[Federal Register Volume 84, Number 212 (Friday, November 1, 2019)]
[Notices]
[Pages 59126-59192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23856]



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Vol. 84

Friday,

No. 212

November 1, 2019

Part V





National Credit Union Administration





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The NCUA Staff Draft 2020-2021 Budget Justification; Notice

  Federal Register / Vol. 84 , No. 212 / Friday, November 1, 2019 / 
Notices  

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NATIONAL CREDIT UNION ADMINISTRATION


The NCUA Staff Draft 2020--2021 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 Tuesday, November 12, 2019. In order for the NCUA 
to produce copies for public distribution at the budget briefing, 
written statements and presentations for those scheduled to appear at 
the budget briefing must be received on or before Monday, November 18, 
2019.
    Written comments without public presentation at the budget briefing 
may be submitted by Monday, December 2, 2019.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Presentation at public budget briefing: submit requests to 
deliver a statement at the briefing to ncua.gov">BudgetBriefing@ncua.gov by 
Tuesday, November 12, 2019. Include your name, title, affiliation, 
mailing address, email address, and telephone number. Copies of your 
presentation must be submitted to the same email address by Monday, 
November 18, 2019.
     Written comments: submit comments to 
ncua.gov">BudgetComments@ncua.gov by Monday, December 2, 2019. Include your name 
and the following subject line ``Comments on the NCUA Draft 2020-2021 
Budget Justification.''
    Copies of the NCUA Draft 2020-2021 Budget Justification and 
associated materials are also available on the NCUA website at https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx. Printed copies will be available at the November 20, 
2019 budget briefing.

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

SUPPLEMENTARY INFORMATION: 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 2020-2021 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 (Pub. L. 115-174) amended 12 U.S.C. 1789(b)(1)(A) to 
require the NCUA Board (Board) to ``make publicly available and publish 
in the Federal Register a draft of the detailed business-type budget.'' 
Although 12 U.S.C. 1789(b)(1)(A) requires publication of a ``business-
type budget'' only for the agency operations arising under the Federal 
Credit Union Act's subchapter on insurance activities, in the interest 
of transparency the Board is providing the agency's entire staff draft 
2020-2021 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, 
November 20, 2019 from 10:00 a.m. to 12:00 p.m. Eastern. The budget 
briefing will be held in the NCUA Board meeting room. A livestream of 
the briefing also will be available through a link on ncua.gov.
    If you wish to attend the briefing and deliver a statement, you 
must email a request to ncua.gov">BudgetBriefing@ncua.gov by Tuesday, November 
12, 2019. 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 
November 20, 2019 budget briefing. The Board Secretary will inform you 
if you have been approved to make a presentation and how much time you 
will be allotted. A written copy of your presentation must be delivered 
to the Board Secretary via email at ncua.gov">BudgetBriefing@ncua.gov by Monday, 
November 18, 2019.
    Written comments on the draft budget will also be accepted by email 
at ncua.gov">BudgetComments@ncua.gov until Monday, December 2, 2019. Include your 
name and the following subject line with your comments: ``Comments on 
the NCUA Draft 2020-2021 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 October 28, 
2019.
Gerard S. Poliquin,
Secretary of the Board.

I. The NCUA Budget in Brief

Proposed 2020 and 2021 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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[GRAPHIC] [TIFF OMITTED] TN01NO19.022

    The NCUA's 2020-2021 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 $347.7 million for 2020, which is 
1.1 percent more than the 2020 funding level approved by the NCUA Board 
in November 2018, and 3.9 percent more than the comparable 2019 Board-
approved budget.
    A significant cost driver in the 2020 budget is the increase in 
mandatory contributions all federal agencies must make to the Office of 
Personnel Management (OPM) for the Federal Employee Retirement System 
(FERS). Of the total 3.9 percent budget increase between 2019 and 2020, 
1.6 percentage points of growth are directly attributable to the 
increased cost of FERS contributions and 2.3 percentage points of 
growth are the result of changes in agency operations.
    The 2.3 percent growth in agency operations also includes absorbing 
the equivalent of 0.8 percentage points of growth for costs avoided in 
the Share Insurance Fund Administrative Budget. This means the actual 
budget increase to fund the agency's operations is the equivalent of 
1.5 percent growth.
    Personnel levels for 2020 and 2021 reflect the agency's current 
staffing requirements and proposed staffing enhancements related to 
high-priority initiatives.

Operating Budget

    The proposed 2020 Operating Budget is $316.2 million. Personnel 
levels increase by three full-time equivalents (FTE) compared to the 
2019 Board-approved budget.\1\
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    \1\ The published 2019 FTE level approved by the Board on 
November 15, 2018 was 1,173 for the Operating Budget. On July 18, 
2019, the NCUA Board approved an additional four FTE. The revised 
2020 Operating Budget proposes three more FTE, for a total of 1,180.
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    The 2020 Operating Budget, when adjusted for inflation, represents 
a real dollar increase of approximately $5.2 million, or 1.7 percent, 
compared to the 2019 Board-approved budget. In nominal dollars, the 
2019 Budget increases by $11.8 million, or 3.9 percent, over the 2019 
Board-approved budget of $304.4 million. The Operating Budget estimate 
for 2021 is $326 million and reflects no change to authorized 
positions.
    The following chart shows recent year-on-year trends for the NCUA 
Operating Budget, in both real dollar and nominal terms:

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[GRAPHIC] [TIFF OMITTED] TN01NO19.023

    The following chart presents the major categories of spending 
supported by the 2020 budget, while specific adjustments to the 2019 
Board-approved budget are discussed in further detail, below:
[GRAPHIC] [TIFF OMITTED] TN01NO19.024

    Total Staffing. The budget supports 1,185 FTE in total for 2020, of 
which five are funded by the Share Insurance Fund Administrative 
Budget. The Operating Budget funds 1,180 FTE in 2020, a net increase of 
three FTEs from the 2019 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

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within a range of approximately five positions, as shown in the chart 
below.
[GRAPHIC] [TIFF OMITTED] TN01NO19.025

    Pay and Benefits. Pay and benefits increase by $8.5 million in 
2020, or 3.8 percent, for a budget of $231.4 million. Over 50 percent 
of the growth in pay and benefits--nearly $5 million--is the result of 
OPM increasing the mandatory employer contribution for the FERS. 
Required FERS payments to OPM increase from 13.7 percent of covered 
employees' salaries to 16 percent, a change of 230 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 2020. Excluding additional FERS contributions from the 2020 budget, 
total personnel compensation growth would be 1.6 percent instead of 3.8 
percent, and total Operating Budget growth would be 2.2 percent instead 
of 3.9 percent.
    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 three new positions proposed for 2020, 
anticipated staff promotions, position changes, and increased costs for 
other mandatory employer contributions such as health insurance and 
retirement contributions.
    Travel. The travel budget increases by $590,000 in 2020, or 2.2 
percent, for a budget of $27.4 million. In 2020, the NCUA plans to 
train its Credit Union Examiner workforce to conduct examinations using 
the Modern Examination and Risk Identification Tool (MERIT) system, 
which is planned for full implementation in the fourth quarter of 2020. 
State credit union examiners will also be trained to use MERIT. The 
Operating Budget includes approximately $1.0 million in one-time travel 
costs associated with the 778 NCUA employees who will participate in 
MERIT training meetings in 2020.
    In general, the NCUA continues working to contain the growth of 
travel costs by expanding offsite examination work and using 
technology-driven training. Government-wide per diem rates published by 
the General Services Administration (GSA) are expected to increase by 
almost 1.3 percent in 2020, accounting for a share of the travel budget 
growth. In addition, starting in 2019 GSA instituted a cost recovery 
fee for airline tickets purchased at negotiated government rates, which 
adds approximately $20,000 annually to the agency's cost of purchasing 
airline tickets at government rates.
    Rent, Communications, and Utilities. Rent, communications, and 
utilities increase by $188,000 in 2020, or 2.3 percent, for a budget of 
$8.2 million. This funding pays for telecommunications services, data 
capacity contracts, and information technology network support. The 
increase is primarily due to additional data capacity that will be 
required as a result of implementing the new MERIT examination system, 
which will be cloud-based and consume more data bandwidth than the 
AIRES system it is replacing.
    Administrative Expenses. Administrative expenses decrease by $2.8 
million in 2020, or 31.9 percent, for a total budget of $5.9 million. 
Decreases to the administrative expenses budget category largely result 
from reclassifying $2.6 million in software licensing costs as 
contracted services, not administrative expenses, in order to reflect 
these costs consistently with other federal budgetary presentations.
    Contracted Services. Contracted services expenses increase by $5.3 
million in 2020 for a total budget of $43.3 million. However, as 
discussed above, approximately $2.6 million of this increase results 
from costs previously shown as administrative expenses being 
reclassified as contracted services in order to reflect these costs 
consistently with other federal budgetary presentations. The actual 
increase in the contracted services budget is approximately $2.7 
million, or 7 percent.
    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. Certain information technology costs that were previously 
reported as administrative expenses are now included as contracted 
services, which accounts for a portion of this increase. Expected price 
inflation for services to be purchased in 2020 accounts for the

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remainder of the growth in this category.
    Capital Budget. The proposed 2020 Capital Budget is $25.1 million. 
The 2020 Capital Budget is $6.5 million more than the 2020 funding 
level approved by the Board in November 2018, and $3.1 million than the 
2019 Board-approved budget.
    The Capital Budget pays for continued investments in technology and 
infrastructure projects. A major component of the Capital Budget is the 
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 business 
intelligence capabilities were slated for a later iteration of ESM, but 
were added to the first phase when it was determined they could be 
integrated into MERIT for the 2020 release. The NCUA's Information 
Technology Prioritization Council recommended $20.9 million for IT 
software development projects that continue to replace the NCUA's 
decades-old and functionally obsolete information technology systems, 
and $2.7 million in other IT investments for 2020. The NCUA's 
facilities require $1.5 million in capital investments.
    Share Insurance Fund Administrative Expenses. The proposed 2020 
Share Insurance Fund Administrative budget is $6.5 million.
    The 2020 Share Insurance Fund (SIF) Administrative Budget is $2.7 
million less than the 2020 funding level approved by the Board in 
November 2018, and $1.9 million less than the 2019 Board-approved 
budget. The decrease in the SIF Administrative Budget is primarily 
attributed to the Office of National Examinations and Supervision plan 
to oversee credit union-run stress testing for the largest Credit 
Unions using its own proprietary models in 2020. Direct charges within 
this budget include administration of the NCUA Guaranteed Note (NGN) 
program, state examiner training and laptop leases, as well as 
financial audit support. The reduction in the SIF Administrative 
Expenses budget reflects that costs related to the oversight of credit 
union-run stress testing will be financed by the Operating Budget.

Budget Trends.

    As shown in the chart below, the relative size of the NCUA budget 
continues to decline when compared to balance sheets at federally 
insured credit unions. 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.
[GRAPHIC] [TIFF OMITTED] TN01NO19.026

    It is also notable that the NCUA's operations have become more 
efficient relative to the size of the credit union system because 
consolidation in the industry has led to growth in the number of large 
credit unions, specifically those with more than $10 billion in assets. 
This results in additional complexity in the balance

[[Page 59131]]

sheets of such credit unions, and a corresponding increase in the 
supervisory review required to ensure the safety and soundness of such 
large institutions. The NCUA has responded to this increasing 
complexity through several initiatives: Creation of the specialized 
Office of National Examination and Supervision, 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 Burden

    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 
generally result in increasing costs. These compliance activities 
require additional effort 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 add additional layers 
of review and procedures that make processes more challenging and 
expensive.

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

    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, 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 13.7 to 16.0 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 2020 is an increase of approximately $5 million over 2019.
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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.
    On June 26, 2019, the NCUA celebrated the 85th Anniversary of 
President Franklin Roosevelt's signing of the Federal Credit Union Act. 
The law was enacted during the Great Depression, in 1934, enabling 
credit unions to be organized throughout the United States under 
charters approved by the federal government. The purpose of the federal 
law 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.
    Today, the NCUA is responsible for the regulation and supervision 
of 5,308 federally insured credit unions \2\ with approximately 118.3 
million members \3\ and more than $1.5 trillion \3\ in assets across 
all states and U.S. territories.
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    \2\ Source: The NCUA quarterly call report data, Q2 2019.
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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 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

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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\ 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.\6\ In accordance with its authority \7\ 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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    \5\ See 12 U.S.C. 1755(a)-(b).
    \6\ See 12 U.S.C. 1755(d).
    \7\ See 12 U.S.C. 1783(a).
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Mission, Goals, and Strategy

    The NCUA's 2020-2021 Budget Submission supports the agency's third 
year implementing its 2018-2022 Strategic Plan to achieve its 
priorities and improve program performance.
    Throughout 2020 and 2021, the NCUA will continue fulfilling its 
mission to ``provide, through regulation and supervision, a safe and 
sound credit union system which promotes confidence in the national 
system of cooperative credit,'' and its vision to ensure that the 
``NCUA protects credit unions and consumers who own them through 
effective supervision, regulation and insurance.'' This budget commits 
the resources necessary to implement the NCUA's plans to identify key 
challenges facing the credit union industry and leverage agency 
strengths to help credit unions address those challenges.
    The budget supports the NCUA's programs, which are focused on 
achieving the agency's three strategic goals:
    [ssquf] Ensure a safe and sound credit union system;
    [ssquf] Provide a regulatory framework that is transparent, 
efficient, and improves consumer access; and
    [ssquf] Maximize organizational performance to enable mission 
success.
    Additional information about alignment of the budget to the NCUA's 
strategic goals is in Appendix A.
    In support of its first strategic goal--ensure a safe and sound 
credit union system--the NCUA will continue to supervise federally 
insured credit unions effectively 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 2020 include addressing broad market risks 
and emerging cybersecurity threats that could threaten financial 
stability generally, including the safety and soundness of the credit 
union system.
    Cybersecurity threats and other technology-related issues continue 
to be of key interest and concern to the NCUA. Increasingly 
sophisticated cyber-attacks pose a significant threat to credit unions, 
financial regulators, and the broader financial services sector. The 
availability, confidentiality, and integrity of credit union member 
information remains a key supervisory priority for the NCUA. As such, 
the 2020 budget includes resources to continue to improve and 
standardize supervision related to information protection and 
cybersecurity risks and threats.
    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 ESM program will reach a major milestone in 2020 with the 
release 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. The 2020 budget includes 
resources to train and prepare the NCUA staff as they transition to 
using MERIT.
    To fulfill the NCUA's second strategic goal--provide a regulatory 
framework that is transparent, efficient, and improves customer 
access--the agency is committed to creating a more responsive system 
that will encourage innovation, provide flexibility, and fulfill its 
primary mission of protecting safety and soundness. The NCUA also seeks 
to promote financial inclusion to better serve a changing population 
and economy. The NCUA also seeks to ensure consumer compliance, and 
financial protection. The budget allocates resources to agency programs 
that keep regulations up to date and consistent with current law, 
assist existing and prospective credit unions with expansion and new 
chartering activities.
    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.

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.
    In January 2019, the NCUA consolidated its five regional offices 
into three--Eastern, Southern, and Western--as part of its on-going 
effort to strengthen agency operations while increasing efficiency. 
Reporting to these regional offices, the NCUA has credit union 
examiners responsible for a portfolio of credit unions covering all 50 
states, the District of Columbia, Guam, Puerto Rico, and the U.S. 
Virgin Islands.
    The NCUA organizational chart below reflects the agency's current 
structure, and the map shows each region's geographical alignment:
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BILLING CODE 7535-01-C

    The NCUA's regional offices will carry out the agency's 2020 
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 
credit unions with assets that total over $10 billion that are located 
throughout the United States. Based on 2019 second quarter call report 
statistics, there are currently nine such credit unions with 18.0 
million members, accounting for $256 billion in credit union assets.
    In 2020 and 2021, the agency's workforce will undertake tasks in 
all of the NCUA's major programs:
    Supervision: The NCUA supervises federally insured credit unions 
through examinations and regulatory enforcement including providing 
guidance through various publications, taking administrative actions 
and conserving, liquidating, or merging severely troubled institutions 
as necessary to manage risk.
    Insurance: The NCUA manages the $16 billion Share Insurance Fund, 
which provides insurance to at least $250,000 for deposits held at 
federally insured credit unions. The fund is capitalized by credit 
unions and through retained earnings.
    Credit Union Development: Through training, partnerships and 
resource assistance, the NCUA fosters credit union development, 
particularly the expansion of services to eligible members provided by 
small, minority, newly chartered, and low-income designated credit 
unions. The NCUA also charters new federal credit unions, as well as 
approves modifications to existing charters and fields of membership.
    Consumer Financial Protection: The NCUA protects consumers' rights 
through effective enforcement of federal consumer financial protection 
laws, regulations, and requirements. The NCUA also develops and 
promotes financial education programs for credit unions to assist 
members in making smarter financial decisions.
    Asset Management: The NCUA conducts credit union liquidations and 
performs management and recovery of assets through AMAC. This office 
effectively and efficiently manages and disposes assets acquired from 
liquidations.
    The NCUA also performs stakeholder outreach and is involved in 
numerous cross-agency initiatives. The NCUA conducts stakeholder 
outreach to clearly understand the needs of the credit union system. 
The NCUA seeks input from all of its stakeholders, including the 
Administration, Congress, State Supervisory Authorities, credit union 
members, credit unions, and their associations.
    The NCUA collaborates with the other financial regulatory agencies 
including through participation in several councils. Significant 
councils include the Financial Stability Oversight Council (FSOC), the 
Federal Financial Institutions Examination Council (FFIEC), and the 
Financial and Banking Information Infrastructure Committee (FBIIC). 
These councils and relationships help ensure consistent policy and 
standards within the nation's financial system, where appropriate.

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

[[Page 59137]]

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 current year. The workload estimates are 
then refined by regional managers and submitted to the NCUA central 
office for the annual budget proposal. The workload analysis accounts 
for the efforts of nearly seventy percent of the NCUA workforce and is 
the foundation for budget requests from regional offices and 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 2020-2021 budget justification document includes comparisons 
to the Board approved 2019-2020 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 2020 represents the NCUA's 
projections of operating and capital costs for the year, and is subject 
to approval by the Board.

Commitment to Financial Stewardship

    The NCUA funds its activities through operating fees levied on all 
federal credit unions and through reimbursements from the Share 
Insurance Fund, funded by both federal credit unions and federally 
insured state-chartered credit unions. The Overhead Transfer Rate (OTR) 
calculation determines the annual amount that the Share Insurance Fund 
reimburses the Operating Fund to pay for the NCUA's insurance-related 
activities. At the end of each calendar year, the NCUA's financial 
transactions are subject to audit in accordance with Generally Accepted 
Government Auditing Standards.\8\
---------------------------------------------------------------------------

    \8\ 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. In addition, through prudent management of the 
Corporate System Resolution Program, the NCUA has paid nearly $900 
million in dividends to eligible credit unions over the last two years.
    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 2020-2021 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 2018, the agency provided 
an unmodified Statement of Assurance (signed February 14, 2019) 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.

III. Forecast and Enterprise Challenges

Economic Outlook

    The NCUA's mission is to provide, through regulation and 
supervision, a safe and sound credit union system, which promotes 
confidence in the national system of cooperative credit. The challenges 
that the NCUA faces, and the resources the NCUA requires to fulfill its 
mission, depend on a variety of factors that directly or indirectly 
affect the health of the credit union system. The NCUA must anticipate, 
to the extent possible, developments that will affect the system, 
develop strategies, plans and processes to meet

[[Page 59138]]

both the current and anticipated needs, and assemble the resources, 
including staff, necessary to ensure a safe and sound system.
    One key determinant of credit union performance is the underlying 
economic environment in which they must operate. In general, for the 
past few years, the economy has supported solid financial system 
performance. The economy continued to perform well in the first half of 
2019. Real gross domestic product expanded by 2.6 percent at an annual 
rate and, in July, the current economic expansion reached the 10-year 
mark, making it the longest post-war expansion on record. Employment 
has risen steadily for close to a decade and the unemployment rate at 
mid-year was at a five-decade low. Inflation remained subdued.
    With the support of a solid economic foundation, credit union 
lending, membership growth, and credit quality remained strong through 
the second quarter of 2019. Federally insured credit unions added 4.3 
million members over the year, boosting credit union membership to 
118.3 million in the second quarter of 2019. Credit union shares and 
deposits rose 5.5 percent over the year ending in the second quarter to 
$1.5 trillion. Total loans outstanding at federally insured credit 
unions increased 6.4 percent to $1.1 trillion, and the system-wide loan 
delinquency rate fell to 63 basis points from 67 basis points a year 
earlier. The credit union system's return on average assets rose to 97 
basis points, and the system's net worth ratio increased to 11.27 
percent in the second quarter.
    Although economic conditions were generally favorable heading into 
the second half of 2019, a number of downside risks exist. Growth in 
several major economies overseas showed signs of weakness. This has 
generated a level of uncertainty, which weighs on business activity, 
boosts financial market volatility, has pushed long-term interest rates 
in the U.S. downward, and has contributed to the Federal Reserve's 
decision to loosen monetary policy and lower their short-term policy 
rate in two 25 basis point moves during the summer after four years of 
tightening.
    As of early October, long-term interest rates had fallen by about 
160 basis points from their most recent peaks in late 2018, and short-
term rates had declined roughly 50 basis points. With long-term rates 
falling more than short-term rates, the yield curve shifted down and 
flattened.
    In late May, the spread between the 10-year Treasury note and 3-
month Treasury bond turned negative; it remained negative through the 
start of October. Yield curve inversion has preceded every recession in 
the last 50 years, but the timing between initial inversion and the 
onset of recession has varied, as shown in the chart. Most analysts 
expect the current expansion to continue during the NCUA 2020-2021 
budget horizon.
[GRAPHIC] [TIFF OMITTED] TN01NO19.031

    Even though the number of negative risks to the economy has risen, 
the near-term outlook for the U.S. economy remains positive. Forecasts 
for the next two years call for somewhat slower--but still solid--
economic growth compared with 2018. Employment is projected to rise and 
the unemployment rate--already below the level associated with full 
employment--is expected to remain low. Tight labor market conditions 
are projected to keep inflation near the Federal Reserve's 2.0 percent 
target. Federal Reserve policymakers have lowered the federal funds 
target rate by 50 basis points since July. Their most recent forecast, 
released in September, suggests they could leave the federal funds rate 
unchanged in a range of 1.75 percent and 2.00 percent through next 
year, but there is a wide range of views on the appropriate path of 
short-term interest rates going forward. Analysts are expecting the 
federal funds target rate to decline by an additional 25 basis points 
before the end of 2019 and are projecting that other short-term 
interest rates--which largely determine the interest payments credit 
unions make--will also move lower in the months

[[Page 59139]]

ahead. Longer-term rates--which largely determine the interest payments 
credit unions receive--are expected to stabilize in the second half of 
2019 and edge higher in 2020, as the recent flight to safety reverses.
    Solid economic conditions should remain a positive force for credit 
union lending, membership growth, and credit quality over the 2020-2021 
budget horizon. In addition, the wider term spread implied by current 
interest rate forecasts should translate into less pressure on credit 
union net interest margins and net income going forward.
    However, forecasts of the economic environment are far from 
perfect. A recession would pose significant challenges to the credit 
union system, leading to rising delinquencies, reduced loan demand, 
and, potentially, an increase in shares as consumers move funds from 
riskier investments into safer, insured credit union deposits. A 
downturn in the economy would likely lead to lower interest rates as 
well. Credit union balance sheets should be robust to a variety of rate 
environments. The NCUA, like the credit unions themselves, needs to 
plan and prepare for a range of economic outcomes that could affect 
credit union performance and determine resource needs.

Other Risk Factors and Trends

    In addition to risks associated with movements in the general 
economy, the NCUA and credit unions will need to understand their 
increasing exposure to, and address risks associated with, the 
technological and structural changes facing the system. Over the 
longer-term, increased concentration of loan portfolios, development of 
alternative loan and deposit products, technology-driven changes in the 
financial landscape, continued industry consolidation, and ongoing 
demographic changes will continue to shape the environment facing 
credit unions and will determine the resource needs of the NCUA.
    Cybersecurity: Credit unions' increasing use of technology is 
making the credit union system more vulnerable to cyber-attacks. The 
prevalence of malware, ransomware, distributed denial of service (DDOS) 
attacks, and other forms of cyber intrusion are creating challenges at 
credit unions of all sizes, and will require ongoing measures for 
containment. These trends are likely to continue, and even accelerate, 
over the next two years.
    Lending trends: Increasing concentrations in member business loans 
and private student loans, in addition to other new types of lending by 
credit unions, emphasize the need for long-term risk diversification 
and effective risk management tools and practices, along with expertise 
to properly manage increasing concentrations of risk.
    Financial Landscape and Technology: New financial products that 
mimic deposit and loan accounts, such as Apple Pay, Walmart pre-paid 
cards and peer-to-peer lending, continue to emerge. These new products 
pose a competitive challenge to credit unions and banks alike. Credit 
unions also face a range of challenges from financial technology 
(Fintech) companies in the areas of lending and the provision of other 
services. For example, underwriting and lending may be automated at a 
cost below levels associated with more traditional financial 
institutions, but may not be subject to the same regulations and 
safeguards that credit unions and other traditional financial 
institutions face. The emergence and increasing importance of digital 
currencies may pose both risks and opportunities for credit unions. As 
these institutions and products gain popularity, credit unions may have 
to be more active in marketing and rethink their business models.
    Technological changes outside the financial sector may also lead to 
changes in consumer behavior that indirectly affect credit unions. For 
example, the increase in on-demand use of auto services and 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 2019 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, including weak earnings, declining membership, high 
loan delinquencies, and elevated non-interest expenses. If current 
consolidation trends persist, there will be fewer credit unions in 
operation and those that remain will be considerably larger and more 
complex. As of June 30, 2019, there were 576 federally insured credit 
unions with assets of at least $500 million, 29 percent more than just 
five years earlier. These 576 credit unions accounted for 73 percent of 
credit union members and 79 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.

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 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 and managing risks that 
could affect the achievement of its strategic objectives. In 2018 and 
2019, the NCUA developed and implemented processes for analyzing and 
responding to enterprise risks. The NCUA has conducted several risk 
response assessments for priority areas including credit union business 
diversification, credit union cybersecurity, agency controls, and 
information security. These assessments help inform the agency's 
activities, operations, and planning and budget processes. 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.
    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

[[Page 59140]]

NCUA's actions to achieve its strategic objectives in support of 
providing, through regulation and supervision, a safe and sound 
credit union system, which promotes confidence in the national 
system of cooperative credit.

    The agency's risk appetite helps align risks with opportunities 
when making decisions and allocating resources to achieve the agency's 
strategic goals and objectives. This enterprise risk appetite statement 
is part of the NCUA's overall management approach and is supported by 
detailed appetite statements for individual risk areas.
    In practice, this means that the NCUA recognizes that risk is 
unavoidable and sometimes inherent in carrying out the agency's 
mandate. The NCUA is positioned to accept greater risks in some areas 
than in others; however, when consolidated, the risk appetite 
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 2020-2021 incorporates 
several specific programmatic changes that resulted from the NCUA's 
enterprise risk management reviews, such as hiring new personnel 
focused on cybersecurity, acquiring data loss prevention and other 
network security tools, and strengthening analytical focus on emerging 
financial risks within the credit union system.

IV. Key Themes of the 2020-2021 Budget

Overview

    The budget supports the priorities and goals outlined in the 
agency's annual performance plan and the 2018-2022 Strategic Plan. The 
resources and new initiatives proposed in the budget support the NCUA's 
mission to maintain a safe and sound credit union system.
    The 2020-2021 budget carries forward a number of key ongoing 
initiatives, which include: The Exam Flexibility Initiative; the 
increased use of off-site examinations work and data analytics; the 
modernization of information technology systems; regulatory reform 
initiatives; and efforts to implement organizational efficiencies. Over 
the course of the next five years, these efforts will result in a more 
effective organization.
    In the 2020-2021 budget, the NCUA will increase staffing in 
critical areas necessary to operate as an effective federal financial 
regulator capable of addressing emerging issues and continuing to 
modernize the examination program. 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.
    Employment-related costs are the single largest driver of the NCUA 
budget; therefore, managing the size of the workforce is important from 
a budgetary standpoint. Increases to the agency's staffing levels in 
2020 address gaps in the agency's workforce that must be filled in 
order to execute the agency's mission and foster an innovative, 
responsive and sound credit union system that meets the needs of all 
Americans. The NCUA continues to assess and balance its mission 
workload needs with the financial costs the agency imposes on the 
credit union system. Although the number of credit unions continues to 
decline nationwide, the NCUA must also consider the increasing 
complexity and growing asset base of the entire credit union system.
    The efficiency and effectiveness of the agency's workforce is 
dependent upon the resiliency of the NCUA's information technology 
infrastructure and availability of technological applications. The NCUA 
is committed to implementing new technology responsibly and delivering 
secure, reliable and innovative technological solutions to support its 
mission. This necessitates investments funded in the Capital Budget and 
additional staff to provide the analytical tools and technology the 
workforce needs to achieve the NCUA mission.

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:

[[Page 59141]]

[GRAPHIC] [TIFF OMITTED] TN01NO19.032

    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:
[GRAPHIC] [TIFF OMITTED] TN01NO19.033

    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 ESS program 
capabilities have been deployed in part in 2019 and will be rolled out 
nationwide in 2020. The new examination solution, which is named the 
Modern Examination and Risk Identification Tool (MERIT), was released 
to the Office of National Examinations and Supervision in September 
2019, while the release to the remaining Regional staff is scheduled 
for the summer of 2020.
    Though not originally included as part of the initial ESM plan, the 
agency has incorporated a robust business intelligence solution into 
the MERIT deployment, which advances the agency's analytic capabilities 
during this phase. The need for better analytics 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] Implementation of better controlled access to examination 
data across the organization.
    [cir] Faster and well-organized ability to request and submit items 
for the examination.
    [cir] Collaboration and real-time information for examiners, team 
members, and supervisors, including state supervisory authorities on 
joint exams.

[[Page 59142]]

    [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.

Cost Estimates

    The NCUA engaged an independent market research firm to estimate 
the cost of the initial ESM phases, including MERIT. Their research 
estimated a range in costs of $18.9 to $37.9 million.
    From 2015 to 2019, the NCUA Board approved a total budget of $20.8 
million for the MERIT program. This total included the modernized and 
more secure IT infrastructure, central user interface, and the first 
release of MERIT.
    The total expected acquisition costs for this phase of ESM, 
including actual costs through 2019 and the budget for 2020, is $36.6 
million. This will provide additional needed functionality in the 
second release of MERIT, including the loan and share download business 
intelligence integration.
    The NCUA awarded the Examination and Supervision Solution agile 
development contract in 2018. For the first three-month discovery phase 
of the contract, the NCUA and the systems integrator worked diligently 
to translate the business process context and identify tool-based 
implications and functional gaps. After discovery concluded, the NCUA 
determined the full funding needed to meet developmental, 
organizational change management, and scheduling requirements. As 
discussed above, the funding total now includes the advanced business 
intelligence capabilities.
    Through September 2019, 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 ONES to support 
examination and supervision of the largest credit unions.
    [cir] Developed financial analytics with dashboards and 
visualizations designed to assist the examiner in identifying risk.
    The project is on schedule to meet the following performance 
targets:
    [cir] 2019: Conduct ONES examinations and supervision contacts for 
all federal credit unions with assets greater than $10 billion and 
joint exams with state regulators in federally insured state-chartered 
credit unions with assets greater than $10 billion in Washington and 
North Carolina using the MERIT solution, which commenced on October 7, 
2019.
    [cir] 2020: Deploy second release of MERIT for the majority of the 
NCUA staff, state supervisory authorities, and credit unions in the 
third quarter of 2020.

Cybersecurity Priorities

    Cyber-attacks pose a threat to credit unions, financial regulators, 
and the broader financial system. Advances in technology and increased 
use of 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 Board. 
In June 2019, Chairman Rodney E. Hood appointed a special advisor for 
cybersecurity who not only will provide strategic counsel on 
cybersecurity policy but will also engage with other federal financial 
institution regulators and external stakeholders.
    In 2018, the NCUA began implementing a new Automated Cybersecurity 
Examination Tool (ACET) maturity assessment for credit unions with 
assets greater than $1 billion. The focus of the ACET implementation 
was to baseline individual credit unions' cybersecurity maturity 
consistently while benchmarking the entirety of the sector. In 2019, 
the maturity assessments were conducted on credit unions with assets 
greater than $250 million; in 2020, the agency will conduct maturity 
assessments on credit unions with assets between $100 million and $250 
million. The NCUA continues to evaluate the feasibility for conducting 
the maturity assessments on even smaller, less complex institutions.
    Concurrently, the NCUA is developing a tailored examination program 
based on the Information Technology Risk Examination (InTREx) solution 
leveraged by the Federal Deposit Insurance Corporation, the Federal 
Reserve Board and state regulators to ensure a harmonized, repeatable, 
measurable and transparent process for examining the compliance, safety 
and soundness of the credit unions' information security programs.
    The examination procedures will be maintained within the NCUA MERIT 
solution. The agency expects the results of both the maturity 
assessment and the examination program to help focus and prioritize 
cybersecurity for credit unions and make it an integral part of their 
risk-management strategies.
    The NCUA will further build upon its cybersecurity capabilities and 
programs to continue helping credit unions and consumers protect 
themselves. Specifically, the 2020 budget allocates resources to the 
following cybersecurity-related activities:
    [cir] Advancing consistency, transparency and accountability within 
the cybersecurity examination and supervision program;
    [cir] Expanding cybersecurity analytics to better inform 
examination and supervision decisions;
    [cir] Enhancing interoperability of the maturity assessment 
capability for broad credit union system distribution and full 
integration into the new examination system, MERIT;
    [cir] Stimulating due diligence for supply chain and third-party 
service provider management within the credit union sub-sector;
    [cir] Assisting institutions with resources to improve operational 
cybersecurity hygiene and resilience;
    [cir] Performing skills assessments of credit union examiners and 
taking steps to build skill set of examination staff in accordance with 
the National Initiative of Cybersecurity Education (NICE) Framework;
    [cir] Enhancing the professional expertise and knowledge management 
of
    [cir] agency specialists on cybersecurity and emerging technical 
innovation in the delivery of financial services, cybersecurity trends 
and risk/threat; and
    [cir] Expanding collaboration and coordination with relevant 
agencies towards a more harmonized examination and critical 
infrastructure protection capability.
    These initiatives--focused on supervisory program development, 
training, industry analysis and exercises, combined with interagency 
coordination and industry outreach--will require additional personnel. 
The 2020 budget includes two new cybersecurity positions within the 
Office of Examination and Insurance to improve the agency's ability to 
be prepared for and respond to the broadening responsibilities tied to 
cybersecurity and critical infrastructure protection.
    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

[[Page 59143]]

from compromise, including the work done as part of ESM. The 2020 
budget allocates $500,000 to acquire and implement data loss prevention 
(DLP) as part of the Information Technology (IT) Infrastructure, 
Platform and Security Refresh Capital Initiative. DLP is a set of tools 
and processes used to ensure that sensitive data is not lost, misused, 
or accessed by unauthorized users.

Bank Secrecy Act Compliance

    The NCUA continues to budget resources to comply with the statutory 
mandate from Congress to enforce federal 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 by 
conducting BSA examinations in federally insured, state-chartered 
credit unions where state resources are limited.
    In 2019, the NCUA's field staff began more in-depth reviews of 
credit unions' BSA and AML policies, procedures, and processes to 
assess compliance with new customer due diligence (31 CFR 
1020.210(b)(5)) and beneficial ownership requirements (31 CFR 1010.230) 
which became effective May 11, 2018.
    The NCUA's BSA reviews are risk-focused and include procedures to 
review an institution's compliance with the pillars of the BSA. These 
procedures are based on the examination procedures in the FFIEC BSA/AML 
Examination Manual the NCUA issues jointly with the other federal 
financial institution regulators. The NCUA's examiners tailor 
examinations based on the unique risk characteristics of each federal 
credit union. Additional or more in depth reviews are performed for 
those with higher risk activities; reviews at credit unions with lower 
risk activities are scaled appropriately.
    The NCUA coordinates regularly with our counterparts at the other 
federal financial institution regulatory agencies, as well as the 
Financial Crimes Enforcement Network (FinCEN). The NCUA actively 
participates in the Bank Secrecy Act Advisory Group (BSAAG), the FFIEC 
BSA/AML Working Group and an interagency working group to improve 
effectiveness and streamline, where possible, regulations and 
supervisory processes. The NCUA also partners with the other federal 
financial institution regulators to issue joint BSA statements, 
including the Joint Statement on Risk-Focused BSA/AML Supervision, 
dated July 22, 2019. Interagency groups are currently updating the 
Interagency Statement on Enforcement of BSA/AML Requirements, 
originally issued in 2007, and the FFIEC BSA/AML Examination Manual, 
last revised in 2014. The NCUA intends to continue collaborating with 
our regulatory counterparts, including FinCEN.
    In 2019, the NCUA issued Regulatory Alert 19-RA-02, Serving Hemp 
Businesses, to update federally insured credit unions about changes in 
federal law and regulation related to hemp. Specifically, the guidance 
clarifies that credit unions may provide the customary range of 
financial services for business accounts, including loans, to lawfully 
operating hemp related businesses within their fields of membership, 
and provides information to help credit unions better understand what 
they should consider providing financial services to lawfully operating 
hemp businesses.

Stakeholder Engagement

    In 2020, the agency is allocating resources for engagement summits 
with stakeholders. These events will include credit union officials, 
staff, and volunteers in order to discuss many of the priorities the 
agency has funded through this budget process. Topics of interest at 
these summits may include financial inclusion, minority depository 
institutions, cybersecurity or risk and risk mitigation strategies in 
the current environment. The NCUA Board is committed to understanding 
how these priority areas impact credit unions and engaging in a 
thoughtful dialogue to determine whether there are additional actions 
the NCUA should and shouldn't take to ensure credit unions are best 
prepared to serve their members while doing so in a safe and sound 
manner.

Examination Initiatives

    The NCUA is focused on several additional examination modernization 
efforts as outlined in the August 2018 Letter to Credit Unions: 18-CU-
01--``Examination Modernization Initiatives.'' This letter outlined 
five initiatives to modernize the agency's examinations processes, 
including the ESM program outlined above. Intended benefits of these 
initiatives include:

    [cir] More efficient and less burdensome examinations and 
supervision
    [cir] More consistent and accurate supervisory determinations
    [cir] Enhanced coordination with State Supervisory Authorities
    [cir] More secure, reliable, and flexible technology to support 
future expansion capabilities

    These modernization initiatives are interrelated and complement 
each other. As these initiatives support and build upon each other, 
they will ultimately result in a fully modernized examination and 
supervision program with various incremental improvements along the 
way. The budget allocates resources in support of these improvements. 
Below is a more in-depth discussion of four of the initiatives. The 
fifth initiative, the ESM program, is discussed in detail above.

ONES Data-Driven Supervision

    This initiative began in 2018 as an effort to move to a continuous 
supervision model for the large, natural-person credit unions 
supervised by the ONES. This ongoing supervision program will use data-
driven analytics to monitor and identify credit union risk while 
supporting the oversight of credit union-driven stress testing. The 
NCUA's ONES travel costs are projected to decrease by 10 percent as a 
result of implementing this program and the transition to the NCUA's 
in-house oversight of credit union run stress-testing will allow the 
NCUSIF to avoid $3 million in costs in 2020. The data-driven 
supervision initiative may lead to analytical advancements that can be 
adapted for supervising some or all other insured credit unions.

Shared NCUA-State Regulator Federally Insured, State-Chartered Credit 
Unions Program

    In 2017, the NCUA created the Joint NCUA-State Supervisor Working 
Group (working group), which is tasked with improving coordination and 
scheduling for joint exams, providing scheduling flexibility, and 
reducing redundancy where possible. The group's goal is to minimize the 
burden on federally insured, state-chartered credit unions resulting 
from having a separate financial regulator and insurer.
    In addition, the working group is evaluating the appropriateness 
and feasibility of adopting an alternating-year examination approach 
for federally insured, state-chartered credit unions. A pilot program 
launched January 2019 and will allow the NCUA, state regulators, and 
stakeholders to evaluate the benefits and challenges of an alternate-
year examination program. The pilot will last approximately three years 
in order to collect enough information to evaluate one full 
alternating-year exam cycle. The results of the pilot will provide 
valuable insight into the advantages and risks of such an

[[Page 59144]]

approach prior to finalizing a decision about a permanent alternating-
year exam cycle.
    To support joint examinations in federally insured, state-chartered 
credit unions, the working group developed a new template framework for 
improved coordination and cooperation between the NCUA regions and the 
respective state regulators. The working group is also exploring ways 
to minimize duplication and overlap through examination and procedure 
improvements and greater use of technology. In addition, the working 
group is evaluating other areas of potential duplication that can be 
reduced or eliminated, such as loan participations, Credit Union 
Service Organizations (CUSOs) and third party vendor reviews, and other 
supervisory matters. The goal of these reviews is to better leverage 
the work of each regulatory party in examining and supervising 
federally insured, state-chartered credit unions.

Virtual Examination Program

    In 2017, the NCUA Board approved the project and associated 
resources to research methods to conduct offsite as many aspects of the 
examination and supervision processes as possible. The virtual exam 
project team is researching ways to harness new and emerging data, 
advancements in analytical techniques, innovative technology, and 
improvements in supervisory approaches. When approving the 2019 budget, 
the NCUA Board approved using past years' unspent balances to complete 
the research and discovery phase for virtualizing key elements of the 
examination; this work will continue through 2020.
    By identifying and adopting alternative methods to remotely analyze 
much of the financial and operational condition of a credit union, with 
equivalent or improved effectiveness relative to current examinations, 
it may be possible to significantly reduce the frequency and scope of 
onsite examinations. Onsite examination activities could potentially be 
limited to periodic data quality and governance reviews, interventions 
for material problems, and meetings or other examination activities 
that need to be handled in person.
    The virtual exam should lead to greater use of standardized 
interaction protocols, advanced analytical capabilities, and more-
informed subject matter experts. This should result in more consistent 
and accurate supervisory determinations, provide greater clarity and 
consistency with respect to how the agency conducts supervisory 
oversight, and reduce coordination challenges between agency and credit 
union staff.
    To be successful, it is likely examination staff will need to 
analyze more information about the credit union being examined and 
communicate more frequently with management at the credit union. 
However, it is not the agency's intent to intervene in credit unions' 
day-to-day operations or strategic planning.
    The virtual examination team will deliver to the NCUA Board by the 
end of 2020 a report discussing alternative methods identified to 
remotely analyze aspects of the financial and operational condition of 
a credit union.

Offsite Examination Procedures

    Starting in 2016, the NCUA's Southern Region piloted a flexible 
exam program--commonly called FLEX. The pilot program ran through 2018 
and evaluated conducting certain existing exam procedures offsite. The 
pilot assessed examiners working remotely on elements of examinations 
of well-run credit unions with the technology and platforms to provide 
electronic data securely.
    In 2019, the NCUA adopted the best practices from the FLEX pilot 
nationally. Now known as offsite examination procedures, the NCUA 
updated its National Supervision Policy Manual to indicate the agency's 
support for providing staff with the flexibility to conduct examination 
work offsite when appropriate conditions are met. The NCUA continues to 
develop plans to increase agency use of offsite procedures.

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, including matters such as advertising, field 
of membership, equity distribution, and securitization. The Task Force 
published its final report in December 2018.

Reorganization/Restructuring

    In July 2017, the NCUA's executive leadership committed to a 
comprehensive plan that would invest in the agency's future, make 
critical organizational alignment changes, and improve the NCUA's 
efficiency, effectiveness, and focus on its core mission 
responsibilities. The agency has completed the operational actions 
related to its reform plan.
    As a result of the NCUA's reform plan:
    [cir] The NCUA created an office focused exclusively on credit 
union service needs including new charters, credit union expansion, and 
training--the Credit Union Resources and Expansion (CURE) Office.
    [cir] Examination reports have been improved through enhanced 
quality measures.
    [cir] Two regional offices closed in January 2019 and leased office 
space has been reduced.
    [cir] AMAC's staffing has been reduced, and support functions are 
now better aligned with the central office.
    The NCUA continues to examine how to best balance meeting workforce 
and technology needs while containing operating costs.

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 2020 reflect the resource 
requirements for steady state operations at the NCUA as it continues to 
modernize the examination process to enhance the efficiency and 
effectiveness of the supervisory process. Two new information systems 
officers in the Office of Examinations and Insurance will support 
expanded responsibilities for cybersecurity and critical infrastructure 
protection. A third position will be created in the

[[Page 59145]]

Chairman's office to support the NCUA through strategic outreach and 
engagement with stakeholders in the credit union system, including 
credit union management, associations and leagues, and journalists who 
cover the industry.
    During the July 2019 mid-session review, the NCUA Board approved 
four additional staff to support the agency's growing engagement with 
the Administration, Congress, industry stakeholders, and the general 
public. The newly authorized positions for the Office of External 
Affairs and Communications include a Deputy Director, a Communications 
Specialist, a Technical Writer and Editor, and a Program Analyst for 
External Affairs. The full cost of these positions are included in the 
2020 budget.
    The 2020 budget supports a total agency staffing level of 1,185 
personnel, of which 1,180 are funded in the Operating Budget. This is a 
net increase of three positions, or 0.25 percent, compared to the 
Board-approved level for 2019, as modified at the July 2019 Board 
meeting. The new 2020 positions are described in greater detail below.
[GRAPHIC] [TIFF OMITTED] TN01NO19.034

    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 2020

Information Systems Officers (+2 New Positions)
    These new employees, requested in the Office of Examination and 
Insurance, will be responsible for expanded cybersecurity 
responsibilities that include: Management of interagency activities, 
development of industry policy related to information security, and 
improvement of credit union cybersecurity resilience. The goal of these 
positions is to increase institutional knowledge of cybersecurity best 
practices within the credit union

[[Page 59146]]

system and broaden skills within the NCUA to ensure a consistent and 
professional approach during credit union supervision.
Senior Adviser to the Chairman for Communications and Engagement (+1 
New Position)
    This new employee will support the NCUA through strategic outreach 
and engagement with stakeholders in the credit union system, including 
credit union management, associations and leagues, and journalists who 
cover the industry. This employee will also assist the NCUA Board by 
keeping members up to date about challenges and changes within the 
system.

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 and comprehensive accounting of 
the Operating Budget.
[GRAPHIC] [TIFF OMITTED] TN01NO19.035

Salaries and Benefits

    The budget includes $231.4 million for employee salaries and 
benefits in 2020. This change is an $8.5 million, or 3.8 percent, 
increase from the 2019 Board-approved budget.
    Salaries and benefits costs make up 73.2 percent of the total 
budget. There are two primary drivers of increased costs in 2020 for 
the Salaries and Benefits category:
    [cir] Merit and locality pay increases for the NCUA's 1,180 
personnel paid from the Operating Budget, in accordance with the 
agency's current Collective Bargaining Agreement (CBA) and its merit-
based pay system. Salaries are estimated to increase 1.8 percent in 
aggregate compared to 2019. This growth is lower than prior years due 
to new employee starting salaries being set at the lower end of pay 
ranges when turnover occurs and because of some staff reaching the 
salary caps for their pay grades.
    [cir] Contributions for employee retirement to the Federal Employee

[[Page 59147]]

Retirement System (FERS), which are unilaterally set by the Office of 
Personnel Management, and which cannot be negotiated or changed by the 
NCUA. Driven by the mandatory rate adjustment, the 2020 benefits costs 
increase 9.0 percent compared to 2019.
    These changes are described in more detail below.
    In 2020, the NCUA's compensation levels will continue to ``maintain 
comparability with other federal bank regulatory agencies,'' as 
required by the Federal Credit Union Act.\9\ The Salaries and Benefits 
category of the budget includes all employee pay raises for 2020, such 
as merit and locality increases, and those for promotions, 
reassignments, and other changes, as described below.
---------------------------------------------------------------------------

    \9\ 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).
---------------------------------------------------------------------------

    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 -1.0 percent to +3.0 
percent, depending on the geographic location. The average increase in 
locality pay is estimated to be 1.52 percent. Starting in 2018, the 
NCUA discontinued the annual, general pay scale increase of 1.25 
percent in accordance with the most-recent CBA negotiations.
    The first-year cost of the new positions added in 2020 is estimated 
to be $0.9 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 2020. All federal agencies are 
expected to contribute 16.0 percent of FERS employees' salaries to the 
OPM retirement system, an increase of 230 basis points compared to the 
2019 level. This mandatary contribution is prescribed in the OPM 
Benefits Administration Letter dated June 2019. The estimated impact on 
the NCUA budget is an increase of approximately $5.0 million in 
mandatory payments to OPM, or 1.6 percentage points of budgetary 
growth, compared to 2019 levels.
    The average health insurance costs for the Federal Employees Health 
Benefits program for 2020 are consistent with historical actual 
expenses. 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.
    The 2020 budget estimate for pay and benefits includes the 
assumption of a 2.2 percent vacancy rate (roughly 26 full-time 
positions) during the year. This aligns with the NCUA's recent 
attrition rates and workforce management efforts to carefully review 
every vacancy created in the agency in 2020 before a hiring notice is 
published. The effect of this adjustment lowers the NCUA budget 
estimate and results in reduced fees collected from credit unions.
    The 2021 budget request for salaries and benefits is estimated at 
$237.8 million, a $6.4 million increase from the 2020 level, which 
accounts for merit and locality increases consistent with the CBA 
(approximately $4.1 million), the full-year cost impact of new 
positions (approximately $0.6 million), and associated increases in 
benefits for all employees (approximately $1.7 million). The 
assumptions used for compensation-related adjustments are based on the 
CBA currently in force. The NCUA CBA will be renegotiated during 2020, 
with any changes reflected in future budget cycles.

Travel

    The 2020 budget includes $27.4 million for Travel. This change is a 
$590,000, or 2.2 percent, increase to the 2019 Board-approved budget. 
Travel comprises approximately nine percent of the overall 2020 budget. 
The cumulative reduction of the credit union examiner positions 
compared to past years, extended examination cycles, and increased use 
of offsite examinations all help contain the NCUA's travel costs. 
However, the General Services Administration (GSA) announced an 
increase to standard lodging rates to $96 dollars in 2020, an increase 
of four dollars, or four percent compared to 2019, which contributes to 
the growth of estimated travel expenses in 2020. In addition, effective 
with 2019, GSA will charge the NCUA fees for the city pair program that 
provides discounted and flexible air passenger transportation services 
to federal government travelers. Although the NCUA has always 
participated in the mandatory program, prior year fee payments were not 
applied to the NCUA. The annual cost of $20,000 to GSA for all the NCUA 
employee travel fees may increase depending on future travel schedules.
    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 will conduct a series of training events to support the 
nationwide roll-out of MERIT. The NCUA's planning staff conducted 
extensive research to identify low-cost locations for these events. The 
roll-out will be a labor intensive effort requiring up to six weeks of 
travel for many of the NCUA's staff, and will provide hands-on training 
for this new system, which will be officially deployed in the fourth 
quarter of 2020. The estimated travel costs for MERIT-related training 
funded in the 2020 Operating Budget is $1.0 million.
    The NCUA plans to evaluate future cost avoidance for travel through 
continued expansion of offsite examination work. In addition, agency 
personnel will continue to utilize more virtual training options, where 
appropriate, to help minimize travel expenses. The 2021 budget request 
for

[[Page 59148]]

the travel is estimated to be $26.7 million, less than 2020 because of 
the exclusion of one-time MERIT training costs.

Rent, Communications, and Utilities

    The 2020 budget includes $8.2 million for Rent, Communications, and 
Utilities. This is an $188,000 increase, or 2.3 percent more than the 
2019 Board-approved budget. The Rent, Communications, and Utilities 
category is the smallest component of the NCUA's budget and funds the 
agency's telecommunications and information technology network 
expenses, and facility rental costs.
    The agency telecommunications budget for 2020 is $4.5 million and 
accounts for most of the increase in this budget category. 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 increased costs support trusted internet protocol 
services due to higher data consumption and use of cloud-based 
services.
    Office building leases, meeting rentals, office utilities, and 
postage expenses are also included in this budget category. Facility 
costs total $2.1 million for 2020 and include the NCUA's annual payment 
of $1.3 million to the Share Insurance Fund for its central office 
note, which is scheduled to be fully repaid in 2023. The annual utility 
costs for the central office and regional offices are estimated at 
$483,000.
    The 2020 budget also includes $1.1 million for event rental costs 
for examiner meetings and other training events. This includes the one-
time costs of $220,000 for space rental for the MERIT training events 
planned in 2020.
    The 2021 budget request for the Rent, Communications, and Utilities 
category is estimated to be $8.0 million, less than 2020 because of the 
exclusion of one-time MERIT training costs.

Administrative Expenses

    The 2020 budget includes $5.9 million for Administrative Expenses. 
This is a decrease of $2.8 million, or 31.9 percent, compared to the 
2019 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.
    Most of the decrease in the Administrative Expenses budget results 
from realigning the costs of various service contracts, maintenance 
fees, and end-user licensing for computer software and database 
management applications to the Contracted Services budget. 
Approximately $3.8 million, unchanged from 2019, will be permanently 
included in Contract Services, which is consistent with standard 
government reporting for software costs. This includes annual software 
licenses and maintenance support fees for the call center managed by 
the Office of Consumer Financial Protection.
    As part of the FFIEC, the NCUA shares in costs for joint actions 
and services that affect the financial services industry. The overall 
decrease is $78,000 less than the 2019 budget levels since the state 
examiner training costs will be reduced next year.
    The 2020 budget includes $100,000 for employee relocation expenses, 
although expected relocation expenses are estimated to be more. The 
budget proposes using $900,000 of unspent balances from prior years to 
pay for these additional costs, for a total relocation budget of 
$1,000,000. This spending level reflects recent average annual 
expenditures for employee relocations and is a $250,000 increase over 
the 2019 Board-approved 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. 
Employee relocations have increased in quantity and cost per employee 
in recent years, especially in 2019. The larger number of employee 
relocations is partly the result of additional hiring and partly from 
the effects of the 2018 NCUA reorganization. The increase in relocation 
costs is also related to changes in the 2017 tax law that now treats 
all relocation reimbursements as taxable income. Like other government 
agencies and private sector employees, the NCUA must now reimburse 
employees not just for their relocation expenses, but also for the 
personal tax liability resulting from those payments.
    Continuous business process improvements and financial controls 
have decreased costs for printing, and other administrative costs, 
which are estimated to be $112,000 less than in 2019.
    The 2021 budget request for the Administrative Services category is 
expected to increase by $250,000, or 4.2 percent, due to increases in 
the employee relocation budget.

Contracted Services

    The 2020 budget includes $43.3 million for Contracted Services. 
This is a $5.3 million, or 13.8 percent, increase compared to the 2019 
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 is 
related to the NCUA's priority to implement a robust supervision 
framework by identifying and resolving traditional risk concerns such 
as interest rate risk, credit risk, and industry concentration risk, as 
well as by addressing new and evolving operational risks such as 
cybersecurity threats. Growth in the contracted services budget 
category results primarily from new operations and maintenance costs 
associated with ongoing capital investments, such as replacements for 
the AIRES and CU Online. 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:

[ssquf] Information Technology Operations and Maintenance (45 percent 
of contracted services)
    --IT network support services and help desk support
    --Contractor program and web support and network and equipment 
maintenance services
    --Administration of software products such as Microsoft Office, 
Share Point and audio visual services
[ssquf] Administrative Support and Other Services (14 percent of 
contracted services)
    --Examination and Supervision program support
    --Technical support for examination and cybersecurity training 
programs
    --Equipment maintenance services
    --Legal services and other expert consulting support
    --Other administrative mission support services for the NCUA 
central office

[[Page 59149]]

[ssquf] Accounting, Procurement, Payroll and Human Resources Systems 
(10 percent of contracted services)
    --Accounting and procurement systems and support
    --Human resources, payroll, and employee services
    --Equal employment opportunity and diversity programs
[ssquf] Building Operations, Maintenance, and Security (10 percent of 
contracted services)
    --Central office facility operations and maintenance
    --Building security and continuity programs
    --Personnel security and administrative programs
[ssquf] Information Technology Security (9 percent of contracted 
services)
    --Enhanced secure data storage and operations
    --Information security programs
    --Security system assessment services
[ssquf] Training (7 percent of contracted services)
    --Examiner staff, technical and specialized training and 
development
    --Senior executive and mission support staff professional 
development
[ssquf] Audit and Financial Management Support (5 percent of contracted 
services)
    --Annual audit support services
    --Material loss reviews
    --Investigation support services
    --Financial management support services

    The following pie chart illustrates the breakout of the seven 
categories for the total 2020 contracted services budget of $43.3 
million.
[GRAPHIC] [TIFF OMITTED] TN01NO19.036

    Major programs within the contracted services category include:
    [ssquf] Training requirements for the examiner workforce. The 
NCUA's most important resource is its highly educated, experienced, and 
skilled workforce. It is important that staff have the proper 
knowledge, skills, and abilities to perform assigned duties and meet 
emerging needs. Each year, Credit Union Examiners attend several levels 
of training, including in core areas such as capital markets, consumer 
compliance, and specialized lending. The training deliverables for 2020 
include the MERIT training sessions discussed elsewhere in this 
document, classes offered by the Federal Financial Institutions 
Examination Council, new examiner classes, and subject matter expert 
training sessions for the NCUA examiners.
    Starting in 2020, the NCUA is reducing its financial support for 
training for state examiners. Budgets for state examiner training at 
the FFIEC have been reduced by approximately 50 percent.
    Contracted service providers, in partnership with the NCUA subject 
matter experts, will develop and design subject matter expert training 
classes for examiners and conduct a triennial review of several modules 
of the NCUA's core course curriculum. Additionally, contracted service 
providers and central office staff will continue conducting 
organizational development and teambuilding training to help support 
new team operations as a result of the Agency reorganization.
    [ssquf] The NCUA's information security program supports ongoing 
efforts to strengthen cybersecurity and ensure compliance with the 
Federal Information System Management Act.
    [ssquf] Agency financial management services, human resources 
technology support, and payroll services. The NCUA contracts for these 
back-office support services with the U.S. Department of 
Transportation's Enterprise Service Center (DOT/ESC) and the General 
Services Administration. The NCUA's human resource system, HR Links, 
also adopted by other federal agencies, is a shared solution that 
automates routine human

[[Page 59150]]

resource tasks and improves time and attendance functionality.
    [ssquf] Audit. The NCUA Office of Inspector General contracts with 
an accounting firm to conduct the annual audit of the agency's four 
permanent funds. The results of these audits are posted annually on the 
NCUA website and also included as part of the agency's Annual Report.
    A significant share of the budget for the Contracted Services 
category finances on-going infrastructure support for the agency. For 
example, the NCUA relies on recurring contracted services to maintain a 
number of the agency's examination systems that will replace legacy 
systems such as AIRES and CU Online. In future budgets, annual 
Operation and Maintenance costs for the MERIT system will be included 
in the Contract Services spending category. Several of the NCUA's core 
information technology systems and processes also require additional 
contract support in 2020, which result in increased budgets in the 
Contracted Services category, as described below.
    Within the budget for the Office of Chief Information Officer, an 
additional $0.7 million is required primarily for the operations and 
maintenance costs of capital projects delivered in 2019 and 2020, and 
for other information technology hardware critical to ensure business 
continuity.
    Within the budget for the Office of Chief Financial Officer, the 
annual fee paid to the Department of Transportation (DOT) for the 
NCUA's financial management system is roughly the same as the 2019 
level of $1.2 million.
    Within the budget for the Office of Continuity and Security 
Management, the Central Office building's physical access controls will 
be replaced in 2020, which is expected to cost approximately $600,000. 
In addition, mandatory reimbursement to the Office of Personnel 
Management for background investigations will increase by an estimated 
$125,000 in 2020.
    The 2021 budget for Contracted Services is estimated to increase by 
$4,000,000, or 9.3 percent, compared to 2020, 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 uses 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, information technology systems, and information technology 
hardware to determine what requires repair, major renovation, or 
replacement. The staff then make recommendations for prioritized 
investments to the Executive Director and the NCUA Board.
    Routine repairs and lifecycle-driven property renovations are 
necessary to properly maintain 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.
    IT systems and hardware are another significant capital expenditure 
for modern organizations. The 2019 budget allowed the NCUA to deliver 
and deploy a number of cybersecurity and governance tools, and the 
first iteration of ESM with several projects included, such as the 
first release of MERIT in 2019. The 2020 budget maintains the 
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, incident and vulnerability management systems to 
enhance the agency's cybersecurity posture, and various hardware 
investments to refresh agency networks and ensure staff have the tools 
necessary to maintain and increase their productivity.
    The NCUA's 2020 capital budget is $25.1 million. The capital budget 
funds the NCUA's long-term investments. The Information Technology 
Prioritization Council recommended $20.9 million for IT software 
development projects and $2.7 million in other IT investments for 2020. 
The NCUA facilities require $1.5 million in capital investments. 
Detailed descriptions of all 2020 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 ($15.8 
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. In 2020, all NCUA examiners will be trained to 
use the new MERIT system, with full implementation expected by the 
fourth quarter.
Enterprise Central Data Repository ($1.1 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 ($0.45 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.
Asset and Liabilities Management Application ($2.1 Million)
    The purpose of the Asset and Liabilities Management (ALM) 
application is for the NCUA to build internal analytical capabilities 
to run supervisory stress testing in house and to conduct regular 
quantitative risk assessments by procuring and configuring off-the-
shelf analytical tools, models and software used commonly in stress 
testing and other risk management activities.
    This effort delivers a complete solution that will focus on 
modernizing the NCUA's supervision tools and approaches, identifying 
material risks facing the covered credit unions, and

[[Page 59151]]

tailoring resources to the material risks and risk focused exams. This 
effort will allow the NCUA to reduce the existing third party 
contractor's role to only consultation.
Enterprise Learning Management System Replacement ($1.0 Million)
    The purpose of the Enterprise Learning Management System (LMS) 
Replacement project is to conduct market research, initiate an 
acquisition, create a project management plan, and execute the 
production and implementation of a cost-effective, cloud-based solution 
and training services that provides the NCUA with the full-range of 
eLearning functionality associated with a modern LMS. This will allow 
for enhanced examiner utilization and accessibility driven by quality 
content, ease of use and system reliability, role-based interface, 
ability to view personalized pages by role, centralized content and, 
adherence to federally mandated reporting requirements and records 
management requirements.
Integrated Financial Management System Analysis ($0.4 Million)
    The purpose of this project is to analyze financial system 
improvements. The NCUA's current financial management system service 
provider increased the fee it charges the NCUA in 2019 by 40 percent. 
The NCUA plans to review various options to obtain better financial 
management results in a cost-effective manner.
Enterprise Laptop Lease ($0.65 Million)
    The purpose of the Enterprise Laptop Refresh project is to provide 
the NCUA with a more efficient, mobile friendly, and secure tool to 
help employees better perform their jobs at a reasonable cost.
Information Technology Infrastructure, Platform and Security Refresh 
($2.0 Million)
    The purpose of the Information Technology (IT) Infrastructure, 
Platform and Security Refresh project is to refresh and/or replace 
routers, switches virtual servers, wireless, virtual private network, 
infrastructure appliances, end of life and end of service components in 
order to ensure that the NCUA data is secure and operations are stable.
NCUA Website Development ($0.1 Million)
    The purpose of the Web Services project is to serve the web-related 
needs of the internal NCUA stakeholders and the public. The project 
provides design, development, and maintenance of the agency's public 
websites: NCUA.gov and MyCreditUnion.gov.
Central Office Renovations ($0.5 Million)
    NCUA headquarters renovation project will improve overall space 
utilization in the NCUA-owned Central Office. The goal of the project 
is to improve operational efficiency while decreasing operating cost by 
discontinuing commercial office leases and consolidating all 
Washington-region operations within one owned building. The project 
will increase the NCUA headquarters building capacity and some offices 
currently on separate floors will be collocated onto one floor, 
increasing operational efficiency.
Central Office Heating, Ventilation, and Air Conditioning (HVAC) System 
Replacement ($0.75 Million)
    The NCUA central office HVAC system replacement project will 
recapitalize the HVAC system in the agency's central office building, 
including all cooling towers, air handlers, boilers and HVAC 
components. The current HVAC system is original to the facility, 24 
years old and obsolete. The current system is at the end of its usable 
life and it is not working efficiently.
Austin, Texas Office Building Modernization ($0.27 million)
    In 2020, 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 administrative costs, and 
represent total estimated costs to the Share Insurance Fund.\10\ 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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    \10\ Note these direct costs are exclusive of any costs that are 
shared with the Operating Fund through the Overhead Transfer Rate, 
and with payments available upon requisition by the Board, without 
fiscal year limitation, for insurance under section 1787 of this 
title, and for providing assistance and making expenditures under 
section 1788 of this title in connection with the liquidation or 
threatened liquidation of insured credit unions as it may determine 
to be proper.
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    The cost of the NGN program and the Corporate System Resolution 
Program, including costs associated with the 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 2020 Share Insurance Fund Administrative budget is estimated to 
be $6.5 million, $1.9 million, or 23 percent, less than 2019. The 
budget decrease is primarily driven by the removal of third-party 
stress testing on large credit unions and the decrease in costs for 
valuation services for the NGN program. These services enable the NCUA 
to continue supporting the NGN program, which includes managing legacy 
assets within the NGN trusts. Legacy assets consist of over 1,000 
investment securities that are secured by residential mortgages and 
other assets.
    The 2021 requested budget supports similar workload and resources, 
increasing $482,000, or 7.5 percent, compared to the 2020 funding 
level.

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 $1.47 million, 
which represents an increase of $232,000 compared to 2019. 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 23 
percent of the total budget. The financial analysts on the NGN team 
have specialized technical expertise to manage the remaining $6 billion 
of legacy assets. Personnel costs are estimated in a manner similar to 
the operating budget.
Travel
    The estimated travel cost of $52,000 is less than one percent of 
the overall 2019 budget and 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

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program. Two of the five staff are remote employees and are expected to 
travel periodically to the NCUA's central office.
Administrative Training
    Training expenses, which represent less than one percent of the 
budget, are estimated to be remain at $27,000, 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 42 
percent of the budget, are estimated to be $2.7 million, a decrease of 
$0.2 million from the 2019 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 $1.0 million 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 $0.9 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 $0.8 
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 some of the NGNs have 
begun maturing, the NCUA has added 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 monoline insurer exposure, and direct access to various 
industry experts for discussion on specific credits.
Other Direct Expenses
    Other direct expenses of the Share Insurance Fund are estimated to 
be $2.2 million in 2020, a decrease of $1.9 million, or 47 percent, 
compared to the 2019 budget level. NCUA is required to conduct annual 
stress testing of certain large credit unions to ensure the credit 
unions remain financially sound through challenging economic cycles. In 
previous years the NCUA engaged BlackRock Solutions as its partner to 
challenge the stress test results prepared by the covered credit 
unions. Over a multi-year endeavor, the NCUA has procured the 
personnel, data, and systems to conduct this analysis internally. 
Accordingly, the NCUA has determined it will not engage BlackRock 
Solutions for the 2020 stress test cycle and has removed this cost from 
the budget. Had BlackRock been engaged for the 2020 cycle, the agency 
would have incurred $3 million in costs.
    The $0.7 million increase in the estimated costs for state examiner 
training is driven by the MERIT travel and training requirement.
BILLING CODE 7535-01-P

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BILLING CODE 7535-01-C
    The NCUA website has a dedicated section that provides financial 
reports for the Share Insurance Fund, \11\ and a separate page that 
explains the NCUA Guaranteed Notes Program and provides comprehensive 
reporting and analysis on the legacy assets.\12\
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    \11\ See: https://www.ncua.gov/services/Pages/share-insurance/reports.aspx.
    \12\ See: https://www.ncua.gov/regulation-supervision/Pages/guaranteed-notes.aspx.
---------------------------------------------------------------------------

VIII. Financing the NCUA Programs

Overview

    As part of the annual budgetary process, the NCUA remains mindful 
that its operating funding comes directly from federal and state 
chartered credit unions. The agency strives to ensure that any 
allocation of these funds follows a thorough review of the necessity of 
the expenditures and whether programs are operating in an efficient, 
effective, transparent, and fully accountable manner.
    To achieve its statutory mission, the NCUA incurs various expenses, 
including those involved in examining

[[Page 59154]]

and supervising federally insured credit unions. The NCUA Board adopts 
an Operating Budget, including the Capital Budget, in the fall of each 
year to fund the vast majority of the costs of operating the 
agency.\13\ The Federal Credit Union Act authorizes two primary sources 
to fund the Operating Budget:
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    \13\ Some costs are directly charged to the Share Insurance Fund 
when appropriate to do so. For example, costs for training and 
equipment provided to State Supervisory Authorities are directly 
charged to the Share Insurance Fund.
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    (1) Requisitions from the Share Insurance Fund ``for such 
administrative and other expenses incurred in carrying out the purposes 
of [Title II of the Act] as [the Board] may determine to be proper''; 
\14\ and
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    \14\ 12 U.S.C. 1783(a).
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    (2) ``fees and assessments (including income earned on insurance 
deposits) levied on insured credit unions under [the Act].'' \15\ Among 
the fees levied under the Act are annual Operating Fees, which are 
required for federal credit unions under 12 U.S.C. 1755 ``and may be 
expended by the Board to defray the expenses incurred in carrying out 
the provisions of [the Act,] including the examination and supervision 
of [federal credit unions].''
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    \15\ 12 U.S.C. 1766(j)(3). Other sources of income for the 
Operating Budget have included interest income, funds from 
publication sales, parking fee income, and rental income.
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    Taken together, these dual authorities effectively require the 
Board to determine which expenses are appropriately paid from each 
source while giving the Board broad discretion in allocating expenses.
    In 1972, the Government Accountability Office recommended the NCUA 
adopt a method for properly allocating Operating Budget costs--that is, 
the portion of the NCUA's budget funded by requisitions from the Share 
Insurance Fund and the portion covered by Operating Fees paid by 
federal credit unions.\16\ 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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    \16\ http://www.gao.gov/assets/210/203181.pdf.
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    To allocate agency expenses between these two primary funding 
sources, the NCUA uses the OTR methodology. The OTR is the formula the 
NCUA uses to allocate insurance-related expenses to the Share Insurance 
Fund under Title II. Almost all other operating expenses are collected 
through annual Operating Fees paid by federal credit unions.\17\
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    \17\ 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).
---------------------------------------------------------------------------

    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.\18\ Second, the NCUA may not fund its 
entire Operating Budget through charges to the Share Insurance 
Fund.\19\ The NCUA has not imposed additional policy or regulatory 
limitations on its discretion for determining the OTR.
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    \18\ 12 U.S.C. 1783(a).
    \19\ 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 Board approved the current methodology for calculating the 
OTR at its November 2017 open meeting.\20\ 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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    \20\ 82 FR 55644 (Nov. 22, 2017).
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    The OTR formula is based on the following underlying principles to 
allocate agency operating costs:
    1. Time spent examining and supervising federal credit unions is 
allocated as 50 percent insurance related.\21\
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    \21\ 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.\22\
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    \22\ 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.\23\
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    \23\ 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 Fund are allocated as 
100 percent insurance related.\24\
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    \24\ 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.
---------------------------------------------------------------------------

    These four principles are applied to the activities and costs of 
the agency, which results in the portion of the agency's Operating 
Budget that is transferred from the Share Insurance Fund. Based on the 
Board-approved methodology, the OTR for 2020 is modestly higher than 
2019, and estimated to be 61.3 percent. Thus, 61.3 percent of the total 
Operating Budget is estimated to be paid out of the Share Insurance 
Fund. The remaining 38.7 percent of the Operating Budget is estimated 
to be paid for through the Operating Fee. The explicit and implicit 
distribution of total Operating Budget costs for federal credit unions 
and federally insured, state-chartered credit unions is as follows:

[[Page 59155]]



------------------------------------------------------------------------
                                                     Federally insured,
 Est. share of the operating     Federal credit        state-chartered
     budget covered by:         unions (percent)        credit unions
                                                          (percent)
------------------------------------------------------------------------
Federal Credit Union                          38.7                   0.0
 Operating Fee..............
OTR x Percent of Insured        31.3 (61.3 x 51.1)    30.0 (61.3 x 48.9)
 Shares.....................
                             -------------------------------------------
    Total...................                  70.0                  30.0
------------------------------------------------------------------------

    In terms of accounting for funds transferred from the Share 
Insurance Fund to the Operating Fund, the OTR is applied to actual 
expenses incurred each month. Therefore, the rate calculated by the OTR 
formula is multiplied by each month's actual operating expenses and 
charged to the Share Insurance Fund. Because of this monthly 
reconciliation to actual operating expenditures, when the NCUA's 
expenditures are less than budgeted, the amount charged to the Share 
Insurance Fund is also less--and those lower expenditures benefit both 
federally chartered and state charted credit unions.
    The following chart illustrates the share of the Operating Budget 
paid by federal credit unions (FCUs, 70.0%) and federally insured, 
state-chartered credit unions (FISCUs, 30.0%).
[GRAPHIC] [TIFF OMITTED] TN01NO19.038

    The Board delegated authority to the Chief Financial Officer to 
administer the methodology approved by the Board for calculating the 
Operating Fees, and to set the fee schedule as calculated per the 
approved methodology outlined in this section. There is no change to 
the underlying approved Operating Fee methodology for 2020; the change 
in the assessments for 2020 are due to changes in the OTR rate and to 
indexing the fee schedule for projected asset growth.
    For 2020, based on the OTR methodology discussed above, the 
resulting share of the budget that is funded from the Operating Fee is 
$144.8 million. This equates to 0.0181 percent of the estimated federal 
credit union assets for December 2019. The overall increase for the 
operating fee is 1.2 percent over 2019.
    The Operating Fee will be assessed to federal credit unions based 
on estimated year-end assets. Credit unions with assets less than $1 
million will not be assessed an Operating Fee. To set the assessment 
scale for 2020, federal credit union asset growth will be projected 
through December 31, 2019. Based on the June 30, 2019, Call Report 
data, annual growth is projected to be 5.6 percent at year end. The 
asset level dividing points will be increased by this same projected 
growth rate. Assets are indexed annually to preserve the same relative 
relationship of the scale to applicable asset base.
    To establish the rate applicable to each asset level, the factors 
outlined in the table below result in an average Operating Fee rate 
increase of 1.2 percent for natural person federal credit unions. The 
corporate federal credit union rate scale remains unchanged from prior 
years.
    To illustrate the rate impact for federal credit unions with assets 
under $1.5 billion, the fee increases from $269.4 per million dollars 
of assets, to $272.7 per one million dollars of assets. This is an 
increase of $3.3 per million dollars of assets, or 1.2 percent.
    Federal credit union assets between $1.5 billion and $4.8 billion 
would be assessed at a rate of $79.48 per million, and assets above 
$4.8 billion would be

[[Page 59156]]

assessed at $26.54 per million. As noted above, these tiers were 
indexed to the 5.6 percent projected asset growth, and the rates are 
increased by 1.2 percent.
    The following tables illustrate the methodology and calculations 
used to develop the Operating Fee.
BILLING CODE 7535-01-P
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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. 2019-23856 Filed 10-31-19; 8:45 am]
 BILLING CODE 7535-01-C