The NCUA Staff Draft 2019-2020 Budget Justification, 49692-49768 [2018-21282]

Agencies

• National Credit Union Administration

[Federal Register Volume 83, Number 191 (Tuesday, October 2, 2018)]
[Notices]
[Pages 49692-49768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21282]



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Vol. 83

Tuesday,

No. 191

October 2, 2018

Part III





National Credit Union Administration





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The NCUA Staff Draft 2019-2020 Budget Justification; Notice

Federal Register / Vol. 83 , No. 191 / Tuesday, October 2, 2018 / 
Notices

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NATIONAL CREDIT UNION ADMINISTRATION


The NCUA Staff Draft 2019-2020 Budget Justification

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice.

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SUMMARY: The NCUA draft detailed business-type budget is being made 
available for public review as required by federal statute. The 
proposed resources will support the agency's annual operations and 
continue implementation of the agency's reorganization plan. The 
briefing schedule and comment instructions are included in the 
supplementary information section.

DATES: Requests to deliver a statement at the budget briefing must be 
received on or before Tuesday, October 9, 2018. Written statements and 
presentations for those scheduled to appear at the budget briefing must 
be received on or before Monday, October 15, 2018.
    Written comments without public presentation at the budget briefing 
may be submitted by Friday, October 26, 2018.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Presentation at public budget briefing: Submit requests to 
deliver a statement at the briefing to ncua.gov">[email protected]ncua.gov by 
Tuesday, October 9, 2018. Include your name, title, affiliation, 
mailing address, email address, and telephone number. Copies of your 
presentation must be submitted to the same email address by Monday, 
October 15, 2018.
     Written comments: Submit comments to 
ncua.gov">[email protected]ncua.gov by Friday, October 26, 2018. Include your name 
and the following subject line ``Comments on the NCUA Draft 2019-2020 
Budget Justification.''
    Public Inspection: Copies of the NCUA Draft 2019-2020 Budget 
Justification and associated materials are also available on the NCUA 
website at https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx. Printed copies will be available at the 
October 17, 2018 budget briefing.

FOR FURTHER INFORMATION CONTACT: Rendell Jones, Chief Financial 
Officer, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428 or telephone: (703) 518-6571.

SUPPLEMENTARY INFORMATION: 

I. The NCUA Budget in Brief
II. Introduction and Strategic Context
III. Forecast and Enterprise Challenges
IV. Key Themes of the 2019-2020 Budget
V. Operating Budget
VI. Capital Budget
VII. Share Insurance Fund Administrative Budget
VIII. Financing the NCUA Budget
IX. Appendix A: Supplemental Budget Information
X: Appendix B: Capital Projects

    Section 212 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act (Pub. L. 115-174) amended 12 U.S.C. 1789(b)(1)(A) to 
require the NCUA Board (Board) to ``make publicly available and publish 
in the Federal Register a draft of the detailed business-type budget.'' 
Although 12 U.S.C. 1789(b)(1)(A) requires publication of a ``business-
type budget'' only for the agency operations arising under the Federal 
Credit Union Act's subchapter on insurance activities, in the interest 
of transparency the Board is providing the agency's entire staff draft 
2019-2020 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 and to continue implementation of the agency's 
reorganization plan.
    The NCUA staff will present its draft budget to the Board at a 
budget briefing open to the public and scheduled for Wednesday, October 
17, 2018 at 10 a.m. Eastern. The budget briefing will be held in the 
NCUA Board meeting room and run for approximately two hours. A 
livestream of the briefing also will be available through a link on 
ncua.gov.
    If you wish to attend the briefing and deliver a statement, you 
must email a request to ncua.gov">[email protected]ncua.gov by Tuesday, October 9, 
2018. 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 October 17, 
2018 budget briefing. The Board Secretary will inform you if you have 
been approved to make a presentation and how much time you will be 
allotted. A written copy of your presentation must be delivered to the 
Board Secretary via email at ncua.gov">[email protected]ncua.gov by Monday, October 
15, 2018.
    Written comments on the draft budget will also be accepted by email 
at ncua.gov">[email protected]ncua.gov until Friday, October 26, 2018. Include your 
name and the following subject line with your comments: ``Comments on 
the NCUA Draft 2019-2020 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.

I. The NCUA Budget in Brief

Proposed 2019 and 2020 Budgets

    The goals and objectives set forth in the National Credit Union 
Administration's (NCUA) Strategic Plan 2018-2022 (https://www.ncua.gov/About/Documents/AgendaItems/AG20160721Item2b.pdf) form the basis for 
determining agency resource needs and allocations. The annual budget 
provides the resources to execute the strategic plan, to implement the 
agency reorganization, 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 2019-2020 budget justification consists of three 
separate budgets: The Operating Budget, the Capital Budget, and the 
Share Insurance Fund Administrative Budget. Combined, these three 
budgets total $334.8 million for 2019, which is 1.1 percent more than 
the 2019 funding level approved by the NCUA Board (the Board) in 
November 2017, and 4.3 percent more than the comparable 2018 Board 
Approved Budget. Personnel levels for 2019 and 2020 reflect the 
agency's expected staffing after completing implementation of its 
reorganization plan, and are lower than the 2018 levels by 10 
positions.
Operating Budget
    The proposed 2019 Operating Budget is $304.4 million. Personnel 
levels decrease by ten full-time equivalents (FTE) compared to the 2018 
Board Approved Budget.
    The 2019 Operating Budget, when adjusted for inflation, represents 
a real dollar decrease of approximately $624,000, or 0.2 percent, 
compared to the 2018 Board Approved Budget. In nominal dollars, the 
2019 Budget increases by $6.3 million, or 2.1 percent, over the 2018 
Board Approved Budget of $298.1 million.
    The Operating Budget estimate for 2020 is $316.2 million and 
reflects no change to authorized positions.
    The following chart shows recent year-on-year trends for the NCUA 
Operating Budget, in both nominal (green line) and real dollar (blue 
line, inflation-adjusted) terms:
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    The following chart presents the major categories of spending 
supported by the 2019 budget, while specific adjustments to the 2018 
Board Approved Budget are discussed in further detail, below:

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    Staffing. The budget supports 1,178 FTE in 2019, a decrease of ten 
FTEs from 2018. For 2019, the reorganization plan eliminated 15 
positions in the NCUA's regional offices, and the budget proposes five 
new positions in the Offices of Examination and Insurance, the Chief 
Economist, and the General Counsel. Three positions focused on Business 
Innovation will be filled by reallocating vacancies. As shown in the 
chart below, the NCUA staffing has decreased in recent years despite 
significant credit union asset growth.
[GRAPHIC] [TIFF OMITTED] TN02OC18.007

    Pay and Benefits. Pay and benefits increase by $2.1 million in 
2019, or one percent, for a budget of $222.8 million. This increase 
supports the merit and locality pay adjustments required by the NCUA's 
current collective bargaining agreement, the new positions described 
above, anticipated staff promotions, position changes, and increased 
costs for other mandatory employer contributions such as health 
insurance and retirement contributions. The 2020 pay and benefits 
budget is estimated at $233.6 million, which reflects increases 
associated with merit and locality pay inflation, the full cost of new 
positions added in 2019, and an increase in required retirement fund 
payments to the Office of Personnel Management (OPM), which manages 
government employees' retirement programs for nearly all federal 
agencies.
    The Federal Employees Retirement System (FERS) covers most NCUA 
employees and includes a defined pension benefit, which is funded by 
both employee and employer contributions. OPM will charge the NCUA a 
mandatory employer contribution of 13.7 percent of total FERS employee 
salaries in 2019, which will increase to 16 percent in 2020, a change 
of 230 basis points. This increase will require the NCUA to pay OPM 
approximately $3.5 million more in retirement contributions in 2020. 
Excluding additional employer contributions from the 2020 budget, total 
personnel compensation growth would be 3.3 percent instead of 4.8 
percent, and total Operating Budget growth would be 2.7 percent instead 
of 3.9 percent.
    Travel. The travel budget increases by $326,000 in 2019, or one 
percent, for a

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budget of $26.8 million. The NCUA has constrained the growth of travel 
costs by continuing to expand offsite examination work and use 
technology-driven training. Government-wide per diem rates published by 
the General Services Administration (GSA) are expected to increase by 
almost eight percent in 2019, accounting for a significant share of the 
travel budget growth. The NCUA plans to hold a national program 
examination training event in 2020 that will coincide with full 
deployment of the new Examination and Supervision Solution system.
    Rent, Communications, and Utilities. Rent, communications, and 
utilities will decrease by $445,000 in 2019, or five percent, for a 
budget of $8.0 million. This funding pays for essential 
telecommunications services, data capacity contracts, and information 
technology network support. The decrease is primarily due to a 
reduction in leased office space as a result of regional consolidation.
    Administrative Expenses. Administrative expenses increase by $1.2 
million in 2019, or 16 percent, for a total budget of $8.7 million. 
Increases are attributable to recurring cost items such as shared 
Federal Financial Institutions Examination Council fees, relocation 
expenses, and software licenses.
    Contracted Services. Contracted services expenses increase by $3.1 
million in 2019, or nine percent, for a total budget of $38.1 million. 
This 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. The 
increase of information technology operations and maintenance, and 
mandatory accounting system service provider costs are the primary 
drivers of the increase.
Capital Budget
    The proposed 2019 Capital Budget is $22.0 million.
    The 2019 Capital Budget is $0.9 million more than the 2019 funding 
level approved by the Board in November 2017, and $6.6 million more 
than the 2018 Board Approved Budget.
    The Capital Budget pays for continued investments in technology and 
infrastructure projects, as well as several new initiatives that will 
start in 2019, including a replacement of the agency's antiquated AIRES 
examination software, which is used by both federal and state examiners 
in almost all credit union examinations. The NCUA's Information 
Technology Prioritization Council recommended $17.1 million for IT 
software development projects that continue to replace the NCUA's 
decades-old and functionally obsolete information technology systems, 
and $4 million in other IT investments for 2019. The NCUA facilities 
require $0.9 million in capital investments.
Share Insurance Fund Administrative Expenses
    The proposed 2019 Share Insurance Fund Administrative budget is 
$8.4 million.
    The 2019 Share Insurance Fund Administrative Budget is $0.9 million 
more than the 2019 funding level approved by the Board in November, 
2017, and $0.3 million more than the 2018 Board Approved Budget. The 
increase is primarily attributed to increased use of consultants and 
contractor support for credit union stress testing. Direct charges 
within this budget include administration of the NCUA Guaranteed Note 
(NGN) program, state examiner training and laptop leases, as well as 
financial audit support.
Budget Trends
    Since 2017, inflation has matched or outpaced the growth of the 
NCUA budget. While the NCUA's annual Operating Budget is projected to 
increase 2.1 percent from 2018 to 2019, inflation is forecast to be 2.3 
percent. Therefore, in real dollar terms, the NCUA Operating Budget is 
0.2 percent lower in 2019 than in 2018 (i.e., 2.1 percent budgetary 
growth less 2.3 percent inflation). Likewise, the projected 2.7 percent 
total budget growth between 2019 and 2020 represents an inflation-
adjusted increase of only 0.4 percent, based on the assumption that 
2020 economic inflation remains constant at 2.3 percent (i.e., 2.7 
percent budgetary growth less 2.3 percent inflation).
    In addition, as shown in the chart below, the relative size of the 
NCUA budget (red line) continues to decline when compared to balance 
sheets at federally-insured credit unions (gray line). This trend 
illustrates the greater operating efficiencies the NCUA has attained in 
the last several years. Additionally, the NCUA has improved its 
operating efficiencies more aggressively than other financial industry 
regulators (red line compared to blue line).

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    It is also notable that the NCUA's operations have become more 
efficient relative to the size of the credit union system because 
consolidation in the industry has led to growth in the number of large 
credit unions, specifically those with more than $10 billion in assets. 
This results in additional complexity in the balance sheets of such 
credit unions, and a corresponding increase in the supervisory review 
required to ensure the safety and soundness of such large institutions. 
The NCUA has responded to this increasing complexity through several 
initiatives: Creation of the specialized Office of National Examination 
and Supervision (ONES), development of an improved analytic model for 
large credit unions' financial condition, and improved quality of 
examination reports through enhanced quality review processes.
2019 Budget in Brief: Summary Table
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II. Introduction and Strategic Context

History

    For more than 100 years, credit unions have provided financial 
services to their members in the United States. Credit unions are 
unique depository institutions created not for profit, but to serve 
their members as credit cooperatives.
    The NCUA is the independent federal agency created by the U.S. 
Congress to regulate, charter, and supervise federal credit unions. 
With the backing of the full faith and credit of the U.S. Government, 
the NCUA operates and manages the National Credit Union Share Insurance 
Fund (NCUSIF), insuring the deposits of the account holders in all 
federal credit unions and the vast majority of state-chartered credit 
unions.
    The NCUA, through its predecessors, was created in 1934 with the 
passage of the Federal Credit Union Act. As the products and services 
provided to members of credit unions changed over the years, the NCUA's 
supervision and regulation evolved as well. In 1970, Congress created 
the NCUSIF to protect deposits by providing the backing of the full 
faith and credit of the U.S. Government to credit union accounts. No 
credit union member has ever lost a penny of deposits insured by the 
NCUSIF.
    The NCUA is responsible for the regulation and supervision of 5,480 
federally insured credit unions \1\ with approximately 114.1 million 
members \1\ and more than $1.4 trillion \1\ in assets across all states 
and U.S. territories.
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    \1\ Source: The NCUA quarterly call report data, Q2 2018.
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Authority
    Pursuant to the Federal Credit Union Act, authority for management 
of the NCUA is vested in the NCUA Board (the Board). It is the Board's 
responsibility to determine the resources necessary to carry out the 
NCUA's responsibilities under the Act.\2\ 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.\3\
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    \2\ See 12 U.S.C. 1752a(a).
    \3\ See 12 U.S.C. 1766(i)(2).
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    Upon determination of the budgeted annual expenses for the agency's

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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.\4\ 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.\5\ In accordance with its 
authority to use the NCUSIF to carry out a portion of its 
responsibilities, the Board approves an annual Overhead Transfer Rate 
and transfers resources from the Share Insurance Fund to the Operating 
Fund on a monthly basis to account for insurance-related expenses.\6\
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    \4\ See 12 U.S.C. 1755(a)-(b).
    \5\ See 12 U.S.C. 1755(d).
    \6\ See 12 U.S.C. 1783(a).
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Mission, Goals, and Strategy
    The NCUA's 2019-2020 Budget Submission supports the agency's second 
year implementing its 2018-2022 Strategic Plan (https://www.ncua.gov/About/Documents/AgendaItems/AG20160721Item2b.pdf) to achieve its 
priorities and improve program performance.
    Throughout 2019 and 2020, the NCUA will continue fulfilling its 
mission to ``provide, through regulation and supervision, a safe and 
sound credit union system which promotes confidence in the national 
system of cooperative credit,'' and its vision to ensure that the 
``NCUA protects credit unions and consumers who own them through 
effective supervision, regulation and insurance.'' This budget commits 
the resources necessary to implement the NCUA's plans to identify key 
challenges facing the credit union industry and leverage agency 
strengths to help credit unions address those challenges.
    The budget supports the NCUA's programs, which are focused on 
achieving the agency's three strategic goals:
    [ssquf] Ensure a safe and sound credit union system;
    [ssquf] Provide a regulatory framework that is transparent, 
efficient, and improves consumer access; and
    [ssquf] Maximize organizational performance to enable mission 
success.
    Additional information about alignment of the budget to the NCUA's 
strategic goals is in Appendix A.
    In support of its first strategic goal--ensure a safe and sound 
credit union system--the NCUA will continue to supervise federally 
insured credit unions effectively while insuring a growing and evolving 
credit union system. As highlighted in the Strategic Plan, the credit 
union system faces several key risks, including:
     How credit unions respond to a changing economic 
environment,
     technological changes in how consumers interact with 
financial institutions, in addition to more general technological 
advances,
     increasing competition and consolidation within the 
financial services industry,
     demographic shifts, such as aging credit union membership,
     forecasts that the U.S. population will become more 
diverse, implying changes in the services needed by credit union 
members, and
     generational shifts in consumer preferences.
    Each risk requires continual monitoring and, where prudent, risk-
mitigation strategies to protect the overall credit union system from 
preventable losses or failures. 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.
    To fulfill the NCUA's second strategic goal--provide a regulatory 
framework that is transparent, efficient, and improves customer 
access--the agency strives to issue balanced, clear, and 
straightforward regulations while addressing emerging adverse trends in 
a timely manner. The NCUA also seeks to improve consumer access and 
ensure consumer compliance, financial protection, and consumer 
education. The budget allocates resources to agency programs that keep 
regulations up to date and consistent with current law, assist existing 
and prospective credit unions with expansion and new chartering 
activities, and promote consumer awareness of sound financial 
practices.
    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 and workspaces necessary to perform their duties. The 
budget makes investments in better process management and internal 
controls, improved tools and facilities for the NCUA staff, and 
technological enhancements including new systems that will improve 
operational effectiveness and efficiency.
Organization, Major Agency Programs, and Workforce
    The NCUA employs regional offices to perform all the tasks in the 
agency's major program areas and support functions, a central office to 
administer and oversee its programs, and an Asset Management and 
Assistance Center (AMAC) to liquidate failed credit unions and recover 
assets.
    Effective January 2019, the NCUA plans to consolidate its five 
regional offices into three--Eastern, Southern, and Western--as part of 
its on-going effort to strengthen agency operations while increasing 
efficiency. Reporting to these regional offices, the NCUA has credit 
union examiners responsible for a portfolio of credit unions covering 
all 50 states, the District of Columbia, Guam, Puerto Rico, and the 
U.S. Virgin Islands. One-time costs associated with the NCUA 
reorganization are being funded by reprioritizing unspent balances from 
2017 and 2018 budgets. These costs include: Salaries and benefits for 
current employees whose positions will be eliminated after their 
separation from the agency, leased office space in Albany, New York and 
Atlanta, Georgia that will be vacated at the end of 2018, central 
office renovation costs necessary to consolidate the former Region II 
office staff into the NCUA-owned central office building, and other 
miscellaneous one-time relocation, separation, and other contractual 
payments.
    The NCUA organizational chart below reflects the new regional 
structure, and the map shows the new regions' geographical alignment:
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BILLING CODE 7535-01-C
    The NCUA's new regional office structure will carry out the 
agency's 2019 examination workload. Based on second quarter statistics 
from call reports, the number of credit unions, members, and assets 
shows a rough estimate of the how the workload will be divided among 
the new regional offices:
     Eastern Region: 2,055 credit unions with 30.6 million 
members and $386 billion in assets.
     Southern Region: 1,668 credit unions with 31.2 million 
members and $340 billion in assets.
     Western Region: 1,751 credit unions with 37.4 million 
members and $504 billion in assets.
    In addition, the Office of National Examination and Supervision 
(ONES) will continue to examine credit unions with assets that total 
over $10 billion and that are located throughout the United States. 
Based on 2018 second quarter call report statistics, there are 
currently six such credit unions with 14.8 million members, accounting 
for $200 billion in credit union assets.
    In 2019 and 2020, the agency's workforce will undertake tasks in 
all of the NCUA's major programs:
     Supervision: The NCUA supervises federally insured credit 
unions through examinations and regulatory enforcement including 
providing guidance through various publications, taking administrative 
actions and conserving, liquidating, or merging severely troubled 
institutions as necessary to manage risk.
     Insurance: The NCUA manages the $16 billion NCUSIF, which 
provides insurance for deposits up to $250,000 that are held at 
federally insured credit unions. The fund is capitalized by credit 
unions and through retained earnings.
     Credit Union Development: The NCUA charters new federal 
credit unions, as well as approves modifications to existing charters 
and fields of membership. 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.
     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 the 
AMAC. The new Southern Region includes AMAC.
     Stakeholder Outreach: In order to clearly understand the 
needs of the credit union system, the NCUA seeks input from all of its 
stakeholders, including Congress, State Supervisory Authorities, credit 
union members, credit unions and their associations.
     Cross-Agency Collaboration: The NCUA is involved in 
numerous cross-agency initiatives by collaborating 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).
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 (https://www.ncua.gov/About/Documents/AgendaItems/AG20160721Item2b.pdf). The 
Strategic Plan is a framework that sets the agency's direction and 
guides resource requests, so that 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 for their office to 
support the NCUA's

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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 to supervise federally 
insured credit unions in order to carry out the NCUA's dual mission as 
insurer and regulator. This analysis starts with a field-level review 
of every federally insured credit union to estimate the number of 
workload hours needed for the current year. The workload estimates are 
then refined by regional managers and submitted to the NCUA central 
office for the annual budget proposal. The workload analysis accounts 
for the efforts of nearly seventy percent of the NCUA workforce and is 
the foundation for budget requests from regional offices and the Office 
of National Examinations and Supervision (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 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 approval 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 budget justification document includes comparisons to the 
Board approved budget for 2018--2019. As in the 2018 budget, this 
document 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 (https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx) to assist the public in 
understanding its budget development process. The budget request for 
2019 represents the NCUA's projections of operating and capital costs 
for the year, and is subject to approval by the Board.
Commitment to Financial Stewardship
    The NCUA funds its activities through operating fees levied on all 
federal credit unions and through reimbursements from the Share 
Insurance Fund, funded by both federal credit unions and federally 
insured state-chartered credit unions. The Overhead Transfer Rate (OTR) 
calculation determines the annual amount that the Share Insurance Fund 
reimburses the Operating Fund to pay for the NCUA's insurance-related 
activities. At the end of each calendar year, the NCUA's financial 
transactions are subject to audit in accordance with Generally Accepted 
Accounting Principles.\7\
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    \7\ See 12 U.S.C. 1783(b) and 1789(b).
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    Since nearly all of the revenue to finance the NCUA's programs 
comes from non-profit credit unions, the Board and the agency are 
committed to providing sound financial stewardship. In recent years, 
the NCUA Chief Financial Officer, with support and direction from the 
Executive Director and Board, has worked to improve the NCUA's 
financial management, financial reporting, and budget processes. In 
addition, through prudent management of the Corporate System Resolution 
Program, in July 2018 the NCUA paid nearly $736 million in dividends to 
over 5,700 credit unions--an amount larger than the cumulative total of 
all previous cash distributions made since the agency's Share Insurance 
Fund was created.
    In the 2018 budget, the NCUA revised its financial presentations to 
conform to Federal budgetary concepts and increase transparency of the 
agency's planned financial activity. The 2019 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 or other agency leadership.
    The NCUA works 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 2017, the agency provided an unmodified 
Statement of Assurance (signed 2/15/2018) 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 that the agency has identified appropriate 
responses to mitigate identified risks, in accordance with the 
Government Accountability Office (GAO) Standards for Internal Controls 
in Federal Government (Green Book) requirements.

III. Forecast and Enterprise Challenges

Economic Outlook

    The NCUA's mission is to provide, through regulation and 
supervision, a safe and sound credit union system, which promotes 
confidence in the national system of cooperative credit.

[[Page 49703]]

The challenges that the NCUA faces, and the resources the NCUA requires 
to fulfill its mission, depend on a variety of factors that directly or 
indirectly affect the health of the credit union system. The NCUA must 
anticipate, to the extent possible, developments that will affect the 
system, develop strategies, plans and processes to meet both the 
current and anticipated needs, and assemble the resources, including 
staff, necessary to ensure a safe and sound system.
    One key determinant of credit union performance is the underlying 
economic environment in which they must operate. In general, for the 
past few years, the economy has supported solid financial system 
performance. The economy performed well in the first half of 2018. Real 
GDP grew at a relatively strong 3.2 percent annual rate, and the 
unemployment rate dipped below 4.0 percent--near or below the full-
employment rate. Inflation edged higher, moving closer to the Federal 
Reserve's 2-percent inflation target, and Federal Reserve policymakers 
raised short-term interest rates. Longer-term rates also increased but 
a variety of factors have kept them from moving in lock-step with 
shorter-term rates.
    With the support of a solid economic foundation, credit union 
lending, membership growth, and credit quality remained strong through 
the second quarter of 2018. Federally insured credit unions added 4.8 
million members over the year, boosting credit union membership to 
114.1 million in the second quarter of 2018. Credit union shares and 
deposits rose 5.4 percent over the year to $1.2 trillion. Total loans 
outstanding at federally insured credit unions increased 9.8 percent to 
$1.0 trillion, and the system-wide loan delinquency rate fell to 67 
basis points, down from 75 basis points a year earlier. The credit 
union system's return on average assets rose to 90 basis points, and 
the system's net worth ratio increased to just over 11 percent in the 
second quarter.
    The consensus of forecasters suggests the economic environment will 
continue to be a solid support to credit union performance over the 
2019-2020 budget horizon. Forecasts for the next two years call for 
somewhat slower economic growth. Employment is projected to continue to 
rise and the unemployment rate--already below the level associated with 
full employment--is expected to remain low. Tight labor market 
conditions are projected to keep inflation near the Federal Reserve's 
2.0 percent target. Solid economic conditions should remain a positive 
force for credit union lending, membership growth, and credit quality 
over the budget horizon.
    However, analysts caution that the tight labor market conditions 
and higher inflation could be associated with higher interest rates. 
Federal Reserve policymakers indicate that the federal funds rate could 
move higher over the next three years to fulfill their dual mandate of 
maintaining maximum employment and low inflation. Analysts are 
projecting that short term interest rates--which largely determine 
interest payments credit unions make--could rise relative to longer 
term interest rates, which largely determine the interest payments 
credit unions receive.
[GRAPHIC] [TIFF OMITTED] TN02OC18.013

    In the consensus projected economic environment, credit unions' 
ability to manage and mitigate interest rate risk will become 
increasingly important to their success. On the liability side, rising 
deposit rates, if realized, could force credit unions to adapt more 
quickly than in the past, since many members have a number of financial 
institution alternatives and can move funds quickly between 
institutions.
    On the asset side, the low interest rate environment of the past 
decade has led some credit unions to lengthen the term of investments 
to boost their portfolio's earnings or to lock in relatively low rates 
on long-term loans like mortgages. For affected credit unions, higher 
deposit rates will push up against low loan rates, which would compress 
net interest margins.
    While the overall forecast appears largely supportive of credit 
unions, forecasts of the economic environment are far from perfect. 
Some analysts are suggesting the long expansion could end during the 
NCUA 2019-2020 budget period; a recession would pose significant 
challenges to the system in terms of rising delinquencies, reduced loan 
demand, and, potentially, an increase in shares as consumers move funds 
from riskier investments into safer, insured credit union deposits. The 
NCUA, like the credit unions themselves, needs to plan and prepare for 
a range of economic outcomes that could affect credit union performance 
and determine resource needs.
    In addition to risks associated with movements in the general 
economy, the NCUA and credit unions will need to understand their 
increasing exposure to, and address risks associated with, the 
technological and structural changes facing the system. Over the 
longer-term, increased concentration of loan portfolios, development of 
alternative loan and deposit products, technology-driven changes in the 
financial landscape, continued industry

[[Page 49704]]

consolidation, and ongoing demographic changes will continue to shape 
the environment facing credit unions and will determine the resource 
needs of the NCUA.
    Cybersecurity: Credit unions' increasing use of technology is 
making the credit union system more vulnerable to cyber-attacks. The 
prevalence of malware, ransomware, distributed denial of service (DDOS) 
attacks, and other forms of cyber intrusion are creating challenges at 
credit unions of all sizes, and will require ongoing measures for 
containment. These trends are likely to continue, and even accelerate, 
over the next two years.
    Lending trends: Increasing concentrations in member business loans 
and private student loans, in addition to other new types of lending by 
credit unions, emphasize the need for long-term risk diversification 
and effective risk management tools and practices, along with expertise 
to properly manage increasing concentrations of risk.
    Financial Landscape and Technology: New financial products that 
mimic deposit and loan accounts, such as Apple Pay, Walmart pre-paid 
cards and peer-to-peer lending, are emerging. These new products pose a 
competitive challenge to credit unions and banks alike. Credit unions 
also face a range of challenges from financial technology (fintech) 
companies in the areas of lending and the provision of other services. 
For example, underwriting and lending may be automated at a cost below 
levels associated with more traditional financial institutions, but may 
not be subject to the same regulations and safeguards that credit 
unions and other traditional financial institutions face. The emergence 
and increasing importance of digital currencies may pose both risks and 
opportunities for credit unions. As these institutions and products 
gain popularity, credit unions may have to be more active in marketing 
and rethink their business models.
    Technological changes outside the financial sector may also lead to 
changes in consumer behavior that indirectly affect credit unions. For 
example, the increase in on-demand use of auto services and the 
potential for 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 strongly, 50 percent of federally insured credit unions had 
fewer members at the end of the second quarter of 2018 than a year 
earlier. Demographic and field of membership changes are likely to 
continue to result in 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. For example, in some 
areas, to be effective, credit unions may need to explore how to meet 
the needs of an aging population or of a growing Hispanic population.
    Smaller credit unions' challenges and industry consolidation: Small 
credit unions face challenges to their long-term viability for a 
variety of reasons, including weak earnings, declining membership, high 
loan delinquencies, and elevated non-interest expenses. If current 
consolidation trends persist, there will be fewer credit unions in 
operation and those that remain will be considerably larger and more 
complex. As of June 30, 2018, there were 542 federally insured credit 
unions with assets of at least $500 million, 28 percent more than just 
five years earlier. These 542 credit unions accounted for 71 percent of 
credit union members and 77 percent of credit union assets. Large 
credit unions tend offer more complex products, services and 
investments. Increasingly complex institutions will pose management 
challenges for the institutions themselves, as well as the NCUA; 
consolidation means the risks posed by individual institutions will 
become more significant to the Share Insurance Fund.
Enterprise Risk Management
    In light of the strategic direction and the challenges and issues 
described above, the NCUA employs an Enterprise Risk Management (ERM) 
program. The ERM program is a means by which agency leadership 
evaluates the various factors (both internal to the agency and external 
in the industry) that can impact the agency's performance relative to 
its mission, vision, and performance outcomes. Agency priority risks 
include both internal consideration such as the agency's internal 
controls framework, to external factors such as credit union 
concentration 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, the 
agency is identifying and managing risks that could affect the 
achievement of its mission. The ERM program was established in 2015 to 
include an enterprise risk appetite statement and risk taxonomy. In 
2018, the NCUA identified a number of enterprise risks that helped 
inform the agency's planning and budget processes, and assigned roles 
and responsibilities for monitoring risks in several specific 
activities. Overall, the NCUA's ERM program promotes effective internal 
controls, which, when combined with robust measurement and 
communication, are central to cost-effective decision-making and risk 
optimization within the agency.
    In its 2018-2022 iteration of its Strategic Plan, the NCUA adopted 
its first agency enterprise risk appetite statement, 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.

The agency's risk appetite will help align risks with opportunities 
when making decisions and allocating resources to achieve the agency's 
strategic goals and objectives. This enterprise risk appetite statement 
is part of the NCUA's overall management approach and is supported by 
detailed appetite statements for individual risk areas.
    In practice, this means that the NCUA recognizes that risk is 
unavoidable and sometimes inherent in carrying out the agency's 
mandate. The NCUA is positioned to accept greater risks in some areas 
than in others; however, when consolidated, the risk appetite should be 
within the boundaries established for the entire agency. Cross-
collaboration across programs and functions is a fundamental piece of 
ensuring the agency stays within its risk appetite boundaries. The NCUA 
will identify, assess, prioritize, respond to and monitor risks to an 
acceptable level. This budget proposal for 2019/2020 incorporates the 
NCUA's enterprise risk management program and agency risk appetite in 
recommending how best to allocate its resources.

IV. Key Themes of the 2019-2020 Budget

Overview

    The budget supports the priorities and goals outlined in the 
agency's annual performance plan and the NCUA Strategic Plan 2018-2022 
(https://www.ncua.gov/About/Documents/

[[Page 49705]]

AgendaItems/AG20160721Item2b.pdf). The resources and new initiatives 
proposed in the budget support the NCUA's mission to maintain a safe 
and sound credit union system.
    The 2019-2020 budget carries forward a number of key ongoing 
initiatives, which include: The Exam Flexibility Initiative; the 
increased use of off-site examinations work and data analytics; the 
modernization of information technology systems; regulatory reform 
initiatives; and efforts to implement organizational efficiencies. Over 
the course of the next five years, these efforts will result in a more 
effective and efficient organization.
    In the 2019-2020 budget, the NCUA continues to reduce its staffing, 
reflecting greater operational efficiency at the agency. 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. As the NCUA continues its efforts to curb expenses and 
reduce overhead costs, we will continue investing in the workforce 
through training and development, helping employees develop the tools 
they need to do their work effectively.
    At the same time, managing the size of the workforce is important 
from a budgetary standpoint, because employment-related costs are the 
single largest driver of the NCUA budget. As discussed in this 
document, the NCUA continues to use workload models to estimate the 
amount of time necessary to conduct examinations and supervise 
federally insured credit unions. This analysis results in an estimate 
of the staffing level required to carry out the NCUA's dual mission as 
insurer and regulator. The NCUA continues to assess and balance its 
mission workload needs with the financial costs the agency imposes on 
the credit union system. Although the number of credit unions continues 
to decline nationwide, the NCUA must also consider the increasing 
complexity and growing asset base of the entire credit union system.
    The efficiency and effectiveness of the agency's workforce is 
dependent upon the resiliency of the NCUA's information technology 
infrastructure and availability of technological applications. The NCUA 
is committed to implementing new technology responsibly and delivering 
secure, reliable and innovative technological solutions to support its 
mission. This necessitates investments funded in the Capital Budget, to 
provide the analytical tools and technology the workforce needs to 
achieve the NCUA mission.
Reorganization/Restructuring
    In July 2017, the NCUA's executive leadership committed to a bold 
plan that would invest in the agency's future, make critical 
organizational alignment changes, and reduce overall staffing of the 
agency. The Board approved a series of operational actions to improve 
the NCUA's efficiency, effectiveness, and focus on its core mission 
responsibilities.
    The NCUA's reform plan positioned the agency to meet the ongoing 
changes in the industry it regulates and insures. The U.S. financial 
sector is subject to continuing advancements and emerging risks, which 
necessitate changes in the way the NCUA conducts its business. 
Advancements in the type and quantity of data available also demands a 
fresh way of thinking about our business model. At the same time, the 
continuing reality of smaller credit unions merging with larger ones, 
while existing credit unions grow significantly in size and complexity, 
requires an even more strategic, nimble and innovative way to carry out 
our responsibilities as established in the Federal Credit Union Act.
    As a result of the NCUA's on-going implementation of its reform 
plan:
     The NCUA created an office focused exclusively on new 
charters and credit union expansion--the Credit Union Resources and 
Expansion (CURE) Office.
     The NCUA is lowering the agency's authorized staffing 
level from 1,247 positions in the 2016 approved budget, down to 1,178 
in the 2019 budget, a reduction of 69 positions, or nearly 6 percent.
     Leased office space is being reduced by 80 percent.
     Examination reports are being improved through 
implementing enhanced quality measures.
     Two regional offices will close in January 2019.
     AMAC's staffing has been reduced, and support functions 
are now carried out by the central office.
    The agency is on-track to meet the staffing reduction targets and 
other key outcomes identified in the reform plan. These actions are 
predicated on the understanding that the industry is consolidating and 
becoming more complex at the same time. The NCUA continues to examine 
how to best reshape its workforce to meet future needs, and to look for 
ways to contain operating costs to create a more efficient 
organization.
Modernizing the Examinations Process
    In August 2018, the NCUA issued Letter to Credit Unions: 18-CU-01- 
``Examination Modernization Initiatives.'' This letter outlined five 
initiatives the NCUA Board approved to modernize the agency's 
examinations processes. Some of the intended benefits of these 
initiatives are:

 More efficient examinations and supervision
 Reduced burden on credit unions
 More consistent and accurate supervisory determinations
 Greater ability to adapt to changes in the marketplace and 
credit union business models
 Enhanced coordination with State Supervisory Authorities
 Reduced travel costs
 Improved quality of life for examiners
 More secure, reliable, and flexible technology foundation able 
to support future expansion capabilities

    These five initiatives are interrelated and complement each other. 
As these initiatives support and build upon each other, they will 
ultimately result in a fully modernized examination and supervision 
program with various incremental improvements occurring along the way. 
Throughout this budget, the NCUA aligns its resources in support of 
these improvements. Below is a more in-depth discussion of each of the 
initiatives:
    Flexible Examination Program (FLEX). FLEX is a pilot program in the 
Southern Region. FLEX is evaluating conducting offsite certain existing 
exam procedures. The pilot was developed to assess examiners working 
remotely on elements of examinations of well-run credit unions that 
have the technology and platforms to provide electronic data securely. 
This program reflects the NCUA's most immediate solution to the 
agency's efforts to reduce, but not eliminate, onsite presence during 
exams.
    In 2017, the NCUA tested the pilot with five examiner groups in 28 
credit unions located in a variety of geographical locations. The pilot 
was tested on credit unions as small as $4 million in assets to those 
as large as $9.4 billion in assets.
    Preliminary results from the pilot show cost savings to the NCUA, 
realized in part by reducing travel time and costs for examiners. In 
designated FLEX reviews, over 35 percent of the total exam hours were 
performed offsite. Credit union feedback has also been positive, with 
the majority of credit unions reporting positive experiences with the 
modified exam approach.
    However, the pilot identified the need for the NCUA to have a 
secure file transfer portal to support much of this offsite work 
efficiently. The secure file

[[Page 49706]]

transfer portal was fully deployed in July 2018. The agency is 
currently testing the portal and expects to move forward developing 
plans to increase agency use of offsite procedures.
    ONES Data-Driven Supervision. This initiative began in 2018 as an 
effort to move to a continuous supervision model for the large, 
natural-person credit unions supervised by the Office of National 
Examinations and Supervision. The continuous supervision model will use 
data-driven analytics to monitor and identify credit union risk while 
supporting the transition to credit union-driven stress testing. The 
data-driven supervision initiative may lead to analytical advancements 
that can be adapted for supervising some or all other insured credit 
unions.
    Shared NCUA-State Regulator Federally-Insured State Credit Unions 
(FISCU) Program. In 2017, the NCUA created the Joint NCUA-State 
Supervisor Working Group (working group), which is tasked with 
improving coordination and scheduling for joint exams, providing 
scheduling flexibility, and reducing redundancy where possible. The 
group's goal is to minimize the burden on FISCUs resulting from having 
a separate financial regulator and insurer.
    In addition, the working group is evaluating the efficacy, 
appropriateness, and feasibility of adopting an alternating-year 
examination approach for FISCUs. A pilot program is under development 
and will allow the NCUA, state regulators, and stakeholders to evaluate 
the benefits and challenges of an alternate-year examination program. 
The pilot will need to run about three years in order to evaluate one 
full alternating-year exam cycle, and will provide valuable insight 
into the advantages and risks of such an approach prior to finalizing a 
decision about a permanent alternating-year exam cycle.
    For joint examinations of FISCUs, the working group is also 
exploring ways to minimize duplication and overlap through process 
improvements and greater use of technology. In addition, the working 
group is evaluating other areas of potential duplication that can be 
reduced or eliminated, such as loan participations, CUSO and third 
party vendor reviews, and other supervisory matters. The goal of these 
reviews is to better leverage the work of each regulatory party in 
examining and supervising FISCUs.
    Enterprise Solution Modernization (ESM). In November 2015, the NCUA 
Board authorized the ESM program. This effort will replace legacy 
applications such as the examination system (AIRES) and the Call Report 
data collection tool (CU Online). ESM will also introduce emerging and 
secure technology that supports the NCUA's examination, data 
collection, and reporting efforts. The result will be a flexible 
technology architecture that integrates modernized systems and tools 
across the agency. The new systems will streamline processes and 
procedures helping create a more effective, less burdensome process.
    ESM will also provide essential upgrades to the NCUA's technology 
foundation that supports the FLEX and Virtual Exam efforts with:
     More efficient ways to securely communicate with credit 
unions.
     Updated tools such as workflow management, data 
integration, document management, and customer relationship management 
capabilities.
     A flexible framework that will allow for integration of 
new solutions so the NCUA's supervisory systems can evolve with changes 
to regulations, data and analytical needs, and activities credit unions 
engage in.
    The first of a series of technology upgrades from ESM are scheduled 
to begin in 2019. Throughout the multi-year implementation phase of 
this initiative, the NCUA will continue to provide updates and engage 
stakeholders.
    Virtual Examination Program. In 2017, the NCUA Board approved the 
project and associated resources to research methods to conduct offsite 
as many aspects of the examination and supervision processes as 
possible. The virtual exam project team is researching ways to harness 
new and emerging data, advancements in analytical techniques, 
innovative technology, and improvements in supervisory approaches.
    By identifying and adopting alternative methods to remotely analyze 
much of the financial and operational condition of a credit union, with 
equivalent or improved effectiveness relative to current examinations, 
it may be possible to significantly reduce the frequency and scope of 
onsite examinations. Onsite examination activities could potentially be 
limited to periodic data quality and governance reviews, interventions 
for material problems, and meetings or other examination activities 
that need to be handled in person.
    The virtual exam should lead to greater use of standardized 
interaction protocols, advanced analytical capabilities, and more-
informed subject matter experts. This should result in more consistent 
and accurate supervisory determinations, provide greater clarity and 
consistency with respect to how the agency conducts supervisory 
oversight, and reduce coordination challenges between agency and 
institution staff.
    To be successful, it is likely examination staff will need to 
analyze more information about the credit union being examined and 
communicate more frequently with management at the credit union. 
However, it is not the agency's intent to intervene in credit unions' 
day-to-day operations or strategic planning.
    The virtual examination team will deliver to the NCUA board by the 
end of 2020 a report discussing alternative methods identified to 
remotely analyze aspects of the financial and operational condition of 
a credit union. For credit unions that are compatible with this 
approach, the agency's goal is to transform the examination and 
supervision program into a predominately virtual one within the next 
five to ten years. The transformation is expected to occur through 
incremental adoption of the corresponding new techniques and 
approaches.
Reducing Regulatory Burden
    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 Task Force published and sought comment 
on its first report in August 2017.
    The NCUA has undertaken a series of regulatory changes as part of 
this effort, and continues to pursue a regulatory reform agenda, 
including matters such as advertising, field of membership, equity 
distribution, and securitization. The task force is in the process of 
preparing its second report, which should be issued in late 2018 or 
early 2019.

V. Operating Budget

Overview

    The NCUA Operating Budget is the annual resource plan for the NCUA 
to conduct activities prescribed by the Federal Credit Union Act of 
1934. These activities include: (1) Chartering new Federal credit 
unions; (2) approving

[[Page 49707]]

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 (NCUSIF or the Share Insurance Fund).
    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.
    As outlined in the NCUA Letter to Credit Unions 18-CU-01, dated 
August, 2018, there are several examination modernization initiatives 
in process to improve how the agency conducts examinations and 
supervision. The goals of these initiatives are to replace outdated, 
end-of-life examination systems, streamline processes, adopt enhanced 
examination techniques, and leverage new technology and data to 
maintain high quality supervision of insured credit unions with less on 
site presence. Modernizing agency systems and processes will reduce the 
burden on the credit union community and increase the effectiveness of 
the NCUA.
Staffing
    The staffing levels proposed for 2019 reflect the resource 
requirements for steady state operations at the NCUA as it implements 
the agency reform plan and modernizes the examination process. The 
estimated resource level will fund the appropriate workload balance 
that supports extended exam cycles and enhanced examinations. The new 
positions supported by the budget include a Business Data Lead, two 
Business Innovation Officers, a Bank Secrecy Act Specialist, a 
Financial Technology Analyst, two Enforcement and litigation attorneys, 
and one Regulations and Legislation attorney. There will be a 
realignment of three regional office vacancies to offset three of the 
new positions.
    In 2019, the agency is also establishing the Office of Business 
Innovation to lead the Enterprise Solution Modernization (ESM) program, 
as well as other modernization and business enterprise initiatives 
outside the scope of ESM. This includes the agency's initiative to 
modernize the member loan and share download, advance the information 
security program, and enhance analytics through data management. 
Previously, the employees assigned to Business Innovation were included 
in the Office of the Executive Director. By creating the new office 
structure, the budget will more clearly delineate these expenses and be 
more transparent to interested parties.
    The budget for 2019 supports a total agency staffing level of 1,178 
personnel. This is a net decrease of ten positions from the Board-
approved level for 2018, or a decrease of 0.8 percent.
BILLING CODE 7535-01-P

[[Page 49708]]

[GRAPHIC] [TIFF OMITTED] TN02OC18.014

BILLING CODE 7535-01-C
Request for New Staff in 2019
Business Data Lead (1 Position Reallocated From Regional Vacancies)
    The Office of Business Innovation requires one full-time position 
to serve as the Business Data leader who will drive implementation of 
an agency-wide analytic data strategy and governance framework. This 
work will include: (1) Chairing an enterprise analytic data council; 
(2) supervising three enterprise data stewards; (3) working with 
contract consultants to assist the council and data stewards; (4) 
piloting the enterprise data strategy and governance framework; (5) 
initiating the enterprise data office study; and (6) recommending and 
running a future state for enterprise data management.
Business Innovation Officers (2 Positions Reallocated From Regional 
Vacancies)
    The Office of Business Innovation requires two Business Innovation 
Officers to conduct the daily work to support development of an agency-
wide analytic data strategy and governance framework, including: (1) 
Creating and executing a data governance framework, (2) defining 
business requirements to ensure initial proper configuration of the 
NCUA's analytic data repository, (3) researching data information to 
update the NCUA's data dictionary and develop data lineage 
requirements, and (4) working with system owners and other stakeholders 
to resolve conflicts and facilitate acceptance into the data framework.
Bank Secrecy Act Specialist (+1 New Position)
    The Office of Examination and Insurance requires a full-time 
position to support Bank Secrecy Act (BSA) policies and workload 
requirements. The BSA has consumed considerable attention within the 
NCUA and throughout the government's regulatory responsibilities for 
the financial services industry. Interagency planning and policy 
development groups have already created significant new workload for 
the NCUA. This additional workload is expected to continue as the 
interagency groups develops new supervisory policies, coordinate BSA-
related rulemaking, implement industry and supervisory guidance, and 
conduct industry outreach.

[[Page 49709]]

Financial Technology Analyst (+1 New Position)
    The Office of the Chief Economist requires one new employee to 
research new financial technology innovations and organize and lead a 
working group to review these emerging technologies. This position will 
also expand the NCUA's policy expertise in cryptocurrencies.
Enforcement and Litigation Attorneys (+2 New Positions)
    The Office of General Counsel requires two additional attorneys in 
the Enforcement and Litigation Division to support the agency and 
enable attorneys to work more collaboratively as supervisory offices' 
formal enforcement actions are being considered and planned. These 
additional employees will help improve the NCUA's overall enforcement 
process by focusing support and investigatory efforts more 
strategically and earlier in the enforcement process.
Regulations and Legislation Attorney (+1 New Position)
    The Office of General Counsel requires an additional attorney for 
the Division of Regulations and Legislation. This attorney will focus 
on the review of legislation, provide technical drafting assistance for 
legislation when necessary, write responses to Congressional and 
interagency inquiries, and assist in drafting both oral and written 
testimony for Congressional hearings. The new attorney will also 
coordinate legislative efforts with other public and Congressional 
Affairs staff at the NCUA.
Budget Category Descriptions and Major Changes
    There are five major expenditure categories in the NCUA's budget. 
This section explains how these expenditures support the NCUA's 
operations, and presents a transparent and comprehensive accounting of 
the Operating Budget.
BILLING CODE 7535-01-P
[GRAPHIC] [TIFF OMITTED] TN02OC18.015

BILLING CODE 7535-01-C
Salaries and Benefits
    The budget includes $222.8 million for employee salaries and 
benefits in 2019. This change is a $2.1 million, or 1.0 percent, 
increase from the 2018 Board Approved Budget.
    Salaries and benefits make up 73 percent of the total budget. The 
primary driver of increased costs in the Salaries and Benefits category 
is merit and locality pay increases for the NCUA's 1,173 personnel paid 
from the Operating Budget, in accordance with the agency's current 
Collective Bargaining Agreement (CBA) and its merit-based pay system. 
In 2019, the NCUA's compensation levels will continue to ``maintain 
comparability with other federal bank regulatory agencies,'' as 
required by the Federal Credit Union

[[Page 49710]]

Act.\8\ The Salaries and Benefits category of the budget includes all 
employee pay raises for 2019, such as merit and locality increases, and 
those for promotions, reassignments, and other changes, as described 
below.
---------------------------------------------------------------------------

    \8\ 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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    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 zero to 3.0 percent, 
depending on location. The average increase in locality pay is 
estimated to be 1.4 percent. Starting in 2019, the NCUA discontinued 
the annual, general pay scale increase of 1.25 percent in accordance 
with recent CBA negotiations. By merging the general pay scale increase 
into the annual merit-based pay increase, the NCUA expects to better 
reward employee performance while reducing future year payroll growth.
    The first-year cost of the new positions added in 2019 is estimated 
to be $1.0 million, or approximately half the annual salaries and 
benefits associated with the positions since these new employees will 
be hired throughout the year. The full-year salaries and benefits costs 
of these employees will approximately double in 2020. Specific 
increases to individual offices' pay 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 employees' 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 Office of Personnel Management (OPM) economic assumptions for 
actuarial valuation of the Federal Employees Retirement System (FERS) 
remains unchanged in 2019, so all federal agencies are expected to 
contribute 13.7 percent of FERS employees' salary to the OPM retirement 
system. This mandatary contribution is expected to increase to 16.0 
percent, or +230 basis points, in 2020, consistent with published 
actuarial updates. This change will result in an estimated $3.5 million 
in additional, mandatory retirement-related payments by the NCUA to 
OPM.
    The average health insurance costs for the Federal Employees Health 
Benefits program for 2019 are consistent with historical actual 
expenses. The employee pay and benefits category also includes costs 
associated with other mandatory employer contributions such as Social 
Security, Medicare, transportation subsidies, unemployment, and 
workers' compensation. Notably, charges from the U.S. Department of 
Labor (DOL) for the NCUA's workers' compensation claims increased by 
nearly $250,000 between 2018 and 2019. DOL manages the workers' 
compensation system for all federal agencies.
    The 2019 budget reflects a $4.0 million reduction, or the 
equivalent of a two percent vacancy rate (21 positions) during the 
year. This aligns with the NCUA's most recent attrition rates and the 
recruitment and retention challenges the agency expects to face in the 
current, high-employment labor market. The effect of this adjustment 
lowers the NCUA budget and results in reduced fees collected from 
credit unions.
    The 2020 budget request for salaries and benefits is estimated at 
$233.6 million, a $10.8 million increase from the 2019 level, which 
accounts for merit and locality increases consistent with the CBA 
(approximately $6.3 million), the full-year cost impact of new 
positions (approximately $1 million), and the mandatory FERS retirement 
contributions to OPM (approximately $3.5 million).
Travel
    The 2019 budget includes $26.8 million for Travel. This change is a 
$326,000, or 1.2 percent, increase to the 2018 Board Approved Budget. 
Travel comprises approximately nine percent of the overall 2019 budget. 
The cumulative reduction of the credit union examiner positions 
compared to past years, extended examination cycles, and increased use 
of offsite examinations all help contain the NCUA's travel costs. 
However, the General Services Administration has announced an increase 
of nearly eight percent for per diem rates in 2019, which drives the 
growth of estimated travel expenses in 2019.
    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 training, and there will be minor 
increases to training-related travel expenses to support field exams. 
For example, technical experts such as payment system, capital market, 
and lending specialists will assist field examiners with program 
examinations and training, while consumer access analysts will provide 
support on field consumer compliance issues and follow-up field 
assessments of business marketing plans for field-of-membership 
expansions.
    The 2020 budget request for travel is estimated at $27.8 million, a 
$1 million increase to the 2019 level, which accounts for a national 
program examination training event. This one-time training conference 
is anticipated to coincide with full deployment of the new Examination 
and Supervision Solution system.
    The NCUA plans to evaluate future cost avoidance for travel through 
continued expansion of offsite examination work. In addition, agency 
personnel will continue to utilize more virtual training options, where 
appropriate, to help minimize travel expenses.
Rent, Communications, and Utilities
    The 2019 budget includes $8.0 million for Rent, Communications, and 
Utilities. This is a $445,000 reduction, or five percent less than the 
2018 Board Approved Budget. The Rent, Communications, and Utilities 
category is the smallest component of the NCUA's budget and funds the 
agency's telecommunications and information

[[Page 49711]]

technology network expenses, and facility rental costs. The agency 
telecommunications expense for 2019 is $3.2 million. Office building 
leases, meeting rentals, office utilities, and postage expenses are 
also included in this budget category. Facility costs total $2.6 
million for 2019, which is $600,000 less than the prior year budget due 
to the closure of regional offices in Atlanta, Georgia and Albany, New 
York. Facility costs also include the NCUA's annual payment of $1.3 
million to the Share Insurance Fund for its central office note, which 
is scheduled to be fully repaid in 2023.
    The 2020 budget request for the Rent, Communications, and Utilities 
category is $8.0 million, and is unchanged from 2019. Additional 
savings from lease terminations are expected in 2021, once Eastern 
Region personnel are co-located in the NCUA-owned central office 
building.
Administrative Expenses
    The 2019 budget includes $8.7 million for Administrative Expenses. 
This is an increase of $1.2 million, or 16 percent, compared to the 
2018 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.
    Service contracts, maintenance fees, and end-user licensing for 
computer software and database management applications will cost $3.8 
million in 2019. This includes annual software licenses and maintenance 
support fees for the call center managed by the Office of Consumer 
Financial Protection. This line item represents a $435,000 increase 
over the prior year budget to support purchases of critical financial 
and information services subscription services to manage risk.
    As part of the FFIEC, the NCUA shares in costs for joint actions 
and services that affect the financial services industry. These costs 
are largely outside of the NCUA's control and are estimated at $1.4 
million in 2019, which is $100,000 more than 2018.
    Employee relocation expenses are adjusted in 2019 to reflect the 
historical average annual expenditures of $750,000. This is a $500,000 
increase over the 2018 Board Approved Budget, which was lower than 
historical averages because of one-time agency reorganization funding 
set aside for relocations in 2018.
    Due to reformed business processes and improved financial controls, 
costs for printing. Meeting support costs are estimated to be $150,000 
less than in 2018.
Contracted Services
    The 2019 budget includes $38.1 million for Contracted Services. 
This is a $3.1 million, or nine percent, increase compared to the 2018 
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 hardware and software development, accounting and auditing 
services, and specialized subject matter expertise that enable staff to 
focus on core mission execution.
    The majority of funding in the Contracted Services category is 
related to the NCUA's priority to implement a robust supervision 
framework by identifying and resolving traditional risk concerns such 
as interest rate risk, credit risk, and industry concentration risk, as 
well as by addressing new and evolving operational risks such as 
cybersecurity threats. Growth in the contracted services budget 
category results primarily from new operations and maintenance costs 
associated with ongoing capital investments, such as replacements for 
the Automated Integrated Regulatory Examination System (AIRES) and CU 
Online. Other costs include core agency business operation systems such 
as for payroll processing, and various recurring costs, as described in 
the seven major categories, below:
    [ssquf] Information Technology Operations and Maintenance (47 
percent of contracted services)

--IT network support services and help desk support
--Contractor program and web support and network and equipment 
maintenance services
--Administration of software products such as Microsoft Office, Share 
Point and audio visual services

    [ssquf] Administrative Support and Other Services (14 percent of 
contracted services)

--Examination and Supervision program support
--Technical support for examination and cybersecurity training programs
--Equipment maintenance services
--Legal services and other expert consulting support
--Other administrative mission support services for the NCUA central 
office

    [ssquf] Accounting, Procurement, Payroll and Human Resources 
Systems (11 percent of contracted services)

--Accounting and procurement systems and support
--Human resources, payroll, and employee services
--Equal employment opportunity and diversity programs

    [ssquf] Building Operations, Maintenance, and Security (9 percent 
of contracted services)

--Central office facility operations and maintenance
--Building security and continuity programs
--Personnel security and administrative programs

    [ssquf] Information Technology Security (7 percent of contracted 
services)

--Enhanced secure data storage and operations
--Information security programs
--Security system assessment services

    [ssquf] Training (7 percent of contracted services)

--Examiner staff technical and specialized training and development
--Senior executive and mission support staff professional development

    [ssquf] Audit and Financial Management Support (5 percent of 
contracted services)

--Annual audit support services
--Material loss reviews
--Investigation support services
--Financial management support services

    The following pie chart illustrates the breakout of the seven 
categories for the total contracted services budget of $38.1 million.

[[Page 49712]]

[GRAPHIC] [TIFF OMITTED] TN02OC18.016

    Major programs within the contracted services category include:
    [ssquf] Training requirements for the examiner workforce. The 
NCUA's most important resource is its highly educated, experienced, and 
skilled workforce. It is important that staff have the proper 
knowledge, skills, and abilities to perform assigned duties and meet 
emerging needs. Each year, Credit Union Examiners attend several levels 
of training, including in core areas such as capital markets, consumer 
compliance, and specialized lending. The training deliverables for 2019 
include classes offered by the Federal Financial Institutions 
Examination Council, new examiner classes, and subject matter expert 
training sessions for the NCUA examiners and state regulators.
    Contracted service providers will develop and design several 
subject matter expert training classes for examiners and conduct a 
triennial review of several modules of the NCUA's core course 
curriculum. Additionally, regional and central office staff will 
conduct change management and teambuilding training exercises to help 
integrate new operations as a result of the Agency reorganization.
    [ssquf] The NCUA's information security program supports ongoing 
efforts to strengthen cybersecurity and ensure compliance with the 
Federal Information System Management Act.
    [ssquf] Agency financial management services, human resources 
technology support, and payroll services. The NCUA contracts for these 
back-office support services with the U.S. Department of 
Transportation's Enterprise Service Center (DOT/ESC) and the General 
Services Administration. A new service provider offers the NCUA's human 
resource system, HR Links, also adopted by many federal agencies, the 
shared solution automates routine human resource tasks and improves 
time and attendance functionality.
    [ssquf] Audit. The NCUA Office of Inspector General contracts with 
an accounting firm to conduct the annual audit of the agency's four 
permanent funds. The results of these audits are posted annually on the 
NCUA website and also included as part of the agency's Annual Report.
    A significant share of the budget for the Contracted Services 
category finances on-going infrastructure support for the agency. For 
example, the NCUA relies on recurring contracted services to maintain a 
number of the agency's systems including critical legacy systems such 
as AIRES and Credit Union Online. Several of the NCUA's core 
information technology systems and processes require additional 
contract support in 2019, which result in increased budgets in the 
Contracted Services category, as described below.
    Within the budget for the Office of Chief Information Officer, an 
additional $3.2 million is required for various contractor support 
requirements in 2019, including:
     Contract Realignment $1.5M. Costs include transition to 
new Operations & Maintenance contract, increase in support skill set to 
cover service gap.
     New Capabilities & Modernization $1.0M. Costs include 
examination solution circuit's maintenance & program rent cost, new 
security tools implementation, and true-up for service management 
system licenses.
     Cost Inflation $0.5M. Costs include expected inflation for 
telecommunications, equipment repair and maintenance and contract 
services.
     AMAC Support $0.2M. Costs include establishing on-site 
information technology support for AMAC.
    Within the budget for the Office of Chief Financial Officer, the 
annual fee paid to the Department of Transportation (DOT) for the 
NCUA's financial management system will increase by nearly $800,000 
over the 2018 level. This is because DOT revised its cost allocation 
model for all of its financial system customers. In 2018, the NCUA also 
replaced its legacy human resources and time and attendance systems 
with a more modern platform called HR Links, which better supports the 
agency's workforce and personnel requirements. The 2019 cost for HR 
Links decreased from the 2018 level by $325,000 due to one-time start-
up costs that were included in the 2018 Board Approved Budget.

VI. Capital Budget

Overview

    The NCUA uses a rigorous process to identify the investment needs 
for information technology, facility improvements and repairs, and 
other

[[Page 49713]]

multi-year capital investments. The NCUA staff review the agency's 
inventory of owned facilities, equipment, information technology 
systems, and information technology hardware to determine what requires 
repair, major renovation, or replacement. The staff then make 
recommendations for prioritized investments to the Executive Director 
and the NCUA Board.
    Routine repairs and lifecycle-driven property renovations are 
necessary to properly maintain the 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.
    Information technology (IT) systems and hardware are another 
significant capital expenditure for modern organizations. The 2019 
budget includes significant investment in current and replacement IT 
systems. The NCUA Examination and Supervision Solution (ESS) project, 
for example, will replace the legacy Automated Integrated Regulatory 
Examination System (AIRES) system, and is the largest single capital 
investment in the 2019 budget. Other IT investments include ongoing 
enhancements and upgrades to decades-old legacy systems, incident and 
vulnerability management systems to enhance the agency's cybersecurity 
posture, and various hardware investments to refresh agency networks 
and ensure staff have the tools necessary to maintain and increase 
their productivity.
    The NCUA's 2019 capital budget is $22.0 million. The capital budget 
includes long-term investment projects. The Information Technology 
Prioritization Council recommended $17.1 million for IT software 
development projects and $4 million in other IT investments for 2019. 
The NCUA facilities require $0.9 million in capital investments. 
Detailed descriptions of all 2019 capital projects, including a 
discussion of how each project helps the agency achieve its strategic 
goals and objectives, are provided in Appendix C.
Summary of Capital Projects
    Examination and Supervision Solution and Infrastructure Hosting 
(ESS&IH) ($8.4 million). The purpose of the 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 Commercial-Off-The-Shelf 
(COTS) solution.
    Data Collection Solution (DCS)/Enterprise Content Management (ECM) 
Analysis of Alternatives Study ($0.2 million). The purpose of this 
project is to award and complete an Analysis of Alternatives (AoA) to 
study the operational effectiveness, suitability, risks and life-cycle 
costs of alternative ECM solutions to support the NCUA's requirements 
for data collection, workflow, document management, customer 
relationship management and records management. An AoA needs to be 
completed to gather the requirements across these areas and to validate 
that the ECM solutions are the most effective and efficient way to meet 
the NCUA's data collection, document management, and records management 
needs.
    Business Intelligence (BI) Tools and Capability Enhancement ($1.9 
million). The purpose of this project is the collection, 
centralization, organization and storage of data collected by the 
Office of National Examination and Supervision (ONES) so that analysis 
is more accurate and efficient. This accessibility will integrate with 
BI tools to improve ONES's overall reporting and data analysis 
capabilities.
    Enterprise Central Data Repository ($1.0 million). The Enterprise 
Central Data Repository (ECDR) project will implement a central data 
repository that will serve as the data integration point for 
Examination and Supervision Solution (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.
    Asset Management and Assistance Center (AMAC) Servicing System 
($0.6 million). The purpose of this project is to enhance AMAC's legacy 
content management and servicing systems. Phase I of the project 
resulted in an enhanced, secure content management solution. During 
Phase II of the project, the NCUA will identify, acquire, and implement 
replacement solutions for AMAC's aging core data processor. The key 
project deliverables are the acquisition and deployment of a 
replacement core processing system.
    Enterprise Data Analytics, Governance and Reporting Services ($0.6 
million). The purpose of this project is the centralization, 
organization and storage of the NCUA data so analysis is more accurate, 
simple and easily distributed across the agency. This increased 
accessibility is combined with analytic tools to improve the NCUA's 
overall reporting and data analysis capabilities.
    Asset and Liabilities Management Application ($3.2 million). The 
purpose of the Asset and Liabilities Management (ALM) application is 
for the NCUA to build internal analytical capabilities to run 
supervisory stress testing in house and to conduct regular quantitative 
risk assessments by procuring and configuring off-the-shelf analytical 
tools, models and software used commonly in stress testing and other 
risk management activities.
    This effort delivers a complete solution that will focus on 
modernizing the NCUA's supervision tools and approaches, identifying 
material risks facing the covered credit unions, and tailoring 
resources to the material risks and risk focused exams. This effort 
will allow the NCUA to reduce the existing third party contractor's 
role to only consultation.
    Enterprise Learning Management System Replacement ($0.6 million). 
The purpose of the Enterprise Learning Management System (LMS) 
Replacement project is to conduct market research, initiate an 
acquisition, create a project management plan, and execute the 
production and implementation of a cost-effective, cloud-based solution 
and training services that provides the NCUA with the full-range of 
eLearning functionality associated with a modern LMS. This will allow 
for enhanced examiner utilization and accessibility driven by quality 
content, ease of use and system reliability, role-based interface, 
ability to view personalized pages by role, centralized content, 
adherence to federally-mandated reporting requirements and records 
management adherence.
    Governance, Risk Management, and Compliance (GRC) tool for Managing 
Compliance Information ($0.3 million). The purpose of the GRC Tool for 
Managing Compliance Information project is to acquire and implement a 
software platform that provides a structured repository for all system 
security and privacy documentation; security risk assessments; risk 
scoring; Plan of Actions and Milestones (POAM) management; and 
authorization workflow.
    Financial Management Analysis of Alternatives ($0.35 million). The 
purpose of this project is to award and complete an Analysis of 
Alternatives

[[Page 49714]]

(AoA) for federal financial management system service providers. The 
NCUA's current financial management system service provider--the 
Department of Transportation's Enterprise Service Center (ESC)--will 
increase the fee it charges the NCUA in 2019 by approximately $800,000, 
or 40 percent more than the 2018 charge. As a result, the NCUA plans to 
review alternative service providers to determine whether it is 
possible to achieve similar or better financial management results in a 
cost-effective manner.
    Enterprise Laptop Lease ($0.8 million). The purpose of the 
Enterprise Laptop Refresh project is to provide the NCUA with a more 
efficient, mobile friendly, and secure tool to help employees better 
perform their jobs at a reasonable cost.
    Information Technology Infrastructure, Platform and Security 
Refresh ($2.4 million). The purpose of the Information Technology (IT) 
Infrastructure, Platform and Security Refresh project is to refresh 
and/or replace routers, switches virtual servers, wireless, virtual 
private network, end of life and end of service components in order to 
ensure that the NCUA data is secure and operations are stable.
    Security Management Tool Upgrades ($0.7 million). The purpose of 
the Security Management Tool Upgrades (Security Event and Incident 
Management (SEIM)) project is to optimize event collection, monitoring, 
detection and response capabilities for information security and IT 
operations, which will enable data-driven proactive management of the 
agency's cybersecurity programs.
    The purpose of the Security Management Tool Upgrade (Patch & 
Vulnerability Management) project is to comply with the Department of 
Homeland Security's requirements for its Continuous Diagnostics and 
Mitigation (CDM) program, which sets standards for effective IT 
cybersecurity service management for Federal agencies.
    Refresh End of Life VOIP Phone System ($0.2 million). The purpose 
of the Refresh End of Life Voice over internet Protocol (VoIP) Phone 
System project is to replace the agency's phone system infrastructure 
and endpoints, which is at end of its service life. The new system will 
ensure voice communications capabilities via a cloud solution that 
provides business continuity and stable operations.
    The NCUA Central Office Heating, Ventilation, and Air Conditioning 
(HVAC) System Replacement ($0.75 million). The NCUA central office HVAC 
system replacement project will recapitalize the HVAC system in the 
agency's central office building, including all cooling towers, air 
handlers, boilers and HVAC components. The current HVAC system is 
original to the facility, 24 years old and obsolete. The current system 
is at the end of its usable life and it is not working efficiently.
    The NCUA Austin, Texas Office Building Modernization ($0.15 
million). In 2019, the NCUA plans to repair or replace several priority 
projects at the Austin, Texas office building. These capital 
improvements are required for the facility to continue routine and safe 
operations, and align with the life cycle replacement required for 
critical infrastructure.

VII. Share Insurance Fund Administrative Budget

Overview

    The Share Insurance Fund Administrative budget funds direct costs 
associated with authorized Share Insurance Fund activities. As in 2018, 
the 2019 budget has been developed to reflect the closure of the 
Temporary Corporate Credit Union Stabilization Fund into the Share 
Insurance Fund. The direct charges to the Share Insurance Fund are 
combined with the NGN program and administrative costs, and represent 
total estimated costs to the Share Insurance Fund.\9\
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    \9\ Note these direct costs are exclusive of any costs that are 
shared with the Operating Fund through the Overhead Transfer Rate, 
and with payments available upon requisition by the Board, without 
fiscal year limitation, for insurance under section 1787 of this 
title, and for providing assistance and making expenditures under 
section 1788 of this title in connection with the liquidation or 
threatened liquidation of insured credit unions as it may determine 
to be proper.
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    The cost of the NCUA Guaranteed Notes (NGN) program and the 
Corporate System Resolution Program, including costs associated with 
the administration of those programs, will be 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 and training. Other direct 
expenses include contract support for stress testing for certain large 
credit unions and financial audit support.
    The 2019 total Share Insurance Fund Administrative budget is 
estimated to be $8.4 million, $0.3 million, or 3.5 percent, more than 
2018. The budget increase is primarily driven by increased support 
required for data-driven analytics on stress testing that large credit 
unions perform, partially offset by savings in other cost categories. 
The Share Insurance Fund Administrative budget also funds five 
positions that were formerly part of the Stabilization Fund budget. 
These costs will enable the NCUA to continue supporting the NGN 
program, which includes managing legacy assets within the NGN trusts. 
Legacy assets consist of over 1,000 investment securities that are 
secured by residential mortgages and other assets.
    The 2020 requested budget supports similar workload and resources; 
however, one additional stress test would be added and is estimated to 
cost $750 thousand. The total administrative budget estimate is 
estimated to be $9.1 million.
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 $1.24 million, 
which represents a decrease of $22,000 compared to 2018. This decrease 
is due to aligning the budget to actual payroll costs for staff on 
board. Personnel compensation is 15 percent of the total budget. The 
financial analysts on the NGN team have specialized technical expertise 
to manage the remaining $7 billion of legacy assets. Personnel costs 
are estimated in a manner similar to the operating budget.
Travel
    The estimated travel cost of $52,000 is less than one percent of 
the overall 2019 budget and decreases by 31 percent from last year's 
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 
budget, are estimated to be $27,000, a decrease of $3,000 from the 2018 
budget based on updated 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 35 
percent of the budget, are estimated to be $2.9

[[Page 49715]]

million, an increase of $0.3 million from the 2018 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 are needed to assist the NCUA with the following 
types of services:
     Consulting Services in the amount of $1.0 million will 
support two NCUA offices: Examination and Insurance and the Chief 
Financial Officer. Services will include quarterly management reviews 
of asset valuations, as well as analyses of emerging issues. Support 
for the annual financial audit process and improvements in internal 
controls will also be provided by contractors. 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 will be used to assist with 
accounting, tax, financial reporting, and systems support for the 
corporate Asset Management Estates.
     Valuation Services in the amount of $1.1 million to fund 
valuation support for the NGN legacy assets. As supported by the NGN 
Oversight Committee, resources are also needed to conduct special 
analyses, including valuations for determining reasonable market prices 
for securities to be sold by auction.
     Software and Data Subscription Services in the amount of 
$0.8 million will support technical tools used to provide waterfall 
models, calculations, and metrics for the structured investment 
products underlying the NGN portfolio. The service provides coverage of 
all relevant asset classes, waterfall models that are seasoned and 
tested throughout the industry, and a broad array of calculations and 
metrics. Financial data analytics play a critical role in the 
surveillance, modeling, and pricing of the legacy assets that 
securitize the NGN Trusts, as well as supporting the management reviews 
that the NCUA performs on the cash flow projections. Now that some of 
the NCUA Guaranteed Notes have begun maturing, the NCUA has added data 
subscription services to provide additional valuation and has added 
support for the legacy asset disposition process.
     Other annual subscriptions provide important services 
related to surveillance of the portfolio of corporate bonds and 
mortgage-related bonds. Independent credit research services include 
fundamental capital structure research, credit analyses for 
surveillance of corporate bond portfolio and monoline insurer exposure, 
and direct access to various industry experts for discussion on 
specific credits.
Other Direct Expenses
    Other direct expenses of the Share Insurance Fund represent close 
to 50 percent of the budget, and are estimated to be $4.1 million. The 
estimated costs for state examiner computer leases and training in the 
amount of $1.2 million is slightly lower than prior years. This will 
allow the NCUA to analyze the stress testing that large credit unions 
perform. By 2020, additional credit unions are anticipated to be 
subject to stress testing. Financial audit support is also expected to 
remain the same as prior years.
[GRAPHIC] [TIFF OMITTED] TN02OC18.017


[[Page 49716]]


    The NCUA website has a dedicated section that provides financial 
reports for the Share Insurance Fund,\10\ and a separate page that 
explains the NCUA Guaranteed Notes Program and provides comprehensive 
reporting and analysis on the legacy assets.\11\
---------------------------------------------------------------------------

    \10\ See: https://www.ncua.gov/services/Pages/share-insurance/reports.aspx.
    \11\ See: https://www.ncua.gov/regulation-supervision/Pages/guaranteed-notes.aspx.
[GRAPHIC] [TIFF OMITTED] TN02OC18.018

VIII. Financing the NCUA Programs

Overview

    As part of the annual budgetary process, the NCUA remains mindful 
that its operating funding comes directly from federal and state 
chartered credit unions. The agency strives to ensure that any 
allocation of these funds follows a thorough review of the necessity of 
the expenditures and whether programs are operating in an efficient, 
effective, transparent, and fully accountable manner.
    To achieve its statutory mission, the NCUA incurs various expenses, 
including those involved in examining and supervising federally insured 
credit unions. The NCUA Board adopts an Operating Budget, including the 
Capital Budget, in the fall of each year to fund the vast majority of 
the costs of operating the agency.\12\ The Federal Credit Union Act 
authorizes two primary sources to fund the Operating Budget:
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    \12\ Some costs are directly charged to the Share Insurance Fund 
when appropriate to do so. For example, costs for training and 
equipment provided to State Supervisory Authorities are directly 
charged to the Share Insurance Fund.
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    (1) Requisitions from the Share Insurance Fund ``for such 
administrative and other expenses incurred in carrying out the purposes 
of [Title II of the Act] as [the Board] may determine to be proper''; 
\13\ and
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    \13\ 12 U.S.C. 1783(a).
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    (2) ``fees and assessments (including income earned on insurance 
deposits) levied on insured credit unions under [the Act].'' \14\ Among 
the fees levied under the Act are annual Operating Fees, which are 
required for federal credit unions under 12 U.S.C. 1755 ``and may be 
expended by the Board to defray the expenses incurred in carrying out 
the provisions of [the Act,] including the examination and supervision 
of [federal credit unions].''
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    \14\ 12 U.S.C. 1766(j)(3). Other sources of income for the 
Operating Budget have included interest income, funds from 
publication sales, parking fee income, and rental income.
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    Taken together, these dual authorities effectively require the 
Board to determine which expenses are appropriately paid from each 
source while giving the Board broad discretion in allocating expenses.
    In 1972, the Government Accountability Office recommended the NCUA 
adopt a method for properly allocating Operating Budget costs--that is, 
the portion of the NCUA's budget funded by requisitions from the Share 
Insurance Fund and the portion covered by Operating Fees paid by 
federal credit unions.\15\ The NCUA has since used an allocation 
methodology, known as the Overhead Transfer Rate (OTR), to determine 
how much of the Operating Budget to fund with a requisition from the 
Share Insurance Fund.
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    \15\ https://www.gao.gov/assets/210/203181.pdf.
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    To allocate agency expenses between these two primary funding 
sources, the NCUA uses the OTR methodology. The OTR is the formula the 
NCUA uses to allocate insurance-related expenses to the Share Insurance 
Fund under Title II. Almost all other operating expenses are collected 
through annual Operating Fees paid by federal credit unions.\16\
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    \16\ 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.'' 1755(b).
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    Two statutory provisions directly limit the Board's discretion with 
respect to Share Insurance Fund requisitions for the NCUA's Operating 
Budget and, hence, the OTR. First, expenses funded from the Share 
Insurance Fund must carry out the purposes of Title II of the Act, 
which relate to share insurance.\17\ Second, the NCUA may not fund its 
entire Operating Budget through charges to the Share Insurance 
Fund.\18\ The NCUA has not imposed additional policy or regulatory 
limitations on its discretion for determining the OTR.
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    \17\ 12 U.S.C. 1783(a).
    \18\ 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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[[Page 49717]]

Overhead Transfer Rate (OTR) Methodology

    The NCUA undertook a multi-year process to simplify and make more 
transparent its OTR methodology.\19\ 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 NCUA Board approved the current methodology for calculating the 
OTR at its November 2017 open meeting. The current methodology is 
principles-based, simpler, more equitable and transparent, and will 
result in lower administrative costs.
    The OTR formula is based on the following underlying principles to 
allocate agency operating costs:
    1. Time spent examining and supervising federal credit unions is 
allocated as 50 percent insurance related.\20\
    2. All time and costs the NCUA spends supervising or evaluating the 
risks posed by federally insured state-chartered credit unions or other 
entities the NCUA does not charter or regulate (for example, third-
party vendors and CUSOs) is allocated as 100 percent insurance 
related.\21\
    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.\22\
    4. Time and costs related to the NCUA's role in administering 
federal share insurance and the Share Insurance Fund are allocated as 
100 percent insurance related.\23\
    These four principles are applied to the activities and costs of 
the agency, which results in the portion of the agency's Operating 
Budget that is transferred from the Share Insurance Fund. Based on the 
Board-approved methodology, the OTR for 2019 is estimated to be 60.4 
percent; thus, 60.4 percent of the total operating budget is estimated 
to be paid out of the Share Insurance Fund. The remaining 39.6 percent 
of the Operating Budget is estimated be paid for through the FCU 
Operating Fee. The explicit and implicit distribution of total 
Operating Budget costs for FCUs and federally insured, state-chartered 
credit unions (FISCUs) is as follows:


----------------------------------------------------------------------------------------------------------------
   Est. share of the operating
        budget covered by:                          FCUs                                   FISCUs
----------------------------------------------------------------------------------------------------------------
FCU Operating Fee................  39.6%                                   0.0%
OTR x Percent of Insured Shares..  31.0% (60.4% x 51.3%)                   29.4% (60.4% x 48.7%)
----------------------------------------------------------------------------------------------------------------
    Total........................  70.6%                                   29.4%
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    In terms of accounting for funds transferred from the Share 
Insurance Fund to the Operating Fund, the OTR is applied to actual 
expenses incurred each month. Therefore, the rate calculated by the OTR 
formula is multiplied by each month's actual operating expenses and 
charged to the Share Insurance Fund. Because of this monthly 
reconciliation to actual operating expenditures, when the NCUA's 
expenditures are less than budgeted, the amount charged to the Share 
Insurance Fund is also less--and those lower expenditures benefit both 
federally chartered and state charted credit unions.
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    \19\ 82 FR 55644 (Nov. 22, 2017).
    \20\ 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 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.
    \21\ 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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    The following chart illustrates the share of the Operating Budget 
paid by Federally Insured Credit Unions (FCUs, 70.6%) and Federally 
Insured, State-Chartered Credit Unions (FISCUs, 29.4%).
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    \22\ 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.
    \23\ 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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[GRAPHIC] [TIFF OMITTED] TN02OC18.019

Operating Fee

    The Board delegated authority to the Chief Financial Officer to 
administer the methodology approved by the Board for calculating the 
Operating Fees, and to set the fee schedule as calculated per the 
approved methodology outlined in this section. There is no change to 
the underlying approved Operating Fee methodology for 2019; the change 
in the assessments for 2019 are due to changes in the OTR rate and to 
indexing the fee schedule for projected asset growth.
    For 2019, based on the OTR methodology discussed above, the 
resulting share of the budget that is funded from the Operating Fee is 
$140.859 million. This equates to 0.0185 percent of the estimated 
federal credit union assets for December 2018. The overall increase for 
the operating fee is 2.2 percent over 2018.
    The Operating Fee will be assessed to federal credit unions based 
on estimated year-end assets. Credit unions with assets less than $1 
million will not be assessed an Operating Fee. To set the assessment 
scale for 2019, federal credit union asset growth will be projected 
through December 31, 2018. Based on the June 30, 2018, Call Report 
data, annual growth is projected to be 6.2 percent at year end. The 
asset level dividing points will be increased by this same projected 
growth rate. Assets are indexed annually to preserve the same relative 
relationship of the scale to applicable asset base.
    To establish the rate applicable to each asset level, the factors 
outlined in the table below result in an average Operating Fee rate 
increase of 2.2 percent for natural person federal credit unions. The 
corporate federal credit union rate scale remains unchanged from prior 
years.
    To illustrate the rate impact for federal credit unions with assets 
under $1.5 billion, the fee increases from $264 per one million dollars 
of assets, to $270 per one million dollars of assets. This is an 
increase of $6 per million dollars of assets, or 2.2 percent.
    Federal credit union assets between $1.5 billion and $4.5 billion 
would be assessed at a rate of $78.69 per million, and assets above 
$4.5 billion would be assessed at $26.28 per million. As noted above, 
these tiers were indexed to the 6.2 percent projected asset growth, and 
the rates are increased by 2.2 percent.
    The following tables illustrate the methodology and calculations 
used to develop the Operating Fee.

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IX. Appendix A: Supplemental Budget Information

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X. Appendix B: Capital Projects

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    By the National Credit Union Administration Board on September 
26, 2018.
Gerard S. Poliquin,
Secretary of the Board.
[FR Doc. 2018-21282 Filed 10-1-18; 8:45 am]
 BILLING CODE 7535-01-P