Testimony at NCUA’s Budget Hearing

Read an edited version of Chip Filson's oral comments to the NCUA Board on November 1st. Please note that since that date, the impact of the NCUSIF’s financial model is more acute. Chip discusses the consequences of the administrative charges at $100 million or more as well as other impacts.


Below is an edited version of Chip Filson's, President of Callahan & Associates, oral comments to the NCUA Board on November 1st. Please note that since that date, the impact of the NCUSIF’s financial model is more acute. Chip Discusses the consequences of the administrative charges at $100 million or more. However, he looks at one other impact.

The Fund consists of the 1% deposit, which grows as credit union insured shares grow, and the .3% equity which can increase only from retained earnings. That .3% is approximately $1.2 billion today. Assume share growth for this year is 15%. That means that $180 million needs to be added to retained earnings just to keep the “normal operating ratio” of the fund at 1.3%--or it starts to decline.

The total income of the Fund this year will be in the $240 million range Total income for the first 8 months was $178 on a portfolio that was earning 5.6% as of August 31, 2001. Over half of the Fund’s investments at that date were under 1 year and $1.4 billion were less than 3 months. So although it looks like the Fund could earn about $240 million this year, next year the revenue could be half that amount. All of these calculations are before taking out a projected $100 million in Administrative costs from NCUA and assuming no insurance losses.

What we face is the prospect of a premium to keep the Fund at a “normal operating level” in the best of times for credit unions!

The following is the write up of the remarks at the meeting:

“Promises Not Lived Up To”

I. Changing the NCUSIF’s Financial Model

In 1984 the Fund’s revenue structure was converted from annual premiums to earnings on a deposit base of 1% of insured savings plus .3% retained earnings or equity. The simplicity of this change was that the Fund’s assets grew at the same rate as the insured risk.

We modeled this approach extensively using different assumptions about loss rates and interest environments. The income for the Fund became the interest earnings on the Fund’s assets provided by the members’ 1% deposit balances. These earnings served four uses. They covered:

  • Administrative costs to manage the fund;
  • Insurance losses from failing credit unions;
  • An addition to equity to keep the .3% capital at the level to maintain a normal operating level of 1.3% of insured risk;
  • Dividends to the Fund’s shareholder owners.

Premiums were not necessary except in extreme circumstances, if ever. Moreover, premiums were restricted to only one assessment in any one year.

The fundamental assumption is that the investment earnings would be sufficient to meet and maintain all of the Fund’s obligations.

II. What’s Happened?

Through increases in Agency expenditures and increases in the overhead transfer rate (OTR), the administrative costs alone now threaten to eat up all of the Fund’s earnings. For example, at current projected budget levels and a 67% transfer rate, the administrative expenses alone could reach $100 million next year. If interest rates continue to fall, say to 2-2.25%, then it is not inconceivable that all the earnings would be for administration. Nothing would be available for:

  • Insurance losses;
  • Growing the .3% retained earnings; or
  • Dividends to the Fund’s owners.

The financial model for the Fund has been turned upside down. Administrative expenses, not insurance losses, are eating up all of the Fund’s revenues.

III. Why is it urgent that this issue be addressed?

1. Promises were made to NCUSIF insured credit unions about how their money would be used. They are documented in the Agency’s 1984 Annual Report. Those promises have not been lived up to. Confidence in the fund’s stability is very closely tied to confidence in the Fund’s administration – not the amount of $.

2. No one can predict how deep an economic downturn we will have, how long the war will last or how low interest rates might go and for how long. Any of these factors or a combination could easily cause the fund to fall short of its ability to maintain a normal operating level.

3. We are in a “new era” – in 2 respects:

a. We are in an emergency wartime condition. Everyone needs to tighten his or her belt – business as usual will not suffice. We must find new ways to do business faster, cheaper, better.

b. Safety and soundness threats are not the same as in the past. Credit unions are failing, not for traditional problems such as bad loans or poor investment decisions, but rather through the loss of relevance, i.e. the inability to deliver true economic value to members. For example at mid-year:

2,518 credit unions had negative share growth

1,716 had growth less than their cost of funds…

These 4,234 credit unions are experiencing disinvestment by members at a time of the highest industry share growth in the last decade.

These are the issues that are central to the soundness of the credit union system.


It is more urgent than ever to change the NCUA’s approach to using the Fund’s revenue – or risk jeopardizing the very purpose for which the fund was capitalized, promoting confidence in the credit union system.