to the fiscal year, as defined by the Office of Management and Budget, Circular No. A-11. The NCUA uses the number of FTE projected in the budget to build its estimated pay and benefits calculations. The actual number of persons employed will vary at any point in time, based on vacancies, use of part-time employees, etc.

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25.  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).

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26.  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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27.  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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29.  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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31.  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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33.  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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34.  The Exam Flexibility Initiative started with the January 1, 2017 examination cycle and it allows for extended examination cycles for eligible credit unions. Letters to Credit Unions 16-CU-12, December 2016.

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35.  On November 16, 2017, the NCUA Board adopted a new methodology for calculating the OTR starting with the 2018 OTR. 82 FR 55644, November 22, 2017.

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36.  82 FR 55644 (Nov. 22, 2017).

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38.  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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39.  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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40.  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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41.  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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43.  12 U.S.C. 1782(c)(2) and (3).

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46.  Total assets are determined using the most-current call report data, however 2020 third-quarter data were not available at time of publication. The NCUA estimate for 2020 third-quarter assets is based on projected growth, and will be revised with actual call report data once available.

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[FR Doc. 2020-25546 Filed 11-18-20; 8:45 am]