The NCUA Staff Draft 2021-2022 Budget Justification, 74090-74159 [2020-25546]

Agencies

• National Credit Union Administration

[Federal Register Volume 85, Number 224 (Thursday, November 19, 2020)]
[Notices]
[Pages 74090-74159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25546]



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Vol. 85

Thursday,

No. 224

November 19, 2020

Part VI





 National Credit Union Administration





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The NCUA Staff Draft 2021-2022 Budget Justification; Notice

Federal Register / Vol. 85, No. 224 / Thursday, November 19, 2020 / 
Notices

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NATIONAL CREDIT UNION ADMINISTRATION


The NCUA Staff Draft 2021-2022 Budget Justification

AGENCY: National Credit Union Administration (NCUA).

ACTION: Notice.

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SUMMARY: The NCUA's draft, ``detailed business-type budget'' is being 
made available for public review as required by federal statute. The 
proposed resources will finance the agency's annual operations and 
capital projects, both of which are necessary for the agency to 
accomplish its mission. The briefing schedule and comment instructions 
are included in the supplementary information section.

DATES: Requests to deliver a statement at the budget briefing must be 
received on or before November 20, 2020. Written statements and 
presentations for those scheduled to appear at the budget briefing must 
be received on or before 5 p.m. Eastern, November 30, 2020.
    Written comments without public presentation at the budget briefing 
may be submitted by December 11, 2020.

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 [email protected] by 
November 20, 2020. Include your name, title, affiliation, mailing 
address, email address, and telephone number. Copies of your 
presentation must be submitted to the same email address by 5 p.m. 
Eastern, November 30, 2020.
     Written comments: Submit comments to 
[email protected] by December 11, 2020. Include your name and the 
following subject line ``Comments on the NCUA Draft 2021-2022 Budget 
Justification.''
    Copies of the NCUA Draft 2021-2022 Budget Justification and 
associated materials are also available on the NCUA website at https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx.

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

SUPPLEMENTARY INFORMATION: The following itemized list details the 
documents attached to this notice and made available for public review:

I. The NCUA Budget in Brief
II. Introduction and Strategic Context
III. Forecast and Enterprise Challenges
IV. Key Themes of the 2021-2022 Budget
V. Operating Budget
VI. Capital Budget
VII. Share Insurance Fund Administrative Budget
VIII. Financing The NCUA Programs
IX. Appendix A: Supplemental Budget Information
X. Appendix B: Capital Projects

    Section 212 of the Economic Growth, Regulatory Relief, and Consumer 
Protection Act amended 12 U.S.C. 1789(b)(1)(A) to require the NCUA 
Board (Board) to ``make publicly available and publish in the Federal 
Register a draft of the detailed business-type budget.'' Although 12 
U.S.C. 1789(b)(1)(A) requires publication of a ``business-type budget'' 
only for the agency operations arising under the Federal Credit Union 
Act's subchapter on insurance activities, in the interest of 
transparency the Board is providing the agency's entire staff draft 
2021-2022 Budget Justification (budget) in this Notice.
    The draft budget details the resources required to support NCUA's 
mission as outlined in its 2018-2022 Strategic Plan. The draft budget 
includes personnel and dollar estimates for three major budget 
components: (1) The Operating Budget; (2) the Capital Budget; and (3) 
the Share Insurance Fund Administrative Budget. The resources proposed 
in the draft budget will be used to carry out the agency's annual 
operations.
    The NCUA staff will present its draft budget to the Board at a 
budget briefing open to the public and scheduled for Wednesday, 
December 2, 2020 from 10:00 a.m. to 12:00 p.m. Eastern. Due to the 
COVID-19 Pandemic, the budget briefing will be open to the public via 
live webcast only. Visit the agency's homepage (www.ncua.gov) and 
access the provided webcast link.
    If you wish to participate in the briefing and deliver a statement, 
you must email a request to [email protected] by November 20, 
2020. Your request must include your name, title, affiliation, mailing 
address, email address, and telephone number. The NCUA will work to 
accommodate as many public statements as possible at the December 2, 
2020 budget briefing. The Board Secretary will inform you if you have 
been approved to make a presentation and how much time you will be 
allotted. A written copy of your presentation must be delivered to the 
Board Secretary via email at [email protected] by 5 p.m. Eastern, 
November 30, 2020.
    Written comments on the draft budget will also be accepted by email 
at [email protected] until December 11, 2020. Include your name 
and the following subject line with your comments: ``Comments on the 
NCUA Draft 2021-2022 Budget Justification.''
    All comments should provide specific, actionable recommendations 
rather than general remarks. The Board will review and consider any 
comments from the public prior to approving the budget.

    By the National Credit Union Administration Board on November 
13, 2020.
Melane Conyers-Ausbrooks,
Secretary of the Board.

I. The NCUA Budget in Brief

Staff Draft 2021 and 2022 Budgets

    The National Credit Union Administration's (NCUA) 2018-2022 
Strategic Plan sets forth the agency's goals and objectives that form 
the basis for determining resource needs and allocations. The annual 
budget provides the resources to execute the strategic plan, to 
implement important initiatives, and to undertake the NCUA's major 
programs: Examination and supervision, insurance, credit union 
development, consumer financial protection, and asset management.

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    The NCUA's 2021-2022 budget justification consists of three 
separate budgets: The Operating Budget, the Capital Budget, and the 
National Credit Union Share Insurance Fund Administrative Budget. 
Combined, these three budgets total $342.5 million for 2021, which is 
4.9 percent less than the 2021 funding level approved by the NCUA Board 
in December 2019 as part of the two-year 2020-2021 budget, and 1.4 
percent less than the comparable level funded by the Board for 2020.
    Three significant factors drive the 2021 budget lower than the 2020 
level.
    1. The NCUA anticipates the continuation of remote/off-site 
examinations into the first few months of 2021, as the result of on-
going concerns about the COVID-19 pandemic, and that examinations-
related and other travel will begin to resume as we continue through 
2021. Accordingly, travel spending estimates in the 2021 budget are 
reduced by approximately 25 percent.
    2. The NCUA reduced its 2021 budget for travel by an additional 25 
percent because it proposes to use surplus funds that resulted from 
reduced travel in 2020. Combined with the first factor, these 
reductions account for approximately $12 million in travel-related 
budget that would otherwise have been included in the 2021 Operating 
Budget. Had the travel budget for 2021 included this $12 million, the 
Operating Budget would have increased by approximately 3.7 percent.
    3. A final factor driving lower overall spending in 2021 is the 
reduction in the Capital Budget, largely driven by the completion of 
the latest phase of the MERIT project.
    Staffing levels for 2021 and 2022 reflect the agency's current 
staffing requirements and proposed staffing enhancements related to 
high-priority initiatives.
    This document is a draft, staff-level budget proposal, made 
available to the NCUA Board members and the public for their 
consideration and comment. The contents of this document represent 
staff-level recommendations for 2021 NCUA funding and have not been 
endorsed or adopted by the NCUA Board. The NCUA plans to hold a public 
meeting on December 2, 2020 at 10:00 a.m. to review the budget document 
and receive comments from members of the public. Final adoption of the 
budget by the NCUA Board, including any changes to the staff draft that 
may result from public comments or Board member recommendations, is 
anticipated at the December Board meeting.

Operating Budget

    The proposed 2021 Operating Budget is $315.6 million. Staffing 
levels are requested to increase by five full-time equivalents (FTE) 
compared to the 2020 Board-approved budget.\1\
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    \1\ The published 2020 FTE level approved by the Board was 1,180 
for the Operating Budget. In March 2020, the NCUA Board approved one 
additional FTE. The revised 2021 Operating Budget proposes five more 
FTE, for a total of 1,186.
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    The 2021 Operating Budget, decreases approximately $0.3 million, or 
0.1 percent, compared to the 2020 Board-approved budget. The Operating 
Budget estimate for 2022 is $341.8 million and reflects no change to 
authorized positions from the 2021 proposed level.
    The following chart presents the major categories of spending 
supported by the 2021 budget, while specific adjustments to the 2020 
Board-approved budget are discussed in further detail, below:
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    Total Staffing. The budget supports 1,191 FTE in total for 2021, of 
which five are funded by the Share Insurance Fund Administrative 
Budget. The Operating Budget funds 1,186 FTE in 2021, a net increase of 
five FTEs from the 2020 levels approved by the Board. Additional staff 
have been added to several offices as discussed later in this document. 
Since 2018 and despite significant credit union asset growth, total 
NCUA staffing has remained within a relatively narrow range, as shown 
in the chart below.
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BILLING CODE 7535-01-C
    Pay and Benefits. Pay and benefits increase by $9.6 million in 
2021, or 4.1 percent, for a budget of $240.9 million. A substantial 
amount of the growth in pay and benefits--nearly $2.3 million--is the 
result of OPM increasing the mandatory employer contribution for the 
Federal Employee Retirement System (FERS). Required FERS payments to 
OPM increase from 16 percent of covered employees' salaries to 17.3 
percent, a change of 130 basis points. Nearly all NCUA employees are 
covered by FERS, which includes a defined pension benefit funded by 
both employee and employer contributions. Because almost every federal 
agency is required to participate in FERS, the employer share of 
contributions increases throughout the government in 2021.
    The remaining increase in pay and benefits accounts for the merit 
and locality pay adjustments required by the NCUA's current collective 
bargaining agreement, the five new positions proposed for 2021, 
anticipated staff promotions, position changes, and increased costs for 
other mandatory employer contributions such as health insurance.

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    Travel. The travel budget decreases by $13.9 million in 2021, or 
50.7 percent, for a budget of $13.5 million. Included in this total and 
as discussed above, the NCUA reduced the 2021 travel budget by 
approximately $12 million because the agency expects travel in the 
first quarter of the year will remain at minimal levels due to the 
COVID-19 pandemic, and because the agency plans to use surplus 2020 
travel funds to pay for a portion of 2021 travel costs. In addition, 
the cost of training the examiner workforce to use the new MERIT system 
was already funded in 2020; most training was rescheduled for 2021 but 
do not require additional resources to carry out.
    The NCUA continues working to contain travel costs by expanding 
offsite examination work and using technology-driven training. In 
future budgets, the NCUA will determine how such adjustments to its 
examination approach will help mitigate travel costs.
    Rent, Communications, and Utilities. The budget for rent, 
communications, and utilities decreases by $1,038,000 in 2021, or 12.6 
percent, for a budget of $7.2 million. This funding pays for space-
related costs, telecommunications services, data capacity contracts, 
and information technology network support. The decrease in 2021 is 
primarily due to the termination of a lease for office space in 
Alexandria VA and the elimination of payments for the NCUA Central 
Office Building note from the Share Insurance Fund, which would be 
retired by paying off all principal balances using surplus 2020 travel 
funds.
    Administrative Expenses. Administrative expenses increase $0.6 
million in 2021, or 9.8 percent, for a total budget of $6.2 million. 
The increase to the administrative expenses budget category largely 
results from including in the 2021 budget the anticipated costs of 
employee relocations. In 2020, employee relocation costs were paid from 
surplus salaries and benefits funds available at the end of 2019.
    Contracted Services. Contracted services expenses increase by $4.5 
million in 2021, an increase of 10.3 percent compared to 2020, for a 
total budget of $47.8 million. The increase in spending for contract 
services primarily results from the operating and maintenance costs 
that will result from deployment of the MERIT system.
    Contracted services funding pays for products and services acquired 
in the commercial marketplace, and includes critical mission support 
services such as information technology hardware and software support, 
accounting and auditing services, and specialized subject matter 
expertise.

Capital Budget

    The proposed 2021 Capital Budget is $18.8 million.
    The 2021 Capital Budget is $6.4 million less than the 2021 funding 
level approved by the Board in December 2019, and $6.2 million less 
than the 2020 Board-approved budget.
    The Capital Budget pays for continued investments in critical 
technology and infrastructure projects. For the past several years, 
major component of the Capital Budget has been development of the first 
phases of the Enterprise Solution Modernization (ESM) program, which 
includes a new technical platform and security infrastructure, a 
central user interface for stakeholders to transact business with the 
NCUA, integration of business intelligence tools into the supervision 
function, and the MERIT examination system, which will replace the 
agency's antiquated AIRES examination software and will be used by both 
federal and state examiners in almost all credit union examinations. 
The MERIT system is scheduled for deployment to all examiners in 2021, 
and MERIT costs will transition to operating and maintenance budgets. 
The NCUA's Information Technology Prioritization Council recommended 
$12 million for IT software development projects that continue to 
replace the NCUA's decades-old and functionally obsolete information 
technology systems, and $5.6 million in other IT investments for 2021. 
The NCUA's facilities require $1.25 million in capital investments.

Share Insurance Fund Administrative Expenses

    The proposed 2021 Share Insurance Fund Administrative budget is 
$8.1 million.
    The 2021 Share Insurance Fund (SIF) Administrative Budget is $1.2 
million more than the 2021 funding level approved by the Board in 
December 2019, and $1.6 million more than the 2020 Board-approved 
budget. The increase in the SIF Administrative Budget is primarily 
attributed to the costs associated with tools and technology used by 
the Office of National Examinations and Supervision to oversee credit 
union-run stress testing for the largest Credit Unions using its own 
proprietary models. The cost to develop such models was included in 
past years' capital budgets and the tools and technology were deployed 
in 2020; the 2021 operating and maintenance costs for ONES tools is now 
included in the SIF Administrative Budget. Direct charges within this 
budget include administration of the NCUA Guaranteed Note (NGN) 
program, state examiner training and laptop leases for state examiners, 
as well as financial audit and internal control support for the Share 
Insurance Fund.

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

    Various public health restrictions instituted in response to the 
COVID-19 pandemic resulted in much lower-than-planned spending on NCUA 
employee travel in 2020, as the NCUA pivoted to remote and offsite 
examinations and work. The NCUA currently estimates that the agency 
will end 2020 having under-spent the Board-approved budget by 
approximately $18.3 million, mostly due to a reduction in travel as 
well as other operating expenses.
    The NCUA's response to the coronavirus pandemic has also led to a 
number of unplanned and unbudgeted expenses, particularly for 
information technology and operational support activities. As of the 
publication of this draft budget, the NCUA has reallocated $3.6 million 
of the projected travel surplus for the liquidation of a portion of 
NCUA's liabilities associated with disbursements to employees for leave 
earned in 2020, reducing the anticipated end of year balance for 
employee leave, as well as increased expenses for items such as remote 
communications and supply reimbursements due to required off-site work, 
information technology licensing and equipment costs, cleaning 
supplies, and facility cleaning and maintenance. These items were 
discussed as part of the mid-session budget briefing presented at the 
July 2020 Board meeting. The mid-session estimate was for a $13 million 
budget surplus from travel, offset by an estimated $5.8 million in 
increases to other spending categories. The revised surplus estimate is 
now $18.3 million, and the amount that has been reallocated is $3.6 
million.
    Deducting the $3.6 million that has been reallocated from the $18.3 
million, leaves a balance of $14.7 million, which--subject to approval 
by the NCUA Board--is being proposed for use in the following way:
     $5.8 million of the budget surplus for 2020 would be made 
available in 2021, to offset 2021's travel budget. For 2021, the NCUA 
is currently forecasting a need for about 75% of its annual travel 
budget, due to the anticipated ongoing travel and on-site work 
restrictions related to COVID. In addition to the $13.5 million 
included in this 2021 budget, an additional $5.8 million

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would be made available from the 2020 surplus, to fund travel at about 
75% of the typical need.
     $2.6 million of the budget surplus would be used to pay 
for COVID-related expenses in 2020 and 2021, which are largely of a 
one-time nature and are not anticipated to result in a long-term 
expense to the agency. This includes:
    [cir] The increase data capacity for computer networks, revised 
data reporting, conference calling services, and virtual meeting 
software, all of which spiked due to the remote/off-site work 
situation.
    [cir] Modifications to facilities operations and maintenance, 
including improvements to air handling and filtration systems; 
anticipated increases in facility cleaning and cleaning supplies; and 
medical consultant support to assess operating status and issues.
    [cir] An assessment of virtual exams in light of the shift to 
remote and off-site examination and supervision in 2020 as a result of 
COVID-19, to evaluate opportunities and long-term changes to the 
supervision program.
     $3.7 million of the surplus would be used to retire the 
note owed by the Operating Budget to the Share Insurance Fund for the 
Central Office building at 1775 Duke Street, Alexandria, VA. When the 
NCUA purchased the building, it was financed by the Share Insurance 
Fund, and the Operating Fund makes annual principal and interest 
payments. This action would retire the note three years ahead of 
schedule, fully repaying the Share Insurance Fund. This will reduce the 
Operating Budget by about $1.3 million in annual principal payments 
scheduled for 2021 through 2023, and also avoid additional interest 
payments for the remaining three years of the loan.
     $2.6 million for the final phase of facilities 
modernization at the Central Office. This project was originally 
planned in the original 2021 Capital Budget for $3.0 million. Over the 
past three years, the NCUA has been modernizing and updating the 
Central Office, much of which has not been updated in over 20 years. 
The project also supports security upgrades at the Central and regional 
offices. Accelerating the funding would enable much of the work to be 
done while a number of staff continue to work remotely, and will allow 
NCUA to terminate the lease it has at 1900 Duke Street rather than keep 
it for 2021, avoiding a cost of approximately $600,000. Therefore, in 
total, the use of the surplus for this project reduces the overall 2021 
budget by $3.6 million.

Budget Trends

    As shown in the chart below, the relative size of the NCUA budget 
(dotted line) continues to decline when compared to balance sheets at 
federally insured credit unions (solid line). This trend illustrates 
the greater operating efficiencies the NCUA has attained in the last 
several years relative to the size of the credit union system. 
Additionally, the NCUA has improved its operating efficiencies more 
aggressively than other financial industry regulators (dotted line 
compared to dashed line).
BILLING CODE 7535-01-P
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BILLING CODE 7535-01-C
    It is also notable that the NCUA's operations have become more 
efficient relative to the size of the credit union system because 
consolidation in the industry has led to growth in the number of large 
credit unions. This

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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 
responded to this increasing complexity through several initiatives: 
Creation of the specialized Office of National Examination and 
Supervision, development of in-house capabilities to oversee large 
credit unions' stress testing, use of specialist examiners with 
expertise in cybersecurity and capital markets, and improved quality of 
examination reports through enhanced quality review processes.

Federal Compliance Cost

    As a federal agency, the NCUA is required to devote significant 
resources to numerous compliance activities required by federal law, 
regulations, or, in some cases, Executive Orders. These requirements 
dictate how many of the agency's activities are implemented and the 
associated costs. These compliance activities affect the level of 
resources needed in areas such as information technology acquisitions 
and management, human capital processes, financial management processes 
and reporting, privacy compliance, and physical and cyber security 
programs. While agency managers are responsible for these activities, 
required compliance activities can add additional processes and 
procedures.

Financial Management

    Federal law, regulations, and government-wide guidance promulgated 
by the Office of Management and Budget (OMB), the Government 
Accountability Office (GAO), and the Department of the Treasury place 
numerous requirements on federal agencies including the NCUA regarding 
the management of public funds. Government-wide financial management 
compliance requirements include: Financial statement audits, improper 
payments, prompt payments, internal controls, procurement, audits, 
enterprise risk management, strategic planning, and public reporting of 
financial and other information.

Information Technology (IT)

    There are numerous laws, regulations and required guidance 
concerning information technology used by the federal government. Many 
of the requirements cover IT security such as the Federal Information 
Security Management Act. Other requirements cover records management, 
paperwork reduction, information technology acquisition, cybersecurity 
spending, and accessible technology and continuity.

Human Capital and Equal Opportunity

    Like other federal agencies, the NCUA is subject to an array of 
human capital-related laws, regulations, and other mandatory guidance 
issued by OPM, the Equal Employment Opportunity Commission, and OMB. 
Human capital compliance requirements include procedures for engagement 
related to hiring; management engagement with public unions and 
collective bargaining; employee discipline and removal procedures; 
required training for supervisors and employees; employee work-life and 
benefits programs; equal employment opportunity and required diversity 
and inclusion programs; and storage and retention of human resource 
records. The NCUA is also required by law to ``maintain comparability 
with other federal bank regulatory agencies'' when setting employee 
salaries.

Security

    The NCUA's security posture is driven by numerous legal and 
regulatory requirements covering the full range of security functions. 
The NCUA is required to comply with mandatory requirements for 
personnel security; physical security; emergency management and 
continuity; communications and information security; and insider threat 
activities. In addition to meeting specific legislative mandates, as a 
federal agency the NCUA is required to follow guidance from, but not 
limited to, the Office of the Director of National Intelligence, the 
Department of Defense, OPM, and the Federal Emergency Management 
Agency.

General Compliance Activities

    The NCUA also has other general compliance activities that cut 
across numerous offices. For example, the NCUA expends resources 
complying with the Privacy Act; Government in the Sunshine Act; 
multiple laws and regulations related to government ethics standards; 
and various reporting and other requirements set forth by the Federal 
Credit Union Act and other statutes.
    Federal retirement costs are an example of mandatory payments to 
other federal agencies. As discussed earlier in this document, the cost 
of mandatory contributions to OPM for most NCUA employees' retirement 
system will increase from 16.0 to 17.3 percent of their salaries, based 
on the OPM Board of Actuaries of the Civil Service Retirement System 
recommendations. The budget impact of these additional retirement costs 
in 2021 is an increase of approximately $2.3 million over 2020.
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BILLING CODE 7535-01-C

II. Introduction and Strategic Context

History

    For more than 100 years, credit unions have provided financial 
services to their members in the United States. Credit unions are 
unique depository institutions created not for profit, but to serve 
their members as credit cooperatives.
    President Franklin Roosevelt signed the Federal Credit Union Act 
into law in 1934 during the Great Depression, enabling credit unions to 
be organized throughout the United States under charters approved by 
the federal government. The law's goal was to make credit available to 
Americans and promote thrift through a national system of nonprofit, 
cooperative credit unions. In the years since the passage of the 
Federal Credit Union Act, credit unions have evolved and are larger and 
more complex today than those first institutions. But, credit unions 
continue to provide needed financial services to millions of Americans.
    The NCUA is the independent federal agency established in 1970 by 
the U.S. Congress to regulate, charter, and supervise federal credit 
unions. With the backing of the full faith and credit of the United 
States, the NCUA operates and manages the National Credit Union Share 
Insurance Fund, insuring the deposits of the account holders in all 
federal credit unions and the vast majority of state-chartered credit 
unions. No credit union member has ever lost a penny of deposits 
insured by the Share Insurance Fund.
    As of June 2020, the NCUA is responsible for the regulation and 
supervision of 5,164 federally insured credit unions, which have 
approximately 122.3 million members and more than $1.75 trillion in 
assets across all states and U.S. territories.\2\
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    \2\ Source: The NCUA quarterly call report data, Q2 2020.
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Authority

    Pursuant to the Federal Credit Union Act, authority for management 
of the NCUA is vested in the NCUA Board. It is the Board's 
responsibility to determine the resources necessary to carry out the 
NCUA's responsibilities

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under the Act.\3\ The Board is authorized to expend such funds and 
perform such other functions or acts as it deems necessary or 
appropriate in accordance with the rules, regulations, or policies it 
establishes.\4\
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    \3\ See 12 U.S.C. 1752a(a).
    \4\ See 12 U.S.C. 1766(i)(2).
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    Upon determination of the budgeted annual expenses for the agency's 
operations, the Board determines a fee schedule to assess federal 
credit unions. The Board gives consideration to the ability of federal 
credit unions to pay such a fee, and the necessity of the expenses the 
NCUA will incur in carrying out its responsibilities in connection with 
federal credit unions.\5\ In July 2020, the Board approved for 
publication in the Federal Register proposed changes to its regulation 
and methodology for determining the fees due from federal credit 
unions, and has invited public comment on the proposals.\6\
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    \5\ See 12 U.S.C. 1755(a)-(b).
    \6\ See https://www.federalregister.gov/d/2020-16981 and https://www.federalregister.gov/d/2020-17009.
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    Pursuant to the law, fees collected are deposited in the agency's 
Operating Fund at the Treasury of the United States, and those fees are 
expended by the Board to defray the cost of carrying out the agency's 
operations, including the examination and supervision of federal credit 
unions.\7\ In accordance with its authority \8\ to use the Share 
Insurance Fund to carry out a portion of its responsibilities, the 
Board approved an Overhead Transfer Rate methodology, and authorized 
the Office of the Chief Financial Officer to transfer resources from 
the Share Insurance Fund to the Operating Fund to account for 
insurance-related expenses.
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    \7\ See 12 U.S.C. 1755(d).
    \8\ See 12 U.S.C. 1783(a).
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Mission, Goals, and Strategy

    The NCUA's 2021-2022 Budget Submission supports the agency's fourth 
year implementing its 2018-2022 Strategic Plan to achieve its 
priorities and improve program performance.
    Throughout 2021 and 2022, the NCUA will continue fulfilling its 
mission to ``provide, through regulation and supervision, a safe and 
sound credit union system which promotes confidence in the national 
system of cooperative credit,'' and its vision to ensure that the 
``NCUA protects credit unions and consumers who own them through 
effective supervision, regulation and insurance.'' This budget commits 
the resources necessary to implement the NCUA's plans to identify key 
challenges facing the credit union industry and leverage agency 
strengths to help credit unions address those challenges.
    The budget supports the NCUA's programs, which are focused on 
achieving the agency's three strategic goals:
     Ensure a safe and sound credit union system;
     Provide a regulatory framework that is transparent, 
efficient, and improves consumer access; and
     Maximize organizational performance to enable mission 
success.
    Additional information about alignment of the budget to the NCUA's 
strategic goals is in Appendix A.
    In support of its first strategic goal--ensure a safe and sound 
credit union system--the NCUA will continue to supervise federally 
insured credit unions effectively and maintain a strong Share Insurance 
Fund.
    The NCUA's primary function is to identify credit union system 
risks, determine the magnitude of those risks, and mitigate 
unacceptable levels through the examination and supervision program. 
The agency identifies supervision program priorities each year, 
aligning budgeted resources to these priorities while addressing 
emerging issues in order to minimize losses to the Share Insurance 
Fund. Program priorities in 2021 include ongoing efforts to:
     Ensure compliance with Bank Secrecy Act and Anti-Money 
Laundering laws and regulations;
     examine credit union operations for compliance with 
applicable consumer financial protection regulations;
     review credit union policies and the use of loan workout 
strategies, risk management practices, and new strategies implemented 
to assist borrowers impacted by the COVID-19 pandemic, including new 
programs authorized through the CARES Act;
     ensure that credit unions have evaluated and effectively 
manage the economic impact of COVID-19 on their credit risk, capital 
position, and overall financial stability;
     evaluating critical security controls for credit union 
information systems in response to emerging cyber-attacks, which are a 
persistent threat to the financial sector;
     assess credit unions' exposure and planning related to a 
transition away from LIBOR; and,
     review liquidity risk management and planning in all 
credit unions.
    The NCUA staff of credit union examiners are the agency's most 
important assets for identifying and addressing risks before they 
threaten members' deposits. To do their jobs effectively in this 
complex and dynamic financial environment, the NCUA staff require the 
advanced skills, training, and tools supported by the budget. The 
multi-year Enterprise Solution Modernization (ESM) program will reach a 
major milestone in 2021 with the deployment of the Modern Examination 
and Risk Identification Tool (MERIT), the agency's modernized 
examination tool replacing the Automated Integrated Regulatory 
Examination System (AIRES), to all credit union examiners and state 
regulators. As the agency transitions to this new tool, which will 
result in more efficient and effective supervision, the NCUA must 
ensure its staff is prepared to use it. Training originally scheduled 
and paid for in the 2020 budget has been postponed to 2021 because of 
COVID-19 related travel restrictions.
    To fulfill the NCUA's second strategic goal--provide a regulatory 
framework that is transparent, efficient, and improves customer 
access--the agency continues its efforts to review its regulations in a 
manner that encourages innovation, provides flexibility, and fulfills 
its primary mission of protecting safety and soundness. The budget 
allocates resources to agency programs that keep regulations up to date 
and consistent with current law, and that assist existing and 
prospective credit unions with expansion and new chartering activities. 
The NCUA also seeks to promote financial inclusion through its 
Advancing Communities through Credit, Education, Stability, and Support 
(ACCESS) initiative to better serve a changing population and economy 
while simultaneously ensuring compliance with consumer and financial 
protections.
    Accomplishing the third strategic goal--maximize organizational 
performance to enable mission success--ensures the NCUA employees 
achieve the agency's mission by supporting them through efficient and 
effective business processes, modern and secure technology, and 
suitable tools necessary to perform their duties. The budget makes 
investments in improved tools and facilities for the NCUA staff, and 
technological enhancements including new systems that will improve 
operational effectiveness and efficiency. The budget also allocates 
resources to developing better human capital planning and processes 
including a new leadership development strategy and a focus on training 
for the transition to MERIT.

[[Page 74099]]

Organization, Major Agency Programs, and Workforce

    The NCUA operates its headquarters in Alexandria, Virginia, to 
administer and oversee its major programs and support functions; its 
Asset Management and Assistance Center (AMAC) in Austin, Texas, to 
liquidate credit unions and recover assets; and three regional offices, 
to carry out the agency's supervision and examination program. 
Reporting to these regional offices, the NCUA has credit union 
examiners responsible for a portfolio of credit unions covering all 50 
states, the District of Columbia, Guam, Puerto Rico, and the U.S. 
Virgin Islands.
    The NCUA organizational chart below reflects the agency's current 
structure, and the map shows each region's geographical alignment:
BILLING CODE 7535-01-P
[GRAPHIC] [TIFF OMITTED] TN19NO20.024


[[Page 74100]]


[GRAPHIC] [TIFF OMITTED] TN19NO20.025

BILLING CODE 7535-01-C
    The NCUA's regional offices will carry out the agency's 2021 
examination program. The NCUA uses an extended examination cycle for 
well-managed, low-risk federal credit unions with assets of less than 
$1 billion. Additionally, the NCUA's examiners perform streamlined 
examination procedures for financially and operationally sound credit 
unions with assets less than $50 million. In addition, the Office of 
National Examination and Supervision (ONES) will continue to examine 
corporate credit unions and large consumer credit unions with assets 
that total over $10 billion. Consumer credit unions fall within ONES' 
purview based on assets reported on the first quarter call report for 
the preceding year. Therefore, based on 2020 first quarter call report 
statistics, in 2021 ONES will examine and supervise 11 consumer credit 
unions with 21.5 million members, accounting for $324.5 billion in 
credit union assets. For the 2022 examination cycle, an additional 
seven credit unions are projected to cross the $10 billion threshold 
and under existing regulations fall within the supervisory purview of 
ONES.
    In 2021 and 2022, the agency's workforce will undertake tasks in 
all of the NCUA's major programs:
    Supervision: The NCUA supervises federally insured credit unions 
through examinations and regulatory enforcement including providing 
guidance through various publications, taking administrative actions 
and conserving, liquidating, or merging severely troubled institutions 
as necessary to manage risk.
    Insurance: The NCUA manages the $17.7 billion \9\ Share Insurance 
Fund, which provides insurance to at least $250,000 for shares held at 
federally insured credit unions. The fund is capitalized by credit 
unions and through retained earnings.
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    \9\ See https://www.ncua.gov/files/publications/share-insurance-financial-highlights-2020-june.pdf.
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    Credit Union Development: Through training, partnerships and 
resource assistance, the NCUA fosters credit union development, 
particularly the expansion of services to eligible members provided by 
small, minority, newly chartered, and low-income designated credit 
unions. The NCUA also charters new federal credit unions, as well as 
approves modifications to existing charters and fields of membership.
    Consumer Financial Protection: The NCUA protects consumers' rights 
through effective enforcement of federal consumer financial protection 
laws, regulations, and requirements. The NCUA also develops and 
promotes financial education programs for credit unions to assist 
members in making smarter financial decisions.
    Asset Management: The NCUA conducts credit union liquidations and 
performs management and recovery of assets through AMAC. This office 
effectively and efficiently manages and disposes assets acquired from 
liquidations.
    The NCUA also performs stakeholder outreach and is involved in 
numerous cross-agency initiatives. The NCUA conducts stakeholder 
outreach to clearly understand the needs of the credit union system. 
The NCUA seeks input from all of its stakeholders, including the 
Administration, Congress, State Supervisory Authorities, credit union 
members, credit unions, and their associations.
    The NCUA collaborates with the other financial regulatory agencies 
including through participation in several councils. Significant 
councils include the Financial Stability Oversight Council (FSOC), the 
Federal Financial Institutions Examination Council (FFIEC), and the 
Financial and Banking Information Infrastructure Committee (FBIIC). 
These councils and relationships help ensure consistent policy and 
standards within the nation's financial system, where appropriate.

[[Page 74101]]

Budget Process--Strategy to Budget

    The NCUA's budget process starts with a review of the agency's 
goals and objectives set forth in the strategic plan. The strategic 
plan is a framework that sets the agency's direction and guides 
resource requests, ensuring the agency's resources and workforce are 
allocated and aligned to agency priorities and initiatives.
    Each regional and central office director at the NCUA develops an 
initial budget request identifying the resources necessary for their 
office to support the NCUA's mission, strategic goals, and strategic 
objectives. These budgets are developed to ensure each office's 
requirements are individually justified and remain consistent with the 
agency's overall strategic plan.
    For regional offices, one of the primary inputs in the development 
process is a comprehensive workload analysis that estimates the amount 
of time necessary to conduct examinations and supervise federally 
insured credit unions in order to carry out the NCUA's dual mission as 
insurer and regulator. This analysis starts with a field-level review 
of every federally insured credit union to estimate the number of 
workload hours needed for the budget year. The workload estimates are 
then refined by regional managers and submitted to the NCUA central 
office for the annual budget proposal. The workload analysis accounts 
for the efforts of nearly seventy percent of the NCUA workforce and is 
the foundation for budget requests from regional offices and ONES.
    In addition to the workload analysis, from which central office 
budget staff derive related personnel and travel cost estimates, each 
of the NCUA offices submit estimates for fixed and recurring expenses, 
such as rental payments for leased property, operations and maintenance 
for owned facilities or equipment, supplies, telecommunications 
services, major capital investments, and other administrative and 
contracted services costs.
    Because information technology investments impact all offices 
within the agency, the NCUA has established an Information Technology 
Prioritization Council (ITPC). The ITPC meets several times each year 
to consider, analyze, and prioritize major information technology 
investments to ensure they are aligned with the NCUA's strategic plan. 
These focused reviews result in a mutually agreed-upon budget 
recommendation to support the NCUA's top short-term and long-term 
information technology needs and investment priorities.
    Once compiled for the entire agency, all office budget submissions 
undergo thorough reviews by the responsible regional and central office 
directors, the Chief Financial Officer, and the NCUA's executive 
leadership. Through a series of presentations and briefings by the 
relevant office executives, the NCUA Executive Director formulates an 
agency-wide budget recommendation for consideration by the Board.
    In recent years, the Board has emphasized the need for increased 
transparency of the NCUA's finances and its budgeting processes. In 
response, the Office of the Chief Financial Officer has made draft 
budgets available for public comment via the NCUA's website, and 
solicited public comments before presenting final budget 
recommendations for the Board's approval. Furthermore, the Economic 
Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-
174, enacted May 24, 2018, requires in Section 212 that the NCUA ``make 
publicly available and publish in the Federal Register a draft of the 
detailed business-type budget.'' To fulfill this requirement, the Board 
delegated to the Executive Director the authority to publish the draft 
budget before submitting it for Board review.
    This 2021-2022 budget justification document includes comparisons 
to the Board approved 2020-2021 budget, and includes a summary 
description of the major spending items in each budget category to 
provide transparency and understanding of the use of budgeted 
resources. Estimates are provided by major budget category, office, and 
cost element.
    The NCUA also posts supporting documentation for its budget request 
on the NCUA website to assist the public in understanding its budget 
development process. The budget request for 2021 represents the NCUA's 
projections of operating and capital costs for the year, and is subject 
to approval by the Board.

Commitment to Financial Stewardship

    The NCUA funds its activities through operating fees levied on all 
federal credit unions and through reimbursements from the Share 
Insurance Fund, which is funded by both federal credit unions and 
federally insured state-chartered credit unions. The Overhead Transfer 
Rate (OTR) calculation determines the annual amount that the Share 
Insurance Fund reimburses the Operating Fund to pay for the NCUA's 
insurance-related activities. At the end of each calendar year, the 
NCUA's financial transactions are subject to audit in accordance with 
Generally Accepted Government Auditing Standards.\10\
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    \10\ See 12 U.S.C. 1783(b) and 1789(b).
---------------------------------------------------------------------------

    The Board and the agency are committed to providing sound financial 
stewardship. In recent years, the NCUA Chief Financial Officer, with 
support and direction from the Executive Director and Board, has worked 
to improve the NCUA's financial management, financial reporting, and 
budget processes.
    The NCUA revised its financial presentations to conform to federal 
budgetary concepts and increase transparency of the agency's planned 
financial activity, starting with the 2018 budget. The 2021-2022 budget 
continues this presentation. The NCUA is the only Financial 
Institutions Reform, Recovery, and Enforcement Act (FIRREA) agency that 
publishes a detailed, draft budget and solicits public comments on it 
at a meeting with its Board and other agency leadership.
    The NCUA continues to work diligently to strengthen its internal 
controls for financial transactions, in accordance with sound financial 
management policies and practices. Based on the results of the NCUA's 
assessments conducted through the course of 2019, the agency provided 
an unmodified Statement of Assurance (signed February 14, 2020) that 
its management had established and maintained effective controls to 
achieve the objectives of the Federal Managers Financial Integrity Act 
(FMFIA) and Office of Management and Budget (OMB) Circular A-123. 
Specifically, the NCUA supports the internal control objectives of 
reporting, operations, and compliance, as well as its integration with 
overarching risk management activities. Within the Office of the Chief 
Financial Officer, the Internal Controls Assessment Team (ICAT) 
continues to mature the agency-wide internal control program and 
continues to strengthen the overall system of internal control, further 
promote the importance of identifying risk, and ensure the agency has 
identified appropriate responses to mitigate identified risks, in 
accordance with the Government Accountability Office's Standards for 
Internal Controls in the Federal Government (Green Book) requirements.

Enterprise Risk Management

    The NCUA uses an Enterprise Risk Management (ERM) program to 
evaluate various factors arising from its operations and activities 
(both internal to the agency and external in the

[[Page 74102]]

industry) that can impact the agency's performance relative to its 
mission, vision, and performance outcomes. Agency priority risks 
include both internal considerations such as the agency's control 
framework, information security posture, and external factors such as 
credit union diversification risk. All of these risks can materially 
impact the agency's ability to achieve its mission.
    The NCUA's ERM Council provides oversight of the agency's 
enterprise risk management activities. Through the ERM program, 
established in 2015, the agency is identifying, analyzing, and managing 
risks that could affect the achievement of its strategic objectives. In 
2020, the NCUA utilized ERM principles to respond to the operational 
challenges and opportunities created by the COVID-19 pandemic. In 2021, 
the NCUA plans to continue its efforts to mature its ERM program, 
analyze high-priority enterprise risks using its assessment framework, 
and refresh its inventory of enterprise risks.
    Overall, the NCUA's ERM program promotes effective awareness and 
management of risks, which, when combined with robust measurement and 
communication, are central to cost-effective decision-making and risk 
optimization within the agency. This holistic evaluation of how the 
agency pursues its goals and objectives is guided by the agency's 
appetite for risk and considers resource availability or limitations. 
The NCUA believes that for many strategic decisions about its programs, 
ERM offers a better framework for evaluating both the quantitative and 
qualitative aspects of enterprise-level decisions than the types of 
cost-benefit analyses used for regulatory development. In addition, the 
agency's risk appetite helps the NCUA's employees align risks with 
opportunities when making decisions and allocating resources to achieve 
the agency's strategic goals and objectives.
    The NCUA adopted its enterprise risk appetite statement in the 
2018-2022 Strategic Plan, which is:

    The NCUA is vigilant and has an overall judicious risk appetite. 
The NCUA's primary goal is to ensure the safety and soundness of the 
credit union system and the agency recognizes it is not desirable or 
practical to avoid all risk. Acceptance of some risk is often 
necessary to foster innovation and agility. This risk appetite will 
guide the NCUA's actions to achieve its strategic objectives in 
support of providing, through regulation and supervision, a safe and 
sound credit union system, which promotes confidence in the national 
system of cooperative credit.

    This enterprise risk appetite statement is part of the NCUA's 
overall management approach and is supported by detailed appetite 
statements for individual risk areas.
    In practice, this means that the NCUA recognizes that risk is 
unavoidable and sometimes inherent in carrying out the agency's 
mandate. The NCUA is positioned to accept greater risks in some areas 
than in others; however, when consolidated, the risk appetite 
establishes boundaries for the entire agency and all of its programs. 
Collaboration across programs and functions is a fundamental part of 
ensuring the agency stays within its risk appetite boundaries, and the 
NCUA will identify, assess, prioritize, respond to, and monitor risks 
to an acceptable level. This budget proposal for 2021-2022 incorporates 
several programmatic investments that resulted from the NCUA's 
enterprise risk management reviews, such as acquiring data loss 
prevention and other network security tools, strengthening analytical 
focus on emerging financial risks within the credit union system, and 
assessing process and technology improvements that could improve the 
NCUA's financial management and reporting functions.

III. Forecast and Enterprise Challenges

Economic Outlook

    The economic environment is a key determinant of credit union 
performance. After several years of solid growth, the economy entered a 
recession at the start of 2020. The significant pull-back in spending 
that occurred as a result of COVID-19 and government efforts to slow 
its spread (including business closures and stay-at-home orders) led to 
an unprecedented drop in real gross domestic product (GDP) and a sharp 
increase in the unemployment rate from a five-decade low of 3.5 percent 
in February 2020, to a post-war high of 14.7 percent in April 2020. The 
Federal Government responded quickly, establishing loan programs for 
affected businesses and providing financial relief to households as 
well as enhanced benefit payments to unemployed workers. Federal 
Reserve policymakers cut short-term interest rates, increased the 
Federal Reserve's asset holdings, and established a number of lending 
programs to support financial conditions and the flow of credit to 
households, businesses, and state and local governments. Interest rates 
across the maturity spectrum fell to historically low levels.
    Despite the severity of the downturn, credit unions in the 
aggregate turned in a relatively solid performance in the first half of 
2020. Federally-insured credit unions added 4.0 million members over 
the year, boosting credit union membership to 122.3 million in the 
second quarter of 2020. Credit union assets rose by 15.1 percent to 
$1.75 trillion. Total loans outstanding at federally insured credit 
unions increased 6.6 percent to $1.14 trillion, and the system-wide 
delinquency rate declined 5 basis points to 58 basis points. Credit 
union shares and deposits increased by 16.5 percent over the year to 
$1.49 trillion in the second quarter of 2020, reflecting the boost to 
income from CARES Act payments to individuals and the sharp, economy-
wide increase in personal saving.
    The credit union system's net worth increased by 6.8 percent over 
the year to $182.9 billion in the second quarter of 2020. The jump in 
assets led to a drop in the credit union system's composite net worth 
ratio but, at 10.46 percent, the credit union system remained well-
capitalized. The overall liquidity position of credit unions improved. 
Cash and short-term investments as a percentage of assets rose from 13 
percent in the second quarter of 2019 to 18 percent in the second 
quarter of 2020, reflecting a 55 percent increase in cash and short-
term investments.
    By late spring, economic conditions had started to improve. 
Employment began to rise again in May and by September the unemployment 
rate had fallen to 7.9 percent. A consensus of forecasters \11\ expects 
the recovery in labor markets and the broader economy to continue. Real 
GDP is projected to grow 3.9 percent in 2021, following an anticipated 
4.0 percent drop in 2020. However, given the depth of the recession--
which is on track to be the most severe downturn since the Great 
Depression--forecasters do not expect the economy to return to its pre-
recession, late 2019 peak before the end of 2021. Forecasters expect 
the labor market recovery will take longer. Although employment is 
expected to rise and the unemployment rate will continue to decline, 
the unemployment rate is not forecast to return to pre-recession levels 
during the 2021-2022 budget window. The unemployment rate is projected 
to average 6.3% in the fourth quarter of 2021 and 5.5% at the end of 
2022.
---------------------------------------------------------------------------

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

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[[Page 74103]]

[GRAPHIC] [TIFF OMITTED] TN19NO20.026

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

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

    Even if the economy continues to expand as expected, the recent 
downturn will likely affect credit union performance through the end of 
the budget period. For example, a sustained, high level of unemployment 
could reduce loan demand, particularly for non-mortgage consumer loans, 
and affect credit quality. System-wide delinquency rates, which 
remained low through the second quarter, could begin to rise as the 
forbearance programs put in place during the spring come to an end. 
Credit union shares could remain elevated as consumers eschew riskier 
investments and opt to keep their funds in insured credit union 
deposits. A prolonged period of low interest rates also poses risks, 
particularly to credit unions that rely primarily on investment income 
for funding their operations.
    While the recovery in economic activity and labor markets is widely 
expected to continue, there is a high risk of a worse-than-expected 
outcome. Much will depend on the path of the coronavirus in the months 
ahead. If COVID-19 cases rise to levels that necessitate another wave 
of temporary business closures and other measures that hinder economic 
activity, the recovery could falter, leading to more job losses and 
higher unemployment. Weaker-than-expected economic conditions or 
another downturn would keep interest rates low or cause them to 
decline, particularly at the long end of the yield curve, and pose more 
significant challenges for the credit union system. The NCUA, like 
credit unions, needs to plan and prepare for a range of economic 
outcomes that could affect credit union performance and determine 
resource needs.

Other Risk Factors and Trends

    In addition to risks associated with movements and trends in the 
general economy, the NCUA and credit unions will need to understand 
their increasing exposure to, and address risks associated with, the 
technological and structural changes facing the system. Over the 
longer-term, increased concentration of loan portfolios, development of 
alternative loan and deposit products, technology-driven changes in the 
financial landscape, continued industry consolidation, and ongoing 
demographic changes will continue to shape the environment facing 
credit unions and will determine the resource needs of the NCUA.
    Cybersecurity: Credit unions' increasing dependency on technology 
is making the credit union system vulnerable to emerging cyber-enabled 
risks and threats. The prevalence of social engineering, malware/
ransomware, distributed denial of service (DDOS) attacks, and other 
forms of cyber-attacks are creating challenges at credit unions of all 
sizes, and will require ongoing measures for rapid detection, 
protection, response and recovery. These trends are likely to continue, 
and even accelerate, over the foreseeable future.
    Lending trends: Increasing concentrations in select loan types and 
the introduction of new types of lending by credit unions, emphasize 
the need for long-term risk diversification and effective risk 
management tools and practices, along with expertise to properly manage 
increasing concentrations of risk.
    Financial Landscape and Technology: New financial products that 
mimic deposit and loan accounts, such as

[[Page 74104]]

Apple Pay and peer-to-peer lending, pose a competitive challenge to 
credit unions and banks alike. Credit unions also face a range of 
challenges from financial technology (Fintech) companies in the areas 
of lending and the provision of other services. For example, 
underwriting and lending may be automated at a cost below levels 
associated with more traditional financial institutions, but may not be 
subject to the same regulations and safeguards that credit unions and 
other traditional financial institutions face. The emergence and 
increasing importance of digital currencies may pose both risks and 
opportunities for credit unions. As these institutions and products 
gain popularity, credit unions may have to be more active in marketing 
and rethink their business models.
    Technological changes outside the financial sector may also lead to 
changes in consumer behavior that indirectly affect credit unions. For 
example, the increase in on-demand use of auto services and pay-as-you-
go, on-demand vehicle rental could reduce purchases of consumer-owned 
vehicles. That could lead to a slowdown or reduction in the demand for 
vehicle loans, now slightly more than a third of the credit union 
system loan portfolio.
    Membership trends: While overall credit union membership continues 
to grow, roughly half of federally insured credit unions had fewer 
members at the end of the second quarter of 2020 than a year earlier. 
Demographic and field of membership changes are likely to continue 
leading to declining membership at many credit unions. All credit 
unions need to consider whether their product mix is consistent with 
their members' needs and demographic profile.
    Smaller credit unions' challenges and industry consolidation: Small 
credit unions face challenges to their long-term viability for a 
variety of reasons. If current consolidation trends persist, there will 
be fewer credit unions in operation in future years and those that 
remain will be considerably larger and more complex. As of June 30, 
2020, there were 627 federally insured credit unions with assets of at 
least $500 million, 34 percent more than just five years earlier. These 
627 credit unions accounted for 76 percent of credit union members and 
81 percent of credit union assets. Large credit unions tend to offer 
more complex products, services and investments. Increasingly complex 
institutions will pose management challenges for the institutions 
themselves, as well as the NCUA; consolidation means the risks posed by 
individual institutions will become more significant to the Share 
Insurance Fund.

IV. Key Themes of the 2021-2022 Budget

Overview

    The budget supports the priorities and goals outlined in the 
agency's strategic plan and its annual performance plan. The resources 
and initiatives proposed in the budget support the NCUA's mission to 
maintain a safe and sound credit union system.
    The COVID-19 pandemic, which onset early in 2020, remains a 
dominant consideration for the 2021-2022 agency priorities and its 
budget. The spread of COVID-19 has presented a multitude of challenges 
to the credit union industry and the NCUA, from the economic downturn 
and its impacts on individuals, business and institutions, to 
legislation such as the CARES act, to how the NCUA operates, to new 
cybersecurity concerns. The impacts of COVID-19 are most readily 
apparent in the 2021-22 budget due to the shift to remote/off-site 
supervision and work, which reduces travel expenses but also increases 
certain other expenses such as information technology.
    The 2021-2022 budget includes funding for the NCUA to increase 
permanent staffing in critical areas necessary to operate as an 
effective federal financial regulator capable of addressing emerging 
issues. Importantly, the agency has made efforts through 2020 to fill 
examination-related positions, so that NCUA is best prepared to address 
the economic impacts from the ongoing COVID-19 situation. The NCUA 
employees are the agency's most valuable resource for achieving its 
mission, and the agency is committed to a workplace and a workforce 
with integrity, accountability, transparency, inclusivity, and 
proficiency. We will continue investing in the workforce through 
training and development, helping employees develop the tools they need 
to do their work effectively.
    The 2021-2022 budget also invests in a number of agency priorities, 
including: The Advancing Communities through Credit, Education, 
Stability, and Support, or ACCESS, initiative focused on financial 
inclusion; increased use of off-site examinations work and data 
analytics through the Virtual Examination project; deployment of the 
MERIT system to all examiners; ongoing implementation of examination 
priorities updated in response to the COVID-19 pandemic; regulatory 
reform initiatives; and efforts to implement organizational 
efficiencies. The NCUA expects these efforts will result in a more 
effective organization.
    The efficiency and effectiveness of the agency's workforce is 
dependent upon the resiliency of the NCUA's information technology 
infrastructure and availability of technological applications. The NCUA 
is committed to implementing new technology responsibly and delivering 
secure, reliable and innovative technological solutions to support its 
mission. This necessitates investments funded in the Capital Budget and 
additional staff to provide the analytical tools and technology the 
workforce needs to achieve the NCUA mission.

Financial Inclusion

    At its heart, financial inclusion means expanding access to safe 
and affordable financial services for unbanked and underserved people 
and communities as well as broadening employment and business 
opportunities. The financial services industry--of which credit unions 
are an important part--plays a key role in helping families achieve 
financial freedom by building generational wealth; helping 
entrepreneurs to get their small businesses off the ground; and helping 
to create jobs and strengthen communities. The NCUA has a role to play 
in making sure that credit unions can support overlooked or underserved 
areas.
    The NCUA recently announced its Advancing Communities through 
Credit, Education, Stability, and Support, or ACCESS, initiative, which 
will bring together agency leaders to develop policies and programs 
that support financial inclusion within the NCUA and more broadly 
throughout the credit union system.\13\ The NCUA has dedicated 
resources from across the agency offices to ensure an inclusive and 
open-minded approach to refreshing and modernizing regulations, 
policies, and processes.
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    \13\ https://www.ncua.gov/access.
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    Addressing the various aspects of inclusion, the agency will look 
at the unique role credit unions can fill by providing access to 
unbanked and underserved individuals and communities, how credit unions 
can remain competitive within the financial services industry, and what 
steps can be taken to modernize the rules and processes for chartering 
new credit unions to provide consumers with services that meet their 
needs.

Virtual Examination Project

    In 2017, the NCUA Board approved the Virtual Examination project 
and

[[Page 74105]]

provided funding to research methods to conduct offsite as many aspects 
of the examination and supervision processes as possible. The Virtual 
Examination project team is researching ways to harness new and 
emerging data, advancements in analytical techniques, innovative 
technology, and improvements in supervisory approaches. Additionally, 
the COVID-19 pandemic necessitated a switch to an offsite examination 
posture, and the project team plans to build upon its work to date by 
integrating lessons learned during the pandemic in planning for 
enhanced offsite procedures.
    By identifying and adopting alternative methods to remotely analyze 
the financial and operational condition of a credit union, while 
maintaining or improving effectiveness relative to current 
examinations, it may be possible to significantly reduce the frequency 
and scope of onsite examinations. Onsite examination activities could 
potentially be limited to periodic data quality and governance reviews, 
interventions for material problems, and meetings or other examination 
activities that need to be handled in person. To be successful, 
examination staff will likely need to analyze more information about 
the credit union being examined and to communicate more frequently with 
management at the credit union. However, by conducting this analytic 
work offsite, the NCUA expects to have less impact on credit unions' 
day-to-day operations.
    The NCUA believes that effective Virtual Examinations should lead 
to greater use of standardized interaction protocols, advanced 
analytical capabilities, and better-informed subject matter experts. 
This should result in more consistent and accurate supervisory 
determinations, provide greater clarity and consistency with respect to 
how the agency conducts supervisory oversight, and reduce coordination 
challenges between agency and credit union staff.
    The virtual examination team will deliver to the NCUA Board by the 
end of 2020 an initial report discussing alternative methods identified 
to remotely analyze aspects of the financial and operational condition 
of a credit union.

Enterprise Solution Modernization

    In 2015, the NCUA conducted an assessment of the information 
technology (IT) needs across the agency and developed a business case 
for replacing its antiquated legacy systems. This assessment recognized 
the full range of industry-leading, cost-effective alternative 
strategies, services, and products for implementing the agency's next 
generation of IT information management, examination, supervisory, and 
data collection solutions.
    At that time, the NCUA acknowledged a technology revamp of this 
magnitude as a high-risk endeavor, both in terms of cost and delivered 
functionality. The risk stems from the number of systems impacted and 
the unique nature of the NCUA's applications, many of which require a 
high degree of customization. However, the agency required a major 
modernization after many years of under-investment in software and 
application development. In November 2015, the NCUA Board approved a 
plan for modernizing the agency's IT systems known as the Enterprise 
Solution Modernization (ESM) program. The ESM program recognizes the 
following legacy systems, capabilities and strategies need to be 
modernized:
    To better manage the complexity of the ESM Program, the NCUA 
established three sub-programs to modernize the NCUA's technology 
solutions and create an integrated examination and data environment 
that facilitates a safe and sound credit union system:
BILLING CODE 7535-01-P

[[Page 74106]]

[GRAPHIC] [TIFF OMITTED] TN19NO20.027

BILLING CODE 7535-01-C
    The NCUA 2021-2022 budget includes funding to complete the roll-out 
of the first Examination and Supervision Solution project as well as to 
initiate the first project under the Data Collection and Sharing 
Solution sub program.

Examination and Supervision Solution

    Given the age of the NCUA's legacy examination systems and their 
importance to the mission of the agency, priority was given to the 
following parts of the modernization effort in the first phase of ESM 
development:
    [cir] Better information security across the organization.
    [cir] Technical platform and foundation for new applications.
    [cir] AIRES replacement (Examination and Supervision Solution), 
including financial analytics.
    [cir] Central user interface for stakeholders to interact with the 
NCUA.
    [cir] Business Intelligence tools for enhanced analytical 
capabilities (added later to the initial phase as explained below).
    To deploy the Examination and Supervision Solution, it was first 
necessary to stand up new agency infrastructure that supports the full 
modernization program: The technology architecture, infrastructure, and 
security posture required to operate modernized systems. The necessary 
infrastructure was acquired and put in place in 2019.
    The new examination solution, which is named the Modern Examination 
and Risk Identification Tool (MERIT), was released as a pilot to the 
Office of National Examinations and Supervision (ONES) and the State 
Supervisory Authorities (SSA) in North Carolina and Washington in 
September 2019. The ESS program capabilities were further developed and 
were on schedule to be released to all users in the summer of 2020. 
However, the training rollout was delayed because of the coronavirus 
pandemic. Instead, the agency deployed the second release to current 
pilot users in July 2020 and began an extended pilot in September 2020 
for additional users from the NCUA's three Regional offices, the 
Wisconsin SSA, select corporate credit unions, and natural person 
credit unions of various asset sizes. The NCUA now plans to conduct 
training for its examiner workforce and other users in 2021, with 
deployment to all remaining system users in the third quarter of 2021.
    Enhancing NCUA's analytic capabilities is an important objective of 
the ESM program. As the MERIT development progressed, the agency 
identified an opportunity to incorporate a robust business intelligence 
solution

[[Page 74107]]

into the MERIT deployment. Though not originally included as part of 
the initial MERIT project plan, this addition advances the agency's 
analytic capabilities and is central to the strategy to shift more exam 
work offsite.
    In addition to better data analytics, MERIT provides numerous 
improvements over the legacy AIRES examination system, including:
    [cir] Better controlled access to examination data across the 
organization.
    [cir] Ability to request and submit items for the examination in an 
organized manner that is easily accessible to members of an exam team.
    [cir] Collaboration and real-time information for examiners, team 
members, and supervisors, including state supervisory authorities on 
joint exams.
    [cir] Opportunities for credit union users to manage examination 
findings and view completed examination reports.
    [cir] Business process improvements to achieve exam efficiencies, 
including less data redundancy and relational support between scope 
tasks, questionnaires, and findings.
    From 2015 to 2020, the NCUA has spent approximately $40.2 million 
on the ESM program, which includes the costs for ESS and MERIT. This 
total includes spending on program planning, a modernized and more 
secure IT infrastructure, the MERIT central user interface, and 
multiple releases of MERIT and associated examination systems.
    Through September 2020, the NCUA accomplished the following:
    [cir] Established the ESM technical program infrastructure 
platform, including enhanced IT security.
    [cir] Developed the central user interface known as NCUA Connect, 
achieving a secure, single entry point into NCUA applications.
    [cir] Deployed the new MERIT examination tool to pilot users to 
support examination and supervision activities.
    [cir] Deployed the Admin Portal which provides confirmed, delegated 
credit union and SSA administrative users the ability to add and manage 
user access to NCUA Connect for their organization.
    [cir] Deployed the Data Exchange Application to ingest credit union 
member loan and share data requested during the examination and 
supervision process.
    [cir] Developed financial analytics and new loan and share 
analytics with dashboards and visualizations designed to assist the 
examiner in identifying risk.
    The NCUA's 2021 budget includes $14.6 million for MERIT, split 
between the operating, capital and SIF administrative expenses budgets. 
Of this total, $14.3 million in the operating and capital budgets will 
support technical and system platform upgrades, surge support for 
functionality enhancements prior to the broad user rollout, and ongoing 
operations and maintenance enhancements, fixes, and technological 
upgrades for the deployed system. An additional $0.3 million for MERIT 
is in the SIF administrative expenses budget, reflecting the cost of 
making MERIT available for those state supervisory agencies that use 
it.
    The project is on schedule and met its 2019 performance target for 
deployment to and use by ONES and State regulators in Washington and 
North Carolina to carry out examinations and supervision contacts for 
all relevant federal credit unions with assets greater than $10 
billion. Due to the economic, travel, and social disruptions caused by 
the coronavirus pandemic, the NCUA has delayed the MERIT training 
rollout for all NCUA examiners originally planned for the third quarter 
of 2020. The MERIT project's performance goal for 2021 is:
    Finalize deployment and training of NCUA and SSA users on MERIT and 
associated examination systems to begin the transition from AIRES to 
MERIT by December 31, 2021.

Data Collection and Sharing Solution

    With the Examination and Supervision Solution project transitioning 
to an operations and maintenance state in 2021, the NCUA will next 
prioritize work on the Data Collection and Sharing (DCS) Solution 
initiative. The NCUA vision of the DCS project is to replace legacy 
systems and to streamline workflow processes. Activities to date have 
included the development and validation of high-level requirements with 
all NCUA stakeholders.
    During the next phase of DCS development, the NCUA will refine the 
validated requirements for use in an analysis of alternatives (AoA) 
study. The AoA study will provide a roadmap for acquiring and 
implementing a solution or set of solutions. The AoA will recommend the 
best approach for a phased rollout strategy needed to implement DCS 
capabilities and the replacement of legacy systems. This analysis will 
also be used to support DCS acquisition planning efforts.

Supervisory Priorities and COVID-19 Response

    In July 2020,\14\ the NCUA updated its annual supervisory 
priorities to address economic conditions that had emerged as a result 
of the COVID-19 pandemic, as well as various statutory and regulatory 
changes that occurred. Within these revised priorities, the NCUA is 
focusing its examination activities on areas that pose elevated risk to 
the credit union industry and the National Credit Union Share Insurance 
Fund. Additional information about the NCUA's response to the pandemic 
is available on the agency's COVID-19 web page.\15\
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    \14\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/update-ncuas-2020-supervisory-priorities.
    \15\ https://www.ncua.gov/coronavirus.
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Coronavirus Aid, Relief and Economic Security Act

    President Trump signed the Coronavirus Aid, Relief and Economic 
Security Act (CARES Act) into law on March 27, 2020. The NCUA has added 
the CARES Act as a supervisory priority to reflect the importance of 
the provisions outlined in the Act. NCUA examiners will review credit 
unions' good faith efforts to comply with the CARES Act and will take 
appropriate action, when necessary, to ensure credit unions meet their 
obligations under the new law.
    Multiple CARES Act provisions directly affect credit unions, 
including those that:
     Provide greater access to liquidity, and improve the 
general financial stability of member credit unions through changes to 
the Central Liquidity Facility;
     Suspend the requirement to categorize certain loan 
modifications related to the COVID-19 pandemic as troubled debt 
restructurings (TDRs);
     Authorize the Small Business Administration to create the 
Paycheck Protection Program, a loan guarantee program to assist 
eligible businesses;
     Change requirements for reporting loan modifications 
related to the COVID-19 pandemic to the credit reporting agencies;
     Prohibit foreclosures on all single family, federally 
backed mortgage loans between March 18, 2020 and May 17, 2020. Fannie 
Mae, Freddie Mac, FHA, VA and USDA subsequently extended the 
prohibition to June 30, 2020. The foreclosure moratorium expiration for 
mortgages purchased by Fannie Mae and Freddie Mac currently extends 
until August 31, 2020;

[[Page 74108]]

     Provide up to a 360-day forbearance for borrowers with a 
single-family, federally backed mortgage loan that experience a 
financial hardship related to the COVID-19 pandemic; and
     Provide up to a 90-day forbearance for borrowers with a 
multifamily, federally backed mortgage loan that experience a financial 
hardship related to the COVID-19 pandemic.

Bank Secrecy Act Compliance/Anti-Money Laundering

    The NCUA continues to budget resources to comply with the statutory 
mandate from Congress to enforce credit union compliance with Bank 
Secrecy Act (BSA) and Anti-Money Laundering (AML) laws and regulations. 
Technological advancements may expose even the smallest credit unions 
to potential illicit finance activities. The NCUA examines federal 
credit union compliance with BSA during every examination. 
Additionally, the NCUA assists state regulators as needed by conducting 
BSA examinations in federally insured, state-chartered credit unions.
    The NCUA will continue communicating with credit unions, engaging 
with law enforcement, and collaborating with the other banking 
regulators on several initiatives associated with this supervisory 
priority, including:
     Publishing additional updates to the FFIEC Bank Secrecy 
Act/Anti-Money Laundering Examination Manual;
     Establishing interagency work-streams to define AML 
compliance program effectiveness;
     Updating the interagency statement on enforcement of BSA/
AML requirements;
     Publishing guidance regarding politically exposed persons; 
and
     Offering clarification and suggestions to improve 
Suspicious Activity Report (SAR) and Currency Transaction Report (CTR) 
filings.
    The NCUA will also continue focusing on proper filing of SARs and 
CTRs, as well as reviews of bi-weekly 314(a) information requests from 
FinCEN. Law enforcement, intelligence, and counterterrorism officials 
depend on prompt reporting of any 314(a) matches and the vital 
information provided through timely and informative SARs and CTRs. 
Officials use this information regularly to identify and thwart illicit 
and terrorist financing activities, and to prosecute and convict guilty 
parties. Credit union efforts in this area help fight crime and keep 
America safe.

Consumer Financial Protection

    The COVID-19 pandemic continues to affect consumers and could 
result in increased consumer compliance risk in certain areas; consumer 
financial protection, therefore, remains an NCUA supervisory priority. 
The NCUA will continue to examine for compliance with applicable 
consumer financial protection regulations during every examination as 
established in agency's 2020 Letters to Credit Unions about 2020 
Supervisory Priorities,\16\ which included:
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    \16\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/2020-supervisory-priorities and https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/update-ncuas-2020-supervisory-priorities.
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     Electronic Fund Transfer Act (Regulation E). Examiners 
will evaluate electronic fund transfer policies and procedures and 
review initial account disclosures as well as Regulation E's error 
resolution procedures for when consumers assert an error.
     Fair Credit Reporting Act. Examiners will review credit 
reporting policies and procedures and the accuracy of reporting to 
credit bureaus, particularly the date of first delinquency.
     Gramm-Leach-Bliley (Privacy Act). Examiners will continue 
to evaluate credit union protection of non-public personal information 
about consumers.
     Small dollar lending (including payday alternative loans). 
Examiners will test for compliance with the NCUA Payday Alternative 
Lending rules and interest rate cap. Examiners will determine whether a 
credit union's short-term, small-dollar loan programs that are not NCUA 
Payday Alternative Lending comply with regulatory requirements.
     Truth in Lending Act (Regulation Z). Examiners will 
evaluate credit union practices concerning annual percentage rates and 
late charges. This includes evaluating whether finance charges and 
annual percentage rates are accurately disclosed and late fees are 
levied appropriately.
     Military Lending Act (MLA) and Servicemembers Civil Relief 
Act (SCRA). The MLA and SCRA have been supervisory priorities for the 
NCUA since 2017. For credit unions that have not received a recent 
review, examiners will review credit union compliance with the MLA and 
SCRA.
    The NCUA's consumer compliance reviews will now also emphasize 
review of the following regulatory changes enacted since the start of 
the COVID-19 pandemic:
     Electronic Fund Transfer Act (Regulation E). Examiners 
will evaluate credit union practices concerning the Regulation E, 
Remittance Transfer Rule changes to the safe harbor threshold and 
disclosures of rates and costs associated with remittance transfers.
     Truth in Lending Act (Regulation Z). Examiners will also 
evaluate credit union practices concerning the changes made in response 
to the COVID-19 pandemic to the Truth in Lending-Real Estate Settlement 
Procedures Act (TRID) rule and Regulation Z Rescission rules that 
permit members to waive the waiting periods under both rules.

Credit Risk Management and Allowance for Loan and Lease Losses

    The NCUA's January 2020 Letter to Credit Unions, 20-CU-01, 2020 
Supervisory Priorities,\17\ prioritized review of a credit union's loan 
underwriting standards and procedures, and exposure to elevated 
concentration risks as outlined in NCUA Letter to Credit Unions, 10-CU-
03, Concentration Risk.\18\ In response to the economic impact of the 
COVID-19 pandemic and subsequent regulatory and statutory changes, the 
NCUA is shifting its emphasis to reviewing actions taken by credit 
unions to assist borrowers facing financial hardship. The NCUA will 
also review the adequacy of loan and lease losses (ALLL) accounts to 
address the pro-cyclical effects of economic downturns.
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    \17\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/2020-supervisory-priorities.
    \18\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/concentration-risk.
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    NCUA examiners will review credit union policies and the use of 
loan workout strategies, risk management practices, and new strategies 
implemented to assist borrowers impacted by the COVID-19 pandemic, 
including new programs authorized through the CARES Act. In particular, 
examiners will evaluate a credit union's controls, reporting, and 
tracking of these programs. Examiners will also ensure credit unions 
have evaluated and are effectively managing the impact of COVID-19 on 
their credit risk, capital position, and overall financial stability.
    In addition, credit unions' risk-monitoring practices should be 
commensurate with the level of complexity and nature of their lending 
activities, provide for safe and sound lending practices, and ensure 
compliance with consumer protections and regulatory reporting 
requirements.
    Further, due to the recent developments in economic conditions and 
the Financial Accounting Standards Board's (FASB) decision to delay its

[[Page 74109]]

requirement to comply with the current expected credit losses (CECL) 
standard until January 2023, NCUA examiners will not be assessing 
credit unions' efforts to transition to the CECL standard until further 
notice. The NCUA encourages credit unions to continue to assess their 
needs and evaluate methodologies for the eventual implementation of the 
CECL standard.
    Credit unions must still maintain an ALLL account in accordance 
with FASB Accounting Standards Codification (ASC) Subtopic 450-20 (loss 
contingencies) and/or ASC 310-10 (loan impairment). NCUA examiners will 
be evaluating the adequacy of credit unions' ALLL accounts by 
reviewing:
     ALLL policies and procedures;
     Documentation of an ALLL reserving methodology, including 
modeling assumptions;
     Adherence to generally accepted accounting principles; and
     Independent reviews of credit union reserving methodology 
and documentation practices by the Supervisory Committee or by an 
internal or external auditor.

Information Systems and Assurance (Cybersecurity)

    Emerging cyber-attacks continue to pose a persistent threat to the 
financial sector, including credit unions, financial regulators, and 
the broader financial system. Advances in financial technology, an 
increased remote workforce, and increased use of mobile technology and 
cyberspace for financial transactions means more opportunities for 
cybersecurity threats and other technology-related issues. As a result, 
cybersecurity is one of the top priorities of the NCUA.
    The NCUA has transitioned its priority from performing Automated 
Cybersecurity Examination Tool (ACET) cybersecurity maturity 
assessments, to evaluating critical security controls. The NCUA is 
piloting an Information Technology Risk Examination solution for Credit 
Unions (InTREx-CU). InTREx-CU harmonizes the IT and Cybersecurity 
examination procedures shared by the Federal Deposit Insurance 
Corporation, the Federal Reserve System, and some state financial 
regulators to ensure consistent approaches are applied to community 
financial institutions. The InTREx-CU will be deployed to identify gaps 
in security safeguards, allowing examiners and credit unions to 
identify and remediate potential high-risk areas through the 
identification of critical information security program deficiencies as 
represented by an array of critical security controls and practices.
    The NCUA has also published information for credit unions on the 
increased cybersecurity threats resulting from the COVID-19 pandemic 
and additional resources for protecting their members. For more 
information, visit the NCUA's Cybersecurity Resources \19\ website and 
the Cybersecurity, Frauds, and Scams section on the NCUA's Frequently 
Asked Questions for Federally Insured Credit Unions.\20\
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    \19\ https://www.ncua.gov/regulation-supervision/regulatory-compliance-resources/cybersecurity-resources.
    \20\ https://www.ncua.gov/coronavirus/frequently-asked-questions-regarding-covid-19-ncua-and-credit-union-operations.
---------------------------------------------------------------------------

    The NCUA also places strong emphasis on ensuring the security of 
the agency's systems and the controlled, unclassified information it 
collects. The NCUA's Office of the Chief Information Officer is 
continually taking steps to enhance the agency's information security 
posture and ensure the NCUA's systems and information are protected 
from compromise, including the work done as part of ESM.

LIBOR Transition Planning

    In a March 23, 2020, statement, the United Kingdom's Financial 
Conduct Authority maintained its central assumption that firms cannot 
rely on LIBOR being published after the end of 2021. This should remain 
the target date for all credit unions to meet.
    Credit unions offer, own, and are counterparties to LIBOR-based 
products and contracts, including loans, investments, derivatives, 
deposits, and borrowings. These may be subject to increased legal, 
financial, and operational risks once the reference rate is no longer 
available. On July 1, 2020, the FFIEC issued a Joint Statement on 
Managing the LIBOR Transition \21\ that highlights the risks that will 
result from the transition away from LIBOR and encourages supervised 
institutions to continue their efforts to transition to alternative 
reference rates.
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    \21\ https://www.ncua.gov/newsroom/press-release/2020/financial-regulators-issue-statement-managing-libor-transition.
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    Planning for the LIBOR transition is an important operational and 
safety and soundness consideration for credit unions with material 
exposures. Examiners will continue assessing credit unions' exposure 
and planning related to a transition away from LIBOR. For credit unions 
with exposure to LIBOR, examiners will continue to conduct reviews 
using the NCUA's LIBOR Assessment Workbook.\22\
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    \22\ https://publishedguides.ncua.gov/examiner/Pages/default.htm#ExaminersGuide/IRR/IRRExamProcedures.htm%3FTocPath%3DInterest%2520Rate%2520Risk%7C__9.
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Liquidity Risk

    The NCUA's January 2020 Letter to Credit Unions, 20-CU-01, 2020 
Supervisory Priorities,\23\ included assessments of liquidity risk 
management as a supervisory priority, noting that on average, credit 
union balance sheets generally exhibit lower levels of on-balance sheet 
liquidity due to strong loan growth. At that time, the NCUA was 
focusing liquidity reviews to address the following, in credit unions 
with low-levels of on-balance sheet liquidity:
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    \23\ https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/2020-supervisory-priorities.
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     The potential effects of changing interest rates on the 
market value of assets and borrowing capacity;
     Scenario analysis for liquidity risk modeling, including 
possible member share migrations (for example, shifts from core 
deposits into more rate-sensitive accounts). Also, scenario analysis 
for changes in cash flow projections for an appropriate range of 
relevant factors (for example, changing prepayment speeds); and
     The appropriateness of contingency funding plans to 
address any potential liquidity shortfalls.
    The economic impact of the COVID-19 pandemic may result in 
additional stress on credit union balance sheets, potentially requiring 
robust liquidity management over the course of 2020 and into 2021. As a 
result, examiners will continue to review liquidity risk management and 
planning in all credit unions, and will place emphasis on:
     The effects of loan payment forbearance, loan 
delinquencies, projected credit losses and loan modifications on 
liquidity and cash flow forecasting;
     Scenario analysis for changes in cash flow projections for 
an appropriate range of relevant factors (for example, changing 
prepayment speeds);
     Scenario analysis for liquidity risk modeling, including 
changes in share compositions and volumes;
     The potential effects of low interest rates and the 
decline of credit quality on the market value of assets, funding costs 
and borrowing capacity; and
     The adequacy of contingency funding plans to address any 
potential liquidity shortfalls.

Impact of COVID-19 on NCUA Operations

    Since March 16, 2020, the NCUA has been operating in a remote work 
posture in response to the COVID-19 pandemic.

[[Page 74110]]

The NCUA has drafted a resumption plan to enable a safe and orderly 
return to onsite work.
    The draft NCUA resumption plan is currently designed as a three-
phased approach to restoring those on-site activities that have been 
suspended during the pandemic. Since the NCUA has been successful in 
maintaining all essential functions and activities under its remote 
posture, any decision to move to a new phase and resume some or all 
suspended activity will be made with caution, and supported by metrics 
and advice from public health professionals.
    The NCUA anticipates that as specific phases of the resumption plan 
are activated, these activations will take place on a county or local 
level, specific to the on-the-ground conditions reported by government 
authorities. As such, different portions of the NCUA workforce may 
operate under different resumption phases based upon local health 
conditions.
    The NCUA has also implemented enhanced cleaning procedures at all 
of the NCUA's facilities to ensure all NCUA owned or leased worksites 
are operated in a manner consistent with health guidance from the 
Centers for Disease Control.

Regulatory Reform

    The NCUA established a Regulatory Reform Task Force (Task Force) in 
March 2017 to oversee implementation of the agency's regulatory reform 
agenda. This is consistent with the spirit of Executive Order 13777 and 
the Trump administration's regulatory reform agenda. Although the NCUA, 
as an independent agency, is not required to comply with Executive 
Order 13777, the agency chose to review all of the NCUA's regulations, 
consistent with the spirit of initiative and the public benefit of 
periodic regulatory review. The NCUA has undertaken a series of 
regulatory changes as part of this effort, and continues to pursue a 
regulatory reform agenda.
    The NCUA's Regulatory Reform Task Force published its final report 
in December 2018. Since that time, the NCUA established an annual 
performance indicator to measure the regulatory reviews it completes on 
a yearly basis. The NCUA's current performance target for regulatory 
review is to complete review of one third of the agency's regulations 
on an annual basis.

V. Operating Budget

Overview

    The NCUA Operating Budget is the annual resource plan for the NCUA 
to conduct activities prescribed by the Federal Credit Union Act of 
1934. These activities include: (1) Chartering new federal credit 
unions; (2) approving field of membership applications of federal 
credit unions; (3) promulgating regulations and providing guidance; (4) 
performing regulatory compliance and safety and soundness examinations; 
(5) implementing and administering enforcement actions, such as 
prohibition orders, orders to cease and desist, orders of 
conservatorship and orders of liquidation; and (6) administering the 
National Credit Union Share Insurance Fund.

Staffing

    The staffing levels proposed for 2021 reflect the resource 
requirements that support the NCUA's continued efforts to modernize the 
examination process and enhance the efficiency and effectiveness of the 
supervisory process.
    In March 2020, the NCUA Board approved one position to support the 
agency's new Office of Ethics Counsel to support agency compliance with 
relevant ethics laws and regulations, to promote accountability and 
ethical conduct, and ensure the success of the NCUA's ethics programs. 
The full cost of this new position is included in the 2021 budget.
    The 2021 budget supports a total agency staffing level of 1,191 
full-time equivalents (FTE), of which 1,186 are funded in the Operating 
Budget. This is a net increase of five FTE, or 0.4 percent, compared to 
the Board-approved level for 2020. The new 2021 FTE are described in 
greater detail below.\24\
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    \24\ Full-time equivalent (FTE) employment is the total number 
of regular straight-time hours (i.e., not including comp time or 
holiday hours) worked by employees divided by the number of 
compensable hours applicable to the fiscal year, as defined by the 
Office of Management and Budget, Circular No. A-11. The NCUA uses 
the number of FTE projected in the budget to build its estimated pay 
and benefits calculations. The actual number of persons employed 
will vary at any point in time, based on vacancies, use of part-time 
employees, etc.
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BILLING CODE 7535-01-P

[[Page 74111]]

[GRAPHIC] [TIFF OMITTED] TN19NO20.028

    In addition to the staff assigned to regional offices, most of the 
staff in ONES are remote field staff who also travel to credit unions 
as part of their examination responsibilities.

Request for New Staff in 2021--+5 FTE

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

Consumer Compliance Program Officer--+1 FTE

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

Financial Literacy Specialist--+1 FTE

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

Senior Credit Specialist--+1 FTE

    This new position, within the Office of Examination and Insurance, 
will provide enhanced risk mitigation and program support for the 
credit risk area. Credit risk, and credit unions' lending functions in 
particular, represents the largest portion of the credit union system's 
business and continues to grow increasingly diverse and complex. The 
NCUA currently has several specialists who analyze the growing 
complexity of the commercial, residential mortgage,

[[Page 74112]]

and consumer lending markets. This additional position will ensure that 
the Office of Examination and Insurance identifies the increased risks 
and program needs of the credit union system by focusing on emergent 
credit risks, developing guidance and program policies needed to 
effectively implement risk management, and executing increasingly 
complex analytic portfolios.
    The staff draft budget and the related FTE authorization also 
includes two additional FTEs to account for the potential need for 
additional support (additional positions and/or changes to position 
grades) for the Central Liquidity Facility, the Board Secretary 
function, and financial innovation. Options are still being developed 
by the NCUA staff related to the resource needs and associated 
priorities of these functions for the Board to consider.
    Additionally, within the overall existing 2020 staffing level of 
1,186 FTE, the NCUA is adjusting its staffing plan to accomplish the 
following in 2021:
     Office of National Examinations and Supervision (ONES): To 
support the additional large consumer credit unions that will come 
under ONES supervision: One national supervision technician, one 
national lending specialist, one national supervision analyst, one 
financial data analyst, and one national information systems officer.
     Office of the Chief Information Officer: One data cloud 
infrastructure specialist and one network specialist to support the 
increasing demands and complexity of the agency's information 
technology systems and networks.
     Office of Examinations and Insurance: One additional risk 
officer to support anticipated increase in risk management actions.

Budget Category Descriptions and Major Changes

    There are five major expenditure categories in the NCUA budget. 
This section explains how these expenditures support the NCUA's 
operations, and presents a transparent overview of the Operating 
Budget.
[GRAPHIC] [TIFF OMITTED] TN19NO20.029

BILLING CODE 7535-01-C
    Actual expenses for the Operating Fund are reported monthly in the 
Operating Fund Financial Highlights posted on the NCUA website. Share 
Insurance Fund Financial Reports and Statements, which are also posted 
to the NCUA website, detail reimbursements

[[Page 74113]]

made to the Operating Fund for NCUA expenses.

Salaries and Benefits

    The budget includes $240.9 million for employee salaries and 
benefits in 2021. This change is a $9.6 million, or 4.1 percent, 
increase from the 2020 Board-approved budget.
    Salaries and benefits costs make up 76.3 percent of the total 
budget. There are two primary drivers of increased costs in 2021 for 
the Salaries and Benefits category:
    Merit and locality pay increases for the NCUA's employees are paid 
in accordance with the agency's current Collective Bargaining Agreement 
(CBA) and its merit-based pay system. Salaries are estimated to 
increase 3.4 percent in aggregate compared to 2020.
    Contributions for employee retirement to the Federal Employee 
Retirement System (FERS), which are unilaterally set by the Office of 
Personnel Management, cannot be negotiated or changed by the NCUA. 
Driven largely by the mandatory FERS rate adjustment, total NCUA 
benefits costs increase 6.0 percent in 2021 compared to 2020.
    These changes are described in more detail below.
    In 2021, the NCUA's compensation levels will continue to ``maintain 
comparability with other federal bank regulatory agencies,'' as 
required by the Federal Credit Union Act.\25\ The Salaries and Benefits 
category of the budget includes all employee pay raises for 2021, such 
as merit and locality increases, and those for promotions, 
reassignments, and other changes, as described below.
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    \25\ The Federal Credit Union Act states that, ``In setting and 
adjusting the total amount of compensation and benefits for 
employees of the Board, the Board shall seek to maintain 
comparability with other [F]ederal bank regulatory agencies.'' See 
12 U.S.C. 1766(j)(2).
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    Consistent with other federal pay systems, the NCUA's compensation 
includes base pay and locality pay components. The NCUA staff will be 
eligible to receive an average merit-based increase of 3.0 percent, and 
an additional locality adjustment ranging from 1.3 percent to 1.7 
percent, depending on the geographic location.
    The first-year cost of the new positions added in 2021 is estimated 
to be $1.0 million. Specific increases to individual offices' salaries 
and benefits budgets will vary based on current pay levels, position 
changes, and promotions.
    Personnel compensation at the NCUA varies among every office and 
region depending on work experience, skills, years of service, 
supervisory or non-supervisory responsibilities, and geographic 
locations. In general, more than 85 percent of the NCUA workforce has 
earned a bachelor's degree or higher, compared to approximately 35 
percent of the private-sector workforce. This high level of educational 
achievement ensures the NCUA workforce is able to fulfill its mission 
effectively and efficiently, and attracting a well-qualified workforce 
requires the agency to pay employees competitive salaries.
    Individual employee compensation varies, depending on the cost of 
living in the location where the employee is stationed. The federal 
government sets locality pay standards, which are managed by the 
President's Pay Agent--a council established to make recommendations on 
federal pay. The council uses data from the Occupational Employment 
Statistics program, collected by the Bureau of Labor Statistics, to 
compare salaries in over 30 metropolitan areas, and establishes 
recommendations for equitable adjustments to employee salaries to 
account for cost-of-living differences between localities.
    The OPM economic assumptions for actuarial valuation of the FERS 
have increased significantly for 2021. All federal agencies are 
expected to contribute 17.3 percent of FERS employees' salaries to the 
OPM retirement system, an increase of 130 basis points compared to the 
2020 level. This mandatary contribution is prescribed in the OPM 
Benefits Administration Letter dated May 2020. The estimated impact on 
the NCUA budget is an increase of approximately $2.3 million in 
mandatory payments to OPM, or approximately 0.7 percentage points of 
overall budgetary growth, compared to 2020 levels.
    The average health insurance costs for the Federal Employees Health 
Benefits (FEHBP) program for 2021 are consistent with historical actual 
expenses and the OPM estimate that the government share of FEHBP 
premiums will increase 3.0 percent in 2021. The employee salary and 
benefits category also includes costs associated with other mandatory 
employer contributions such as Social Security, Medicare, 
transportation subsidies, unemployment, and workers' compensation.
    In past years, the NCUA adjusted its budget downward by an expected 
vacancy rate for positions that are not filled during the year because 
of a time lag between employee separations and hiring new staff. Since 
2018, the NCUA has lowered its vacancy rate by more than 50 percent, 
and continues to closely monitor the hiring and attrition trends within 
its workforce. In anticipation of the need for a full complement of 
staff in 2021, and because of ongoing acceleration in the agency's 
hiring cycle time, the proposed 2021 budget does not include a vacancy 
adjustment.
    The 2022 budget request for salaries and benefits is estimated at 
$249.4 million, a $8.5 million increase from the 2021 level, which 
accounts for merit and locality increases consistent with the CBA 
(approximately $5.6 million), the full-year cost impact of new 
positions (approximately $1.0 million), and associated increases in 
benefits for all employees (approximately $1.9 million). The 
assumptions used for compensation-related adjustments are based on the 
CBA currently in force.

Travel

    The 2021 budget includes $13.5 million for Travel. This change is a 
50.7 percent decrease to the 2020 Board-approved budget.
    There are two reasons for the significant reduction in the 2021 
travel budget. First, the NCUA expects that pandemic-related travel 
restrictions will continue through the first quarter of 2021, and 
adjusted the budget downward as a result. Second, and subject to 
approval by the NCUA Board, the agency will use approximately $6 
million of unspent 2020 travel funds to offset the 2021 travel budget. 
Historically, the travel budget comprises approximately nine percent of 
the overall NCUA budget, however the share of travel in the 2021 budget 
will be only 4.3 percent.
    The travel cost category includes expenses for employees' airfare, 
lodging, meals, auto rentals, reimbursements for privately owned 
vehicle usage, and other travel-related expenses. These are necessary 
expenses for examiners' onsite work in credit unions. Close to two-
thirds of the NCUA's workforce is comprised of field staff who spend a 
significant part of their year traveling to conduct the examination and 
supervision program.
    The NCUA staff also travel for routine and specialized training. In 
2020, the NCUA had planned to conduct a series of training events to 
support the nationwide roll-out of MERIT; however, these training 
events were postponed to 2021 due to pandemic-related travel 
restrictions. Amounts budgeted for MERIT training in 2020 will be used 
to pay for the events' costs in 2021. The NCUA roll-out will be a labor 
intensive effort requiring travel for many of the NCUA's staff, and 
will provide hands-on training for this new system, which

[[Page 74114]]

will be officially deployed in the fourth quarter of 2021.
    During the COVID-19 pandemic, the agency and its employees 
successfully transitioned to an offsite examination posture, developing 
new procedures and processes to continue examination and supervisory 
work. In 2021, the NCUA will continue evaluating how it can conduct 
examinations remotely and offsite, which should result in future cost 
avoidance for travel. In addition, agency personnel will continue to 
utilize more virtual training options, where appropriate, to help 
minimize travel expenses.
    The 2022 budget request for travel is estimated to be $24.3 
million, or an 80.4 percent increase over the 2021 level. This increase 
results from returning to a full year of scheduled travel and from 
using up the unspent 2020 travel balances in 2021.

Rent, Communications, and Utilities

    The 2021 budget includes $7.2 million for Rent, Communications, and 
Utilities. This is a $1.0 million, decrease, or 12.6 percent less than 
the 2020 Board-approved budget. The Rent, Communications, and Utilities 
budget funds the agency's telecommunications and information technology 
network expenses, and facility rental costs.
    The NCUA used approximately $3.7 million of unspent 2020 travel 
funds to pay the balance of a loan taken from the Share Insurance Fund 
for construction of the NCUA's Central Office building. This reduces 
the Rent, Communications, and Utilities budget by approximately $1.3 
million per year through 2023.
    The telecommunication charges include leased lines, domestic and 
international voice (including mobile), and other network charges. 
Telecommunication costs include the circuits and any associated usage 
fees for providing voice or data telecommunications service between 
data centers, office locations, the internet and any customer, supplier 
or partner.
    The 2021 budget includes costs to support the NCUA's bandwidth at 
the NCUA disaster recovery sites, procurement of additional circuits 
and express routes for Microsoft365 implementation, and transition to 
the GSA-managed Enterprise Infrastructure Solutions (EIS). EIS is the 
federal government's contract for enterprise telecommunications and 
networking solutions. By transitioning to EIS, the NCUA will benefit 
from the comprehensive solution EIS provides to address all aspects of 
federal agency IT telecommunications, and infrastructure requirements.
    Office building leases, meeting rentals, office utilities, and 
postage expenses are also included in this budget category. Facility 
costs are approximately $700,000 in 2021 for office space rental for 
the Western Region, insurance, and ancillary costs for the NCUA Central 
Office. The annual utility costs for the Central Office and regional 
offices are estimated at $383,000.
    The 2021 budget also includes $627,000 for event rental costs for 
examiner meetings and other training events. This is a decrease of 
approximately $500,000 compared to 2020 since the costs of MERIT-
related training were already incurred in 2020 but the classes were 
rescheduled to 2021 because of the COVID-19 pandemic.
    The 2022 budget request for the Rent, Communications, and Utilities 
category is estimated to be $8.4 million, an increase of $1.2 million 
over the 2021 level, which includes an additional $740,000 for 
telecommunications transitions and $500,000 for space rentals for a 
national conference.

Administrative Expenses

    The 2021 budget includes $6.2 million for Administrative Expenses. 
This is an increase of $552,000, or 9.8 percent, compared to the 2020 
Board-approved budget. Recurring costs in the Administrative Expenses 
category include the annual reimbursement to the Federal Financial 
Institutions Examination Council (FFIEC), employee relocation expenses, 
recruitment and advertising, shipping, printing, subscriptions, 
examiner training and meeting supplies, office furniture, and employee 
supplies and materials.
    As part of the FFIEC, the NCUA shares in costs for joint actions 
and services that affect the financial services industry. The FFIEC 
costs increased by almost $200,000 from 2020 to 2021.
    The 2020 budget did not include funds for employee relocation but 
instead used approximately $1,000,000 of unspent balances from prior 
years to pay for 2020 employee relocation costs. The 2021 budget 
includes an increase of $750,000 for employee relocations compared to 
the 2020 budget. Relocation costs are paid by the NCUA to employees who 
are competitively selected for a promotion or new job within the agency 
in a different geographic area than where they live.
    The 2022 budget request for Administrative Services is projected to 
be the same as the 2021 recommended level.

Contracted Services

    The 2021 budget includes $47.8 million for Contracted Services. 
This is a $4.5 million, or 10.3 percent, increase compared to the 2020 
Board-approved budget. The Contracted Services budget category includes 
costs incurred when products and services are acquired in the 
commercial marketplace. Acquiring specific expertise or services from 
contract providers is often the most cost-effective approach to fulfill 
the NCUA's mission. Such services include critical mission support such 
as information technology equipment and software development, 
accounting and auditing services, and specialized subject matter 
expertise that enable staff to focus on core mission execution.
    The majority of funding in the Contracted Services category 
supports the NCUA's robust supervision framework, and includes funding 
for tools used to identify and resolve traditional risk concerns such 
as interest rate risk, credit risk, and industry concentration risk, as 
well as by addressing new and evolving operational risks such as 
cybersecurity threats. Growth in the contracted services budget 
category results primarily from new operations and maintenance costs 
associated with capital investments, such as the Examinations and 
Supervision Solution, or MERIT system. Other costs include core agency 
business operation systems such as accounting and payroll processing, 
and various recurring costs, as described in the seven major 
categories, below:

 Information Technology Operations and Maintenance (48 percent 
of contracted services)
[cir] IT network support services and help desk support
[cir] Contractor program and web support and network and equipment 
maintenance services
[cir] Administration of software products such as Microsoft Office, 
Share Point and audio visual services
 Administrative Support and Other Services (13 percent of 
contracted services)
[cir] Examination and Supervision program support
[cir] Technical support for examination and cybersecurity training 
programs
[cir] Equipment maintenance services
[cir] Legal services and other expert consulting support
[cir] Other administrative mission support services for the NCUA 
central office
 Accounting, Procurement, Payroll and Human Resources Systems 
(10 percent of contracted services)
[cir] Accounting and procurement systems and support

[[Page 74115]]

[cir] Human resources, payroll, and employee services
[cir] Equal employment opportunity and diversity programs
 Building Operations, Maintenance, and Security (8 percent of 
contracted services)
[cir] Central office facility operations and maintenance
[cir] Building security and continuity programs
[cir] Personnel security and administrative programs
 Information Technology Security (9 percent of contracted 
services)
[cir] Enhanced secure data storage and operations
[cir] Information security programs
[cir] Security system assessment services
 Training (7 percent of contracted services)
[cir] Examiner staff, technical and specialized training and 
development
[cir] Senior executive and mission support staff professional 
development
 Audit and Financial Management Support (4 percent of 
contracted services)
[cir] Annual audit support services
[cir] Material loss reviews
[cir] Investigation support services
[cir] Financial management support services
    The following pie chart illustrates the breakout of the seven 
categories for the total 2021 contracted services budget of $47.8 
million.
[GRAPHIC] [TIFF OMITTED] TN19NO20.030

    Major programs within the contracted services category include:
     Training requirements for the examiner workforce. The 
NCUA's most important resource is its highly educated, experienced, and 
skilled workforce. It is important that staff have the proper 
knowledge, skills, and abilities to perform assigned duties and meet 
emerging needs. Each year, Credit Union Examiners complete a variety of 
training classes to ensure their skills and industry knowledge are kept 
up to date, including in core areas such as capital markets, consumer 
compliance, and specialized lending. Major training deliverables for 
2021 include the rescheduled MERIT training sessions discussed 
elsewhere in this document, classes offered by the Federal Financial 
Institutions Examination Council, updated examiner classes, and subject 
matter expert training sessions for the NCUA examiners. Contracted 
service providers, in partnership with the NCUA subject matter experts, 
will develop and design training classes for examiners and continue 
work on the triennial review of the NCUA's Subject Matter Examiner 
(SME) course curriculum. The NCUA plans to implement a new Talent 
Management System in 2021, and will simultaneously update some of the 
current online course content. Additionally, contracted service 
providers and central office staff will continue conducting 
organizational development, leadership and teambuilding training.
     The NCUA's information security program supports ongoing 
efforts to strengthen the agency's cybersecurity and ensure its 
compliance with the Federal Information System Management Act.
     Agency financial management services, human resources 
technology support, and payroll services. The NCUA contracts for these 
back-office support services with the U.S. Department of 
Transportation's Enterprise Service Center (DOT/ESC) and the General 
Services Administration. The NCUA's human resource system, HR Links, 
also adopted by other federal agencies, is a shared solution that 
automates routine human resource tasks and improves time and attendance 
functionality.
     Audit. The NCUA Office of Inspector General contracts with 
an accounting firm to conduct the annual audit of the agency's four 
permanent funds. The results of these audits are posted annually on the 
NCUA website

[[Page 74116]]

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. The 
2021 budget includes the first year of funding for that annual 
Operation and Maintenance costs for the MERIT system, which will 
replace the legacy AIRES examination system. Several other of the 
NCUA's core information technology systems and processes also require 
additional contract support in 2021, which result in increased budgets 
in the Contracted Services category, as described below.
    Within the budget for the Office of Chief Information Officer 
(OCIO), an additional $3.8 million is required primarily for the 
operations and maintenance costs of capital projects, including the 
MERIT system.
    Funding for the contract services that support the NCUA's website--
approximately $1.5 million--has been moved from the Office of the Chief 
Information Officer to the Office of External Affairs and 
Communications in the 2021 budget. With the rollout of MERIT and new 
digital training courses for employees, website-related Americans with 
Disabilities Act compliance requests are expected to increase in 2021.
    Within the Office of Examination and Insurance, contract reductions 
of $500,000 are associated with technical accounting and security 
consultant support purchased in 2020 but not required in 2021.
    The 2021 contracted serviced budget includes $250,000 for the 
NCUA's ACCESS initiative, which will bring together agency leaders to 
develop policies and programs that support financial inclusion within 
the NCUA and more broadly throughout the credit union system. By 
building on our successes, ACCESS will expand existing efforts to 
address the financial services and financial literacy needs of 
underserved and diverse communities, as well as expand opportunities 
for employment.
    The 2022 budget for Contracted Services is estimated to increase by 
$5.6 million, or 11.8 percent, compared to 2021, largely due to the 
operations and maintenance costs resulting from the delivery of capital 
projects funded in prior years.

VI. Capital Budget

Overview

    Annually, the NCUA carries out a rigorous investment review process 
to identify the agency's needs for information technology (IT), 
facility improvements and repairs, and other multi-year capital 
investments. The NCUA staff review the agency's inventory of owned 
facilities, equipment, IT systems, and IT hardware to determine what 
requires repair, major renovation, or replacement. The staff then make 
recommendations for prioritized investments to the NCUA Board.
    IT systems and hardware are another significant capital expenditure 
for modern organizations. The 2021 budget continues the NCUA's multi-
year investment in current and replacement IT systems. The budget fully 
supports the NCUA's effort to modernize its IT infrastructure and 
applications, including the full rollout of MERIT, the NCUA's 
Examination and Supervision Solution (ESS) project, which will replace 
the legacy Automated Integrated Regulatory Examination System (AIRES) 
system. Other IT investments include ongoing enhancements and upgrades 
to enhance decades-old legacy systems, network servers, systems to 
ensure the agency's cybersecurity posture, and various hardware 
investments to refresh agency networks and ensure staff have the tools 
necessary to maintain and increase their productivity.
    Routine repairs and lifecycle-driven property renovations are also 
necessary to properly maintain investments in the NCUA's central office 
building in Alexandria, Virginia and the agency's owned office building 
in Austin, Texas. The NCUA facility manager assesses the agency's 
properties to determine the need for essential repairs, replacement of 
building systems that have reached the end of their engineered lives, 
or renovations required to support changes in the agency's 
organizational structure or to address revisions to building standards 
and codes.
    The NCUA's 2021 capital budget is $18.8 million. The capital budget 
funds the NCUA's long-term investments. The Information Technology 
Prioritization Council recommended $12.0 million for IT software 
development projects and $5.6 million in other IT investments for 2021. 
The NCUA facilities require $1.3 million in capital investments.
[GRAPHIC] [TIFF OMITTED] TN19NO20.031

    Detailed descriptions of all 2021 capital projects, including a 
discussion of how each project helps the agency achieve its strategic 
goals and objectives, are provided in Appendix B.

Summary of Capital Projects

Examination and Supervision Solution and Infrastructure Hosting ($7.4 
Million)
    The purpose of the Examination and Supervision Solution and 
Infrastructure Hosting (ESS&IH) project is to implement a new, 
flexible, technical foundation to enable current and future NCUA 
business process modernization initiatives, and replace the NCUA's 
legacy exam system, AIRES, with a new, customized Commercial-Off-The-
Shelf (COTS) solution that will allow the NCUA's examiners and 
supervisors to be more efficient, consistent, and

[[Page 74117]]

effective. In 2021, all NCUA examiners will be trained to use the new 
MERIT system, with full implementation expected by the end of the year. 
After the MERIT system is fully deployed to the examiner workforce, the 
NCUA expects to include the system's on-going operating and maintenance 
costs in the operating budget.
Enterprise Central Data Repository ($1.6 Million)
    The Enterprise Central Data Repository (ECDR) project will 
implement a central data repository that will serve as the data 
integration point for ESS, ONES's analytic tools, the NCUA's legacy 
applications and the Data Collection Solution (DCS). The ECDR will 
become an enterprise solution for the NCUA allowing the agency to 
transition in a phased approach from the existing legacy databases to a 
cloud-based data repository serving the agency's needs.
Enterprise Data Program ($0.4 Million)
    The purpose of this project is the centralization, organization and 
storage of the NCUA data. The primary goal is to enable the NCUA to 
manage enterprise data as a strategic asset through its full lifecycle 
(create/collect, manage/move, consume, dispose). The Enterprise Data 
Program (EDP) will also facilitate the centralization and organization 
of the NCUA's data with an authoritative source so analysis is more 
accurate, simple and easily distributed across the agency.
NCUA Website Development ($0.1 Million)
    The purpose of the website Development project is to serve the web-
related needs of the internal NCUA stakeholders and the public. The 
project provides on-going improvements to the website, such as an 
improved user experience, and provides support for design, development, 
and maintenance of the agency's public websites: NCUA.gov and 
MyCreditUnion.gov.
Performance Management System Replacement ($0.2 Million)
    A replacement system is needed to enable employees to complete all 
phases of NCUA's performance management program. The system will 
standardize the workflows and management of employees' performance 
plans, facilitating employee performance plan issuance, plan 
acknowledgement, progress review acknowledgment, and the issuance of a 
final year-end evaluation for all NCUA employees.
Continuous Diagnostic Mitigation ($0.9 Million)
    The objective of the Continuous Diagnostics and Mitigation (CDM) 
project is to enhance the overall security posture of NCUA with 
capabilities to monitor vulnerabilities and threats in near real-time. 
This is achieved by implementing capabilities and technical controls to 
identify what is on the network, who is on the network, what is 
happening on the network, and to protect data in use, transit, and at 
rest. This increased situational awareness will allow NCUA to 
prioritize actions to mitigate or accept cybersecurity risks based on 
the potential impact to the NCUA mission.
Microsoft Office M365 Implementation ($1.5 Million)
    The goal of the M365 Implementation project is to empower the 
NCUA's employees by delivering the most advanced innovations in 
management, collaboration, enterprise security, and business analytics 
through cloud services. Once implemented, M365 will reduce security 
risks as well as reduce the cost and effort to maintain and manage 
software nearing the end of its service life.
Enterprise Laptop Lease ($0.8 Million)
    The purpose of the Enterprise Laptop Lease project is to ensure the 
NCUA workforce has an efficient, mobile friendly, and secure computer 
that helps employees better perform their jobs at a reasonable cost. 
Because of the priority deployment of the MERIT system in 2021, the 
NCUA plans to purchase its current fleet of laptops at the end of the 
current lease in 2021. The NCUA now plans to replace its laptops in 
2022.
Information Technology Infrastructure, Platform and Security Refresh 
($3.9 Million)
    The purpose of the Information Technology (IT) Infrastructure, 
Platform and Security Refresh project is to refresh and/or replace 
routers, switches, virtual servers, wireless infrastructure, virtual 
private network, infrastructure appliances, end of life and end of 
service components in order to ensure that the NCUA data is secure and 
operations are stable.
Refresh VoIP Phone System ($1.0 Million)
    The purpose of the Refresh Voice over internet Protocol (VoIP) 
Phone System project is to fully replace NCUA's telephone system 
(infrastructure, platform, and endpoints) to ensure voice 
communications capabilities in order to ensure that business continuity 
and operations are stable. NCUA VoIP voice components include Session 
Initiation Protocol (SIP), call control, external and internal call 
routing, local and long-distance call plans, international calling 
plans and VoIP desk/soft phone. In addition, NCUA plans to integrate 
the VoIP infrastructure with the M365 project to optimize the 
workforce's collaboration experience.
Central Office Heating, Ventilation, and Air Conditioning (HVAC) System 
Replacement ($0.5 Million)
    The NCUA central office HVAC system replacement project will 
recapitalize the HVAC system in the agency's central office building, 
including all cooling towers, air handlers, boilers and HVAC 
components. The current HVAC system is original to the facility, 27 
years old, at the end of its useful life, not working efficiently, and 
obsolete. The 2021 budget provides funding to complete the multi-year 
HVAC replacement project.
Austin, Texas Office Building Modernization ($0.8 Million)
    In 2021, the NCUA will continue its multi-year improvement project 
at the Austin, Texas office building. These capital improvements are 
required for the facility to continue routine and safe operations, and 
align with the lifecycle replacement required for critical 
infrastructure.

VII. Share Insurance Fund Administrative Budget

Overview

    The Share Insurance Fund Administrative budget funds direct costs 
associated with authorized Share Insurance Fund activities. The direct 
charges to the Share Insurance Fund include costs associated with the 
NCUA Guaranteed Note (NGN) program and other administrative costs, and 
represent the total estimated direct costs to the Share Insurance 
Fund.\26\ The Share Insurance Fund Administrative budget funds five 
positions that were formerly part of the Temporary Corporate Credit 
Union Stabilization Fund (Stabilization Fund) budget.
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    \26\ Note these direct costs are exclusive of any costs that are 
shared with the Operating Fund through the Overhead Transfer Rate, 
and with payments available upon requisition by the Board, without 
fiscal year limitation, for insurance under section 1787 of this 
title, and for providing assistance and making expenditures under 
section 1788 of this title in connection with the liquidation or 
threatened liquidation of insured credit unions as it may determine 
to be proper.
---------------------------------------------------------------------------

    The cost of the NGN program and the Corporate System Resolution 
Program, including costs associated with the

[[Page 74118]]

administration of those programs, are funded from the Share Insurance 
Fund Administrative budget. These costs have no impact on the NCUA's 
current and future Operating Fund budgets. The budget for the Share 
Insurance Fund also includes funding for expenditures previously 
authorized as direct expenses of the Share Insurance Fund for items 
such as state examiner computer leases, training and financial audit 
support.
    The 2021 Share Insurance Fund Administrative budget is estimated to 
be $8.1 million, $1.6 million, or 26 percent, more than 2020.
    The 2021 budget increase is primarily driven by the addition of 
operations and maintenance costs for technology systems and data used 
by the NCUA to validate stress testing at large credit unions, and the 
addition of the costs of making MERIT, the new examination solution and 
replacement to AIRES, available to those state supervisory agencies 
that use it.
    The 2022 requested budget supports similar workload and resources, 
but is projected to decrease by $218,000 or, or 2.7 percent, compared 
to the 2021 funding level because the one-time nature of the cost of 
providing the MERIT system to state supervisory authorities.

Budget Category Descriptions and Major Changes

Salaries and Benefits
    The employee pay and benefits expense category for the Share 
Insurance Fund Administrative budget is estimated to be $1.5 million, 
which represents an increase of $30,000 compared to 2020. This increase 
is due to aligning the budget to actual payroll costs for staff on 
board, as well as an increase to mandatory agency contribution rates to 
the FERS retirement program. Personnel compensation is 18 percent of 
the total budget. The financial analysts on the NGN team have 
specialized technical expertise to manage the remaining $5 billion of 
legacy assets the NCUA will control in 2021. Personnel costs are 
estimated in a manner similar to the operating budget.
Travel
    The estimated travel cost of $52,000 is less than one percent of 
the overall 2021 budget and remains the same as the 2020 budget 
estimate. These costs cover all of the travel expenses for the five 
staff that manage and support the NGN program. Two of the five staff 
are remote employees and are expected to travel periodically to the 
NCUA's central office.
Administrative: Training
    Training expenses, which represent less than one percent of the 
overall 2021 budget, are estimated to remain at $27,000, identical to 
the 2020 level, based on projections of employee professional 
development plans and specialized training requirements.
Support for the NGN Program (Contract Support)
    Contract costs to support the NGN program, which represent 31 
percent of the overall 2021 budget, are estimated to be $2.5 million, a 
decrease of $0.2 million from the 2020 level. Funding is needed to 
fulfill Corporate System Resolution Program requirements and includes 
outside professional services such as external valuation experts, 
financial specialists, and accountants.
    These experts assist the NCUA with the following services:
    Consulting Services in the amount of $0.9 million to support two 
NCUA offices: Examination and Insurance and the Chief Financial 
Officer. Services include quarterly management reviews of asset 
valuations, as well as analyses of emerging issues. Contractors also 
provide support for the annual financial audit process and improvements 
in internal controls. Tasks include: Supporting complex accounting and 
financial requirements for settlements, sale of legacy assets, parity 
payments, changing valuation model assumptions, and other asset 
disposition activities. Additionally, professional services are used to 
assist with accounting, tax, financial reporting, and systems support 
for the corporate Asset Management Estates.
    Valuation Services in the amount of $1.0 million funds valuation 
support for the NGN legacy assets. As supported by the NGN Oversight 
Committee, resources are also needed to conduct special analyses, 
including valuations for determining reasonable market prices for 
securities to be sold by auction.
    Software and Data Subscription Services in the amount of $0.6 
million supports technical tools used to provide waterfall models, 
calculations, and metrics for the structured investment products 
underlying the NGN portfolio. The service provides coverage of all 
relevant asset classes, waterfall models that are seasoned and tested 
throughout the industry, and a broad array of calculations and metrics. 
Financial data analytics play a critical role in the surveillance, 
modeling, and pricing of the legacy assets that securitize the NGN 
Trusts, as well as supporting the management reviews that the NCUA 
performs on the cash flow projections. Now that the NGNs are maturing, 
the NCUA requires data subscription services to provide additional 
valuation as well as support for the legacy asset disposition process.
    Other annual subscriptions provide important services related to 
surveillance of the portfolio of corporate bonds and mortgage-related 
bonds. Independent credit research services include fundamental capital 
structure research, credit analyses for surveillance of corporate bond 
portfolio and mono-line insurer exposure, and direct access to various 
industry experts for discussion on specific credits.
Other Direct Expenses
    Other direct expenses of the Share Insurance Fund are estimated to 
be $4.0 million in 2021, an increase of $1.8 million, or 82 percent, 
compared to the 2020 budget level.
    The NCUA is required to validate annual stress testing conducted by 
certain large credit unions to help ensure these credit unions can 
remain financially sound through challenging economic cycles. Over a 
multi-year endeavor, the NCUA has developed and implemented its Assets 
and Liabilities Management (ALM) system, which in part allows the NCUA 
to build internal analytical capabilities and run supervisory stress 
testing analyses. The NCUA also uses the ALM system and associated data 
to conduct regular quantitative risk assessments. Development of the 
ALM system was funded from the NCUA capital budget in 2020 and prior 
years, but now that the system is in use, $1.4 million for operations 
and maintenance costs will be funded from the SIF budget in 2021 and 
future budgets.
    The 2021 budget also includes $0.3 million that will be spent to 
make the MERIT examination and supervision system available to State 
Supervisory Authorities that oversee state-chartered credit unions. 
This is expected to be a one-time cost for specific technology 
development.
BILLING CODE 7535-01-P

[[Page 74119]]

[GRAPHIC] [TIFF OMITTED] TN19NO20.032

[GRAPHIC] [TIFF OMITTED] TN19NO20.033

BILLING CODE 7535-01-C

VII. Financing the NCUA Programs

Overview

    When formulating the annual budget, the NCUA is mindful that its 
operating funding comes directly from federal and state chartered 
credit unions. The agency strives to ensure that any use or allocation 
of these funds follows a thorough review that evaluates the necessity 
of the expenditures and whether programs are operating in an efficient, 
effective, transparent, and fully accountable manner.
    To achieve its statutory mission, the NCUA incurs various expenses, 
including those involved in examining and supervising federally insured 
credit unions. The NCUA Board adopts an Operating Budget, which 
includes the Capital Budget, in the fall of each year to fund the vast 
majority of the costs of operating the agency.\27\ The Federal Credit 
Union Act authorizes two primary sources to fund the Operating Budget:
---------------------------------------------------------------------------

    \27\ Some costs are directly charged to the Share Insurance Fund 
when appropriate to do so. For example, costs for training and 
equipment provided to State Supervisory Authorities are directly 
charged to the Share Insurance Fund.
---------------------------------------------------------------------------

    (1) Requisitions from the Share Insurance Fund ``for such 
administrative and other expenses incurred in carrying out the purposes 
of

[[Page 74120]]

[Title II of the Act] as [the Board] may determine to be proper''; \28\ 
and
---------------------------------------------------------------------------

    \28\ 12 U.S.C. 1783(a).
---------------------------------------------------------------------------

    (2) ``fees and assessments (including income earned on insurance 
deposits) levied on insured credit unions under [the Act].'' \29\
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    \29\ 12 U.S.C. 1766(j)(3). Other sources of income for the 
Operating Budget have included interest income, funds from 
publication sales, parking fee income, and rental income.
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    Among the fees levied under the Act are annual Operating Fees, 
which are required for federal credit unions under 12 U.S.C. 1755 ``and 
may be expended by the Board to defray the expenses incurred in 
carrying out the provisions of [the Act,] including the examination and 
supervision of [federal credit unions].''
    Taken together, these authorities effectively require the Board to 
determine which expenses are appropriately paid from each source while 
giving the Board broad discretion in allocating expenses.
    In 1972, the Government Accountability Office recommended the NCUA 
adopt a method for properly allocating Operating Budget costs--that is, 
the portion of the NCUA's budget funded by requisitions from the Share 
Insurance Fund and the portion covered by Operating Fees paid by 
federal credit unions.\30\ The NCUA has since used an allocation 
methodology, known as the Overhead Transfer Rate (OTR), to determine 
how much of the Operating Budget to fund with a requisition from the 
Share Insurance Fund.
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    \30\ https://www.gao.gov/assets/210/203181.pdf.
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    The NCUA uses the OTR methodology to allocate agency expenses 
between these two primary funding sources. Specifically, the OTR is the 
formula the NCUA uses to allocate insurance-related expenses to the 
Share Insurance Fund under Title II. Almost all other operating 
expenses are funded through collecting annual Operating Fees paid by 
federal credit unions.\31\
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    \31\ Annual Operating Fees must ``be determined according to a 
schedule, or schedules, or other method determined by the NCUA Board 
to be appropriate, which gives due consideration to the expenses of 
the [NCUA] in carrying out its responsibilities under the [Act] and 
to the ability of [FCUs] to pay the fee.'' 12 U.S.C. 1755(b).
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    Two statutory provisions directly limit the Board's discretion with 
respect to Share Insurance Fund requisitions for the NCUA's Operating 
Budget and, hence, the OTR. First, expenses funded from the Share 
Insurance Fund must carry out the purposes of Title II of the Act, 
which relate to share insurance.\32\ Second, the NCUA may not fund its 
entire Operating Budget through charges to the Share Insurance 
Fund.\33\ The NCUA has not imposed additional policy or regulatory 
limitations on its discretion for determining the OTR.
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    \32\ 12 U.S.C. 1783(a).
    \33\ The Act in 12 U.S.C. 1755(a) states, ``[i]n accordance with 
rules prescribed by the Board, each [federal credit union] shall pay 
to the [NCUA] an annual operating fee which may be composed of one 
or more charges identified as to the function or functions for which 
assessed.'' See also 12 U.S.C. 1766(j)(3).
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Overhead Transfer Rate (OTR)

    The NCUA conducts a comprehensive workload analysis annually. This 
analysis estimates the amount of time necessary to conduct examinations 
and supervise federally insured credit unions in order to carry out the 
NCUA's dual mission as insurer and regulator. This analysis starts with 
a field-level review of every federally insured credit union to 
estimate the number of workload hours needed for the current year. 
These estimates are informed by the overall parameters of the NCUA's 
examination program, as most recently updated by the Exam Flexibility 
Initiative approved by the Board.\34\ The workload estimates are then 
refined by regional managers and submitted to the NCUA central office 
for the annual budget proposal. The OTR methodology accounts for the 
costs of the NCUA, not the costs of state regulators. Therefore, there 
are no calculations made for state examiner hours.
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    \34\ The Exam Flexibility Initiative started with the January 1, 
2017 examination cycle and it allows for extended examination cycles 
for eligible credit unions. Letters to Credit Unions 16-CU-12, 
December 2016.
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    There have not been any major changes to the parameters of the 
examination program since the current OTR methodology went into 
effect.\35\ The minor variations in the OTR since 2018 are the result 
of routine, small fluctuations in the variables that affect the OTR, 
including normal fluctuations in the workload budget from one calendar 
year to the next.
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    \35\ On November 16, 2017, the NCUA Board adopted a new 
methodology for calculating the OTR starting with the 2018 OTR. 82 
FR 55644, November 22, 2017.
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    The NCUA Board approved the current methodology for calculating the 
OTR at its November 2017 open meeting.\36\ In 2020, the Board published 
\37\ in the Federal Register a request for comment regarding the OTR 
methodology, but did not propose any changes to the current 
methodology. The OTR is designed to cover the NCUA's costs of examining 
and supervising the risk to the Share Insurance Fund posed by all 
federally insured credit unions, as well as the costs of administering 
the fund. The OTR represents the percentage of the agency's operating 
budget paid for by a transfer from the Share Insurance Fund. Federally 
insured credit unions are not billed for and do not have to remit the 
OTR amount; instead, it is transferred directly to the Operating Fund 
from the Share Insurance Fund. This transfer, therefore, represents a 
cost to all federally insured credit unions.
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    \36\ 82 FR 55644 (Nov. 22, 2017).
    \37\ https://www.federalregister.gov/documents/2020/08/31/2020-17009/request-for-comment-regarding-national-credit-union-administration-overhead-transfer-rate.
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    The OTR formula uses the following underlying principles to 
allocate agency operating costs:
    1. Time spent examining and supervising federal credit unions is 
allocated as 50 percent insurance related.\38\
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    \38\ The 50 percent allocation mathematically emulates an 
examination and supervision program design where the NCUA would 
alternate examinations, and/or conduct joint examinations, between 
its insurance function and its prudential regulator function if they 
were separate units within the NCUA. It reflects an equal sharing of 
supervisory responsibilities between the NCUA's dual roles as 
charterer/prudential regulator and insurer given both roles have a 
vested interest in the safety and soundness of federal credit 
unions. It is consistent with the alternating examinations the FDIC 
and state regulators conduct for insured state-chartered banks as 
mandated by Congress. Further, it reflects that the NCUA is 
responsible for managing risk to the Share Insurance Fund and 
therefore should not rely solely on examinations and supervision 
conducted by the prudential regulator.
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    2. All time and costs the NCUA spends supervising or evaluating the 
risks posed by federally insured, state-chartered credit unions or 
other entities that the NCUA does not charter or regulate (for example, 
third-party vendors and CUSOs) are allocated as 100 percent insurance 
related.\39\
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    \39\ The NCUA does not charter state-chartered credit unions nor 
serve as their prudential regulator. The NCUA's role with respect to 
federally insured state-chartered credit unions is as insurer. 
Therefore, all examination and supervision work and other agency 
costs attributable to insured state-chartered credit unions is 
allocated as 100 percent insurance related.
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    3. Time and costs related to the NCUA's role as charterer and 
enforcer of consumer protection and other non-insurance based laws 
governing the operation of credit unions (like field of membership 
requirements) are allocated as 0 percent insurance related.\40\
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    \40\ As the federal agency with the responsibility to charter 
federal credit unions and enforce non-insurance related laws 
governing how credit unions operate in the marketplace, the NCUA 
resources allocated to these functions are properly assigned to its 
role as charterer/prudential regulator.
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    4. Time and costs related to the NCUA's role in administering 
federal share insurance and the Share Insurance

[[Page 74121]]

Fund are allocated as 100 percent insurance related.\41\
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    \41\ The NCUA conducts liquidations of credit unions, insured 
share payouts, and other resolution activities in its role as 
insurer. Also, activities related to share insurance, such as 
answering consumer inquiries about insurance coverage, are a 
function of the NCUA's role as insurer.
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    These four principles are applied to the activities and costs of 
the agency to determine the portion of the agency's budget that is 
funded by the Share Insurance Fund. Based on the Board-approved 
methodology, the OTR for 2021 is one percentage point higher than 2020, 
and estimated to be 62.3 percent. Thus, 62.3 percent of the total 
Operating Budget is estimated to be paid out of the Share Insurance 
Fund. The remaining 37.7 percent of the Operating Budget is estimated 
be paid for by Operating Fees collected from federal credit unions. The 
explicit and implicit distribution of total Operating Budget costs for 
federal credit unions and federally insured, state-chartered credit 
unions is outlined in the table below:
[GRAPHIC] [TIFF OMITTED] TN19NO20.034

    Concurrent with its request for comment regarding the OTR 
methodology, the Board also published proposed changes to the 
methodology used to compute the NCUA's Operating Fee \42\. Included as 
part of the proposed changes, the Board proposed applying the OTR to 
the NCUA's Capital Budget in the same manner as it applies the OTR to 
the Operating Budget. The Board is reviewing public comments received 
about this proposal before making a final decision about the 
applicability of the OTR to the Capital Budget.
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    \42\ https://www.federalregister.gov/documents/2020/08/31/2020-17009/request-for-comment-regarding-national-credit-union-administration-overhead-transfer-rate
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    By applying the four principles in a manner that incorporates all 
Operating and Capital Budget activities, the OTR for 2021 is estimated 
to be 62.3 percent, the same result as applying the four principles to 
the Operating Budget alone.
    To determine the funds transferred from the Share Insurance Fund to 
the Operating Fund, the OTR is applied to actual expenses incurred each 
month. Therefore, the rate calculated by the OTR formula is multiplied 
by each month's actual operating expenditures and the product of that 
calculation is transferred from the Share Insurance Fund to the 
Operating Fund. This monthly reconciliation to actual operating 
expenditures captures the variance between actual and budgeted amounts, 
so when the NCUA's expenditures are less than budgeted, the amount 
charged to the Share Insurance Fund is also less--and those lower 
expenditures benefit both federally chartered and state chartered 
credit unions.
    The use of insured shares in calculating the OTR was eliminated 
from the OTR methodology adopted by the Board in 2017. However, insured 
shares are used for informational purposes to reflect the fundamental 
economics with respect to how the implicit costs of the OTR are borne 
by federal and state-chartered credit unions. Use of insured shares is 
consistent with the mutual nature of the Share Insurance Fund and part 
of the statutory scheme related to Share Insurance Fund deposits, 
premiums and dividends.\43\ The number, size, and health of federal and 
state credit unions affects the NCUA's workload budget, which in turn 
is one of the variables in the OTR methodology.
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    \43\ 12 U.S.C. 1782(c)(2) and (3).
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    The primary driver of the increase in the estimated 2021 OTR is the 
increase in examination and supervision time for federally insured 
state-chartered credit unions. Calendar year 2021 marks the end of the 
first, five-year cycle associated with the Exam Flexibility Initiative 
that extended the NCUA exam time for eligible institutions. The 
increase in budgeted time for FISCU examination and supervision for 
2021 is due to program obligations associated with examination 
scheduling and scope requirements. Normal fluctuations in the workload 
budget from one calendar year to the next are also variables that tend 
to influence the change in the calculated OTR compared to previous 
years. Workload budget variables include, but are not limited to, 
changes in CAMEL ratings, the number and size of credit unions that 
meet the annual exam and extended exam eligibility criteria, credit 
unions with emerging risk indicators, variations in individual state 
regulator programs, and fluctuations in the timing of examinations 
related to a particular calendar year.
    CUSOs are at times subject to review during the examination of a 
federally insured credit union. The OTR methodology captures CUSO-
related time within the scope of the examination and supervision of 
federally insured credit unions under Principle 1 for federal credit 
unions and Principle 2 for federally insured state-chartered credit 
unions.
    The time designated for separate, stand-alone reviews of CUSOs and 
third-party vendors is accounted for separately in the NCUA's workload 
budget and is covered by Principle 2 only. The Board has no direct 
regulatory authority with respect to CUSOs and there is no support to 
allocate time specifically designated for CUSO and third-party vendor 
reviews as anything other than the NCUA's role as insurer. The stand-
alone review of CUSOs and third-party vendors is to identify and 
address risk to federally insured credit unions. These reviews are not 
intended to identify whether credit unions are complying with the 
lending and investment limitations with CUSOs. That is determined as 
part of the examination of the credit union.
    The following chart illustrates the share of the Operating Budget 
paid by federal credit unions (FCUs, 69%) and federally insured, state-
chartered credit unions (FISCUs, 31%).

[[Page 74122]]

[GRAPHIC] [TIFF OMITTED] TN19NO20.035

Operating Fee
    The Board delegated authority to the Chief Financial Officer to 
administer the methodology approved by the Board for calculating the 
Operating Fee, and to set the fee schedule as calculated per the 
approved methodology. In 2020, the Board published \44\ in the Federal 
Register several proposed changes to the Operating Fee methodology, and 
requested public comments about those changes. This section illustrates 
how the Operating Fee is calculated using the current, Board-approved 
Operating Fee methodology and also shows how the Operating Fee would be 
calculated if the Board adopts all of the changes it has proposed to 
the methodology.
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    \44\ https://www.federalregister.gov/documents/2020/08/31/2020-17009/request-for-comment-regarding-national-credit-union-administration-overhead-transfer-rate.
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Current Board-Approved Methodology
    Based on the estimated 2021 OTR and the current methodology for 
computing the Operating Fee, the share of the 2021 budget funded by the 
Operating Fee is $136.8 million. This equates to 0.0149 percent of 
projected federal credit union assets for December 2020. The overall 
decrease for the Operating Fee is estimated at 17.7 percent below the 
2020 level under the current methodology, as shown on the table on page 
64.
    The Operating Fee is assessed on federal credit unions based on 
projected year-end assets under the current methodology. Credit unions 
with assets less than $1 million are not assessed an Operating Fee. To 
set the assessment scale for 2021, federal credit union asset growth is 
projected through December 31, 2020. Based on the June 30, 2020 Call 
Report data, annual growth is projected to be 14.3 percent at year end. 
The asset level dividing points would be increased by this same 
projected growth rate. Under the current methodology, assets are 
indexed annually by the projected annual growth in total federal credit 
union assets, which preserves the same relative relationship of the 
scale to the applicable asset base.
Proposed Changes to Operating Fee Methodology
    In 2020, the NCUA Board proposed changes to the methodology it uses 
to determine how it apportions the Operating Fees and requested public 
comment about the changes. Specifically, the Board proposed: (1) 
Clarifying the treatment of capital project budgets when calculating 
the operating fees; (2) clarifying the treatment of miscellaneous 
revenues when calculating the operating fees; and (3) modifying the 
approach for calculating the annual inflationary adjustments to the 
thresholds for the operating fee rate tiers.
    In a separate notice,\45\ the Board also proposed amending its rule 
for determining total assets used as the basis for calculating the 
Operating Fee by (1) excluding Paycheck Protection Program (PPP) loans 
from the computation of a credit union's total assets and (2) using the 
average of the four quarters' call report data available at the time 
the Board approves the annual budget to compute total assets instead of 
using the projected fourth quarter total assets.
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    \45\ https://www.federalregister.gov/documents/2020/08/31/2020-16981/fees-paid-by-federal-credit-unions.
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    Based on the proposed changes to the Operating Fee methodology and 
the proposed changes for determining credit unions' total assets, the 
share of the 2021 budget funded by the Operating Fee would be $125.3 
million. This equates to 0.0147 percent of the estimated average of 
federal credit union assets for the quarters ending on September 30, 
2020. The overall decrease for the Operating Fee would be 19.4 percent 
less than 2020, as shown on the table on page 64. The Board is 
reviewing comments from the public about the proposals, as well as 
responses to questions the Board asked of the public about the 
Operating Fee rate scale, and may revise the Operating Fee rule, 
methodology, or rate scale based on these comments.
    Under the proposed changes to the determination of total assets, 
the Operating Fee would be assessed on federal credit unions based on 
the average of total assets reported in the fourth quarter 2019 and the 
first three quarters of 2020, net of any reported PPP loans. Credit 
unions with assets less than $1 million would not be assessed an 
Operating Fee.
    To set the assessment scale for 2021, total growth in federal 
credit union assets would be calculated as the change between the 
average of the four most-current quarters (i.e., the fourth quarter of 
2019 and the first three quarters of 2020 in the case of the 2021 
budget) and the previous four quarters (i.e., the fourth quarter of 
2018 and the first three quarters of 2019), which is estimated to

[[Page 74123]]

be 11.9 percent.\46\ Under the proposed methodology, asset level 
dividing points would be increased by this same growth rate in order to 
preserve the same relative relationship of the scale to the applicable 
asset base.
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    \46\ Total assets are determined using the most-current call 
report data, however 2020 third-quarter data were not available at 
time of publication. The NCUA estimate for 2020 third-quarter assets 
is based on projected growth, and will be revised with actual call 
report data once available.
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BILLING CODE 7535-01-P
[GRAPHIC] [TIFF OMITTED] TN19NO20.036

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

[[Page 74124]]

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IX. Appendix A: Supplemental Budget Information
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X. Appendix B: Capital Projects
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[FR Doc. 2020-25546 Filed 11-18-20; 8:45 am]
BILLING CODE 7535-01-C