Request for Comment Regarding National Credit Union Administration Overhead Transfer Rate Methodology and Operating Fee Schedule Methodology
Notice; request for comment.
Citation: "85 FR 53854"
Page Number: "53854"
"Notices"
Agency: "
SUMMARY: The NCUA Board (Board) is inviting comment on the methodology used to determine the Overhead Transfer Rate (OTR). The Board applies the OTR to the NCUA's operating budget to determine the portion of the budget that will be funded from the
DATES: Comments must be received on or before
ADDRESSES: You may submit written comments by any of the following methods (Please send comments by one method only):
* Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
* Fax: (703) 518-6319. Include "[Your Name]--Request for Comment: Operating Fee Schedule Methodology" in the transmittal.
* Mail: Address to
Public Inspection: You may view all public comments on the Federal eRulemaking Portal at http://www.regulations.gov as submitted, except for those we cannot post for technical reasons. The NCUA will not edit or remove any identifying or contact information from the public comments submitted. Due to social distancing measures in effect, the usual opportunity to inspect paper copies of comments in the NCUA's law library is not currently available. After social distancing measures are relaxed, visitors may make an appointment to review paper copies by calling (703) 518-6540 or emailing [email protected].
FOR FURTHER INFORMATION CONTACT:
SUPPLEMENTARY INFORMATION: The Board has separately proposed amending its rule for determining total assets used as the basis for calculating the operating fee due from any FCU. Members of the public are encouraged to comment on this proposed amendment by responding to the appropriate proposed rule. A proposed rule relating to Fees Paid by Federal Credit Unions is published elsewhere in this issue of the
I. Legal Background
The NCUA charters, regulates, and insures deposits in FCUs and insures deposits in state-chartered credit unions that have their shares insured through the
FOOTNOTE 1 See, e.g., 12 U.S.C. 1783(a) (making the
FOOTNOTE 2 12 U.S.C. 1755(a) ("In accordance with rules prescribed by the Board, each [FCU] 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.") and 12 U.S.C. 1766(j)(3). Other sources of income for the Operating Budget include interest income, funds from publication sales, parking fee income, and rental income. END FOOTNOTE
The first budget funding source, the OTR, represents the formula the NCUA uses to allocate insurance-related expenses to the
FOOTNOTE 3 12 U.S.C. 1783(a). END FOOTNOTE
FOOTNOTE 4 12 U.S.C. 1755. END FOOTNOTE
With regard to the Operating Fee, the FCU Act requires each FCU to, "in accordance with rules prescribed by the Board, . . . 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." /5/ The fee must "be determined according to a schedule, or schedules, or other method determined by the Board to be appropriate, which gives due consideration to the expenses of the [NCUA] in carrying out its responsibilities under the [FCU Act] and to the ability of [FCUs] to pay the fee." /6/ The statute requires the Board to, among other things, "determine the periods for which the fee shall be assessed and the date or dates for the payment of the fee or increments thereof." /7/
FOOTNOTE 5 12 U.S.C. 1755(a). END FOOTNOTE
FOOTNOTE 6 12 U.S.C. 1755(b). END FOOTNOTE
FOOTNOTE 7 Id. END FOOTNOTE
Accordingly, the FCU Act imposes three requirements on the Board in connection with assessing an operating fee on all FCUs: (1) The fee must be assessed according to a schedule or schedules, or other method that the Board determines to be appropriate, which gives due consideration to NCUA's responsibilities in carrying out the FCU Act and the ability of FCUs to pay the fee; (2) the Board must determine the period for which the fee will be assessed and the due date for payment; and (3) the Board must deposit collected fees into the
FOOTNOTE 8 12 U.S.C. 1755(d). END FOOTNOTE
II. Historical Practice in Determining the Overhead Transfer Rate and Assessing the Operating Fee
Overhead Transfer Rate
In 1973, a Government Accountability Office audit /9/ recommended the NCUA adopt a method of allocating costs between the operating fund and the newly formed
FOOTNOTE 9 Gen. Accounting Off., Examination of Financial Statements of the Nat'l Credit Union Admin. (
From 1985 through 1994, the NCUA conducted annual examiner time surveys (ETS) to determine an appropriate factor for apportioning the agency's total operating expenses. The survey results supported a transfer rate between 50.1 percent and 60.4 percent for insurance related activities; however, the Board maintained the OTR at 50 percent.
Following the 1994 survey, the Board approved surveys that were conducted every three years. Three-year surveys covered fiscal years 1995 through 1997 and fiscal years 1998 through 2000. During that period, the OTR was kept at 50 percent. The Board voted to resume annual ETS in 2000 and expanded the survey to include more examiners. The 2000 survey results supported an OTR of 66.72 percent and, after 15 years of holding the OTR at 50 percent, the Board increased the OTR to 66.72 percent for fiscal year 2001.
In 2001, the Board hired an independent party, Deloitte & Touche, to assess the OTR process. Deloitte & Touche's review /10/ of the OTR process was issued on
FOOTNOTE 10 https://www.ncua.gov/files/publications/budget/2001DeloitteReportonOTRProcess.pdf. END FOOTNOTE
At the
FOOTNOTE 11 The methodology was refined in 2013. END FOOTNOTE
* The value to the
* The cost of the NCUA resources and programs with different allocation factors from the examination and supervision program.
* The distribution of insured shares between FCUs and FISCUs.
* Operational costs charged directly to the
In 2016, the NCUA published in the
FOOTNOTE 12 81 FR 4804 (
In 2017, the NCUA published in the
FOOTNOTE 13 82 FR 29935 (
1. 50 percent insurance related--Time spent examining and supervising FCUs.
2. 100 percent insurance related--All time and costs the NCUA spends supervising or evaluating the risks posed by FISCUs or other entities the NCUA does not charter or regulate (e.g., third-party vendors and credit union service organizations).
3. Zero percent insurance related--Time and costs related to the NCUA's role as charterer and enforcer of consumer protection and other noninsurance based laws governing the operation of credit unions, for example, field of membership requirements.
4. 100 percent insurance related--Time and costs related to the NCUA's role in administering federal share insurance and the
The Board adopted this principles-based OTR methodology in 2017. /14/ At that time, the Board committed to subject the four principles, but not the particulars of their application, to public comment every three years and in the event it proposes a change to one or more of the principles.
FOOTNOTE 14 82 FR 55644 (
III. Overhead Transfer Rate Methodology
To calculate the OTR, the four principles are applied to the activities and costs of the agency to arrive at the portion of the agency's budget to be charged to the
Step 1--Workload Program
Annually, the NCUA develops a workload budget based on the NCUA's examination and supervision program to carry out the agency's core mission. The workload budget reflects the time necessary to examine and supervise federally insured credit unions (FICUs), along with other related activities, and therefore the level of field staff needed to implement the exam program. Applying principles 1, 2, and 3 (those relevant to the workload budget) to the applicable elements of the workload budget results in a composite rate that reflects the portion of the agency's overall insurance related mission program activities.
Step 2--Annual Budget
The annual budget represents the costs of the activities associated with achieving the strategic goals and objectives set forth in the NCUA's Strategic Plan. The annual budget is based on agency priorities and initiatives that drive resulting resource needs and allocations. Information related to the NCUA's budget process, including details on the Board-approved budgets, is available on the agency's website. /15/
FOOTNOTE 15 https://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx. END FOOTNOTE
The agency achieves its primary mission through the examination and supervision program. The percentage of insurance-related workload hours derived from Step 1 represents the main allocation factor used in Step 2 and is applied to the budgets for the examination and supervision programs to calculate the insurance-related costs of the offices conducting field work (currently the Regions and ONES). A few agency offices have roles distinct enough to warrant their own allocation factors, which are developed by applying the four factors described above to their respective activities. Each of these offices tracks their activities annually to determine their factors. These factors are then applied to the respective offices' budgets to determine their insurance-related costs.
A weighted average allocation factor, calculated by dividing the aggregate insurance-related costs for the field offices conducting the examination and supervision program and the agency offices with their own unique allocation factors by their aggregate total budgets, is applied to the central offices that design or oversee the examination and supervision program or support the agency's overall operations. This factor is then applied to the aggregate budgets for the remaining offices. As such, the proportion of insurance-related activities for these offices corresponds to that of the mission offices. The NCUA's total insurance-related costs are calculated by summing the insurance cost calculated for the field offices, the offices with unique allocations factors, and the insurance cost for all other NCUA offices.
Step 3--Calculate the OTR
The OTR represents the percentage of the NCUA budget funded by a transfer from the
FOOTNOTE 16 The percentage of actual expenses funded by the
Request for Comment on OTR Methodology
This principles-based OTR methodology has streamlined the process for calculating the OTR and reduced the resources needed to gather the cost center time allocation used in the calculation. In addition, the methodology established some consistency in the calculated OTR each year, seen previously only briefly during the three-year period ended 2013.
The consistency in the calculation allows for the minor variations in the OTR to be driven by the variables that affect the OTR, not the calculation itself. These variables include, but are not limited to, the normal fluctuations in the workload budget from one calendar year to the next, changes in FICU CAMEL ratings, variation in the number and size of FICUs that meet the annual exam and extended exam eligibility criteria, emerging risk indicators inherent in FICU operational changes, variations in individual state regulator programs, and small fluctuations in the timing of the examinations related to a particular calendar year. This streamlined and simplified approach to calculating the OTR has provided a level trend in the OTR, with only minor fluctuations due to the variables that affect the OTR.
The Board finds the current OTR methodology to be fair and equitable, more transparent and less complex than prior methodologies, reduced administrative costs related to the OTR, and recognizes that safety and soundness is not the sole domain of the NCUA as insurer. As a result, the NCUA Board does not propose any changes to the methodology at this time. The Board nevertheless invites comments on its OTR methodology. The Board specifically invites comments on the four principles used in the methodology to calculate the OTR discussed above. /17/
FOOTNOTE 17 https://www.ncua.gov/files/publications/budget/overhead-transfer-rate-summary-2020.pdf. END FOOTNOTE
Operating Fee
The NCUA's regulations govern certain of the operating fee processes. /18/ The regulation establishes: (i) The basis for charging operating fees (total assets); (ii) a notice process; (iii) rules for new charters, conversions, mergers, and liquidations; and (iv) administrative fees and interest for late payment, among other principles and processes. /19/ Certain aspects of and adjustments to the operating fee process, such as changes to which FCUs are exempt from operating fees or the multipliers used to determine fees applicable to FCUs that fall within designated asset tiers, are usually not published in the
FOOTNOTE 18 12 CFR 701.6. END FOOTNOTE
FOOTNOTE 19 Id. END FOOTNOTE
FOOTNOTE 20 5 U.S.C.
FOOTNOTE 21 81 FR 4674 (
The Board proposed the current operating fee methodology in 1979, after
FOOTNOTE 22 44 FR 11785 (
FOOTNOTE 23 Id. at 11786. END FOOTNOTE
FOOTNOTE 24 Id. at 11787. END FOOTNOTE
FOOTNOTE 25 44 FR 27379 (
On four additional occasions, the Board has requested comments on potential changes to the operating fee schedule through a
FOOTNOTE 26 55 FR 29857 (
FOOTNOTE 27 57 FR 34152 (
FOOTNOTE 28 60 FR 32925 (
FOOTNOTE 29 Id. END FOOTNOTE
Most recently, in 2016, the Board published its current methodology in detail in the
In general, the Board has not used
FOOTNOTE 30 Board Action Memorandum on 2013 Operating Fee (
FOOTNOTE 31 12 U.S.C. 1755(b). END FOOTNOTE
FOOTNOTE 32 12 CFR 701.6(c). END FOOTNOTE
IV. Methodology for Determining the Aggregate Operating Fee Amount
The Board adopts an annual budget in the fall of each year, which includes as an operating budget the costs of day-to-day operations such as employee compensation, travel and training expenses, support purchased through contracts with service providers that have expertise outside of the agency's core capabilities, and other miscellaneous administrative expenses. The annual budget also includes as a capital budget the estimated spending on capital projects, such as for computer hardware and software, and for investments in agency owned real property and equipment, and provides the resources required to execute the goals and objectives as outlined in the NCUA's strategic plan. /33/ As discussed above, two primary sources fund the annual budget: (1) Requisitions from the
FOOTNOTE 33 Additional information on the NCUA budget may be found at the following Web address: http://www.ncua.gov/About/Pages/budget-strategic-planning/supplementary-materials.aspx. END FOOTNOTE
Adjustments to the Budget. When calculating the aggregate annual operating fee requirements, the Board first subtracts amounts transferred from the
Overhead Transfer Rate: As discussed above, the FCU Act authorizes the NCUA to expend funds from the
FOOTNOTE 34 12 U.S.C. 1783(a). END FOOTNOTE
Other Income: Other income reduces the required operating fees by providing an additional source of funds to cover regulatory (i.e., non-insurance) related aspects of operating the NCUA. Other income is projected based on the latest financial statements and includes interest income and miscellaneous revenues. Interest income includes interest on operating fund balances invested in short-term
Adjustments for capital project budgets and notes payable. The budgets for capital projects and notes payable are added to the balance remaining after deducting the estimated overhead transfer share of the operating budget. These budgets include capital acquisitions planned for the year and the annual payment of the note payable for the NCUA Central Office building on
Capital Projects. Each year the NCUA conducts a rigorous assessment of its needs for information technology (IT), facility improvements and repairs, and other multi-year capital investments. Routine repairs and lifecycle-driven property renovations are necessary to properly maintain investments in the NCUA's Central Office building in
Repayment of NCUA Central Office on
Operating Fee Requirements. The result after adjustments for capital project and notes payable needs is the total budget subject to the operating fee and payable by both natural person and corporate FCUs. The natural person FCU operating fees are determined by deducting the corporate FCU operating fees from the total budget operating fee requirements.
V. Methodology for Determining the Operating Fee Schedule
The corporate credit union fee schedule was established in 1979 and has changed little over the years. Corporate FCUs hold assets of natural person credit unions, which are already assessed under the natural person operating fees for those members that are FCUs. Assessing corporate FCUs at the same rate would, effectively, assess the same assets twice for natural person FCU members of corporate FCUs. Corporate FCUs return a large portion of their earnings to natural person credit unions in the form of lower fees and higher dividends. Raising operating fee assessments for corporate FCUs would result in higher expenses for corporate FCUs. Corporate FCUs would need to pass the higher expenses to natural person credit unions in the form of higher fees and lower investment yields. The corporate FCU fee schedule is a method of charging corporate FCUs a supervisory fee to defray costs and is now published annually in the budget.
The Board delegated authority to the Chief Financial Officer to administer the methodology approved by the
The current fee schedule for natural person FCUs uses three asset tiers. A different assessment rate is applied to each tier, and the threshold for each tier is adjusted annually to reflect inflationary growth of the credit union system. FCUs with
There are two steps used to determine adjustments to the operating fee schedule for the upcoming year. They are: (1) Updating the prior-year asset tier thresholds using the projected asset growth rate and (2) updating the prior-year assessment rates for each asset tier by determining the average assessment rate adjustment.
Updating prior year asset levels. The first step in determining the new operating fee schedule is to increase the threshold for each asset tier from the prior-year by the projected asset growth rate. Tier thresholds are adjusted annually to preserve the same relative relationship of the scale to the applicable asset base.
The projected asset growth rate is a forecast of FCU asset growth rates for a year.
Forecasting method one uses Call Report data for the first half of the year to predict full-year asset growth. This is done by first calculating the ratio of first-half asset growth to full-year asset growth. The percentage of full-year growth accounted for by first-half asset growth varies from year to year but, on average, nearly 80 percent of the asset growth for FCUs occurs in the first half of the year. Using the growth rate in the first half of the year, OCE projects the full-year growth rate.
Forecasting Method two uses Call Report data to determine the most recent four-quarter growth rate and sets this rate to the full-year asset growth rate. This approach is based on the idea that an FCU is likely to establish and maintain a relatively constant growth rate over a short period, after accounting for variations in the growth rate that is attributable to seasonal fluctuations. This implies that a good forecast of full-year asset growth is the most recently available four-quarter asset growth.
Forecasting method three uses a time series statistical model. Using quarterly Call Report data, NCUA predicts future four-quarter asset growth using the four-quarter growth in assets for the period ending two quarters earlier (that is, four-quarter asset growth lagged two quarters).
In general, forecasting literature shows that combining forecasts from different approaches can improve forecast accuracy and decrease the likelihood of forecast errors. Using the root mean squared error statistic to calculate the accuracy of the individual approaches and combined forecast approaches, NCUA has found that the combined forecast approach is better at predicting the final asset growth rate than any of the individual approaches. NCUA therefore averages the forecasts from the three approaches to maximize accuracy.
Updating the prior year's assessment rates. After updating the prior-year asset tier thresholds, the next step is to project operating fees using the updated asset tier thresholds and the prior year assessment rates charged for each tier. The percentage difference between the projected operating fee collections and the operating fee collections required to support the budget is the average rate adjustment.
The average rate adjustment is used to amend the prior-year's assessment rates for each asset tier either upwards or downwards. If the projected amount of operating fees is less than the required budgeted amount, then the assessment rates for each asset tier are adjusted upwards. If the projected amount is more than the required budgeted amount, then the assessment rates for each asset tier are adjusted downwards.
The resulting new operating fee schedule and due date are communicated via a Letter to Federal Credit Unions and posted to NCUA.gov at least 30 days after Board approval of the annual budget. The Board also makes available an online operating fee calculator on the NCUA website for FCUs to estimate their individual fees for the upcoming year. No later than March of each year, natural person FCUs with assets greater than
FOOTNOTE 35 https://www.ncua.gov/files/agenda-items/AG20191212Item1b.pdf, pages 57 to 64. END FOOTNOTE
VI. Proposed Changes to Methodology
As summarized above, the Board seeks comment on three proposed changes to the Operating Fee methodology and details each below. The Board will review the comments received through this notice and consider adopting these changes through subsequent Board action prior to assessment of the 2021 Operating Fees.
1. Treatment of Capital Budget
Currently, the Board initially funds the NCUA's planned capital projects budget entirely through operating fees assessed on FCUs. The Board proposes to change this practice by reimbursing the appropriate portion of these expenditures through the OTR.
In recent years, the
As a result of these improvements and modifications, in the 2018 budget NCUA clarified how non-cash transactions such as the estimated value of employees' earned but unused annual leave and projected depreciation expenses for capital assets would be treated from a budgetary perspective. Namely, such amounts would no longer be included in annual budgets presented to the Board as they result in no expenditure tied to the recognition of an expense under GAAP. Since that time, the calculation for the operating fee has also excluded such items when determining the allocation of the annual budget between the share paid through the OTR and the share paid through the operating fee.
The NCUA Board now proposes to clarify that for the purposes of calculating the operating fee, the budget for capital projects will be included within the total annual budget subject to the OTR. This approach ensures that the cost of new capital acquisitions is borne equitably between FCUs and FISCUs at the time such acquisitions are made and is consistent with the 2018 change that excluded other non-cash expenses from the budget. Under the existing methodology, the
The following table provides a comparison of how the operating fee calculation for the 2020 budget would have differed had funds for capital projects been subject to the OTR like for the other parts of the annual budget for that year.
BILLING CODE 7535-01-P
See illustration in Original Document.
2. Treatment of Miscellaneous Revenues
Currently, miscellaneous revenues collected by the NCUA reduce operating fees charged to FCUs. The Board proposes changing the treatment of miscellaneous revenues, reducing the percentage of the NCUA budget funded by the OTR transfer from the
As discussed above miscellaneous revenues includes revenues from the production and sale of NCUA reports and publications, rent collected from other federal agencies that share NCUA facilities, and parking fee revenues. The NCUA's miscellaneous revenues vary from year to year, but typically total approximately
The Board proposes to clarify that for the purposes of calculating the operating fee, projected miscellaneous revenues will be included within the total annual budget subject to the OTR. The Board believes this approach is consistent with its proposed change to the treatment of capital project budgets, and that it better reflects the equitable distribution of the agency's net expenses between FCUs and FISCUs.
The table below provides a comparison of how the operating fee calculation for the 2020 budget would have differed had miscellaneous revenues reduced the amount of the budget funded through the OTR for that year.
See illustration in Original Document.
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3. Annual inflationary updates to operating fee schedule asset tier thresholds
The Board has separately proposed amending its rule at 12 CFR 701.6 for determining total assets used as the basis for calculating the operating fee due from any FCU. Under the proposed rule, total assets would be calculated as the average of total assets reported on an FCU's previous four Call Reports available at the time the NCUA Board approves the agency's budget for the upcoming year. Members of the public are encouraged to comment on this proposed amendment by responding to the appropriate
To maintain consistency between the total assets used for billing the operating fee to an individual FCU and the asset thresholds used for determining the rate tier into which each FCU falls, the Board proposes changing its approach for adjusting the rate tier thresholds. Specifically, for purposes of determining the annual adjustment to the rate tier thresholds, the Board proposes comparing the average of total system assets reported in Call Reports for the four quarters available at the time it approves the budget to the average of total system assets in Call Reports for the four quarters of the respective previous years. In this way, the tier thresholds shown on the operating fee schedule would be increased each year based on the same reporting data that will be used for computing individual FCU invoice amounts.
Request for Comments
The Board solicits public comment on the proposed changes discussed above. In addition, the Board solicits comment on the following questions to inform potential future enhancements to the methodology:
1. As discussed above, the Board has not substantially modified the current three-tier operating fee schedule since 1993. The current fee schedule is regressive; that is, credit unions with a larger amount of total assets pay a lower marginal rate on those assets above the threshold levels for the lower tiers. Given growth and consolidation in the credit union system, the Board is interested in whether such an approach is an equitable method for allocating the agency's operating costs. There is a potentially wide range of approaches for distributing the cost of the NCUA's budget that is funded by the operating fee. For example, the Board could adopt a single, flat-rate operating fee for all credit unions with total assets that exceed a standard exemption threshold. Overall, a flat-rate operating fee would shift costs away from relatively smaller credit unions to relatively larger ones, making the fee schedule less regressive. The Board could also make the operating fee schedule less regressive by increasing the rates for the second and third tiers on the schedule. Alternatively, adjusting the rates upward for the first and second tiers of the current operating fee would create a more regressive schedule. The Board is interested in receiving public comments on whether or how it should consider modifying the operating fee schedule and what specific aspects and conditions of the credit union system it should evaluate when making such decisions.
2. Currently, the Board does not assess an operating fee to FCUs with assets less than
See illustration in Original Document.
3. The NCUA provides credit unions an annual voluntary diversity self-assessment, as authorized by law. /36/ The NCUA Board believes that diversity coupled with inclusion should be a strategic business goal for credit unions. The Board is interested in views on whether federal credit unions that complete an annual voluntary diversity self-assessment should receive a modest discount on the FCU operating fee due in the subsequent year. How much of a discount on operating fees would be a sufficient incentive to encourage participation in the voluntary diversity self-assessment? Because Federally Insured State-Chartered Credit Unions (FISCUs) pay an operating fee to their state regulatory agency rather than to the NCUA, what appropriate incentives could the Board provide to encourage FISCUs to participate in the survey? Alternatively, what other non-financial incentives might encourage both FCUs and FISCUs to participate?
FOOTNOTE 36 Section 342(b)(2)(C) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203. END FOOTNOTE
By the National Credit Union Administration Board on
Secretary of the Board.
[FR Doc. 2020-17009 Filed 8-28-20;
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