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Credit union watchdog draws fire on spending

The 2011 budget for the National Credit Union Administration, which insures about 7,400 credit unions, will rise 12% from the prior year, fueled partly by contractual pay raises for unionized employees and more than $1 million of renovations at the federal agency's Alexandria, Va., headquarters.

"It blows your mind," says Jason Scott, senior vice president at TruWest Credit Union. The Tempe, Ariz., credit union has more than 60,000 members but hasn't awarded raises to its 200 workers in three years. TruWest recorded a net loss of $8.3 million in 2009.

Unlike most federal agencies, the NCUA doesn't need Congress to approve its annual budget because credit unions fund the regulator through required contributions to a deposit-insurance fund, examination fees, and other revenue sources. The $225.4 million budget was unanimously adopted last month by the NCUA's board of directors.

Deborah Matz, chairman of the NCUA, says the spending jump is necessary, citing plans for a 7% increase in the number of examiners. "Times are difficult, and we are very mindful of that, [but] we are not going to cut corners on safety and soundness," she said.

As credit unions get squeezed by many of the same pressures hurting U.S. banks and savings institutions, the NCUA has started reviewing the books and operations of credit unions every year, instead of the previous 18-month cycle. To handle the increasing workload, the 2011 budget includes funding for 78 new positions, including 53 regional examiners that will be added to the current staff of more than 800 such jobs.

This year, 28 credit unions have failed, compared with 157 banks and savings institutions that were seized and handed over to the Federal Deposit Insurance Corp. Costs of credit-union failures are covered by the NCUA's insurance pool, funded by credit-union assessments.

While the banking industry has regained overall profitability, some credit-union executives expect 2011 to be bleak. Cash-crunched U.S. states will lay off more employees, likely causing mounting losses on loans to teachers and other borrowers that are a big chunk of the customer base at many credit unions.

Still, some credit-union executives are skeptical that hiring more examiners will sniff out fraud and mismanagement. "If they couldn't find them before, they're not going to find them now," said Marshall Boutwell, president and chief executive of Gwinnett Federal Credit Union in suburban Atlanta.

Credit unions are essentially nonprofit cooperatives that are owned by their members. As of September, federally insured credit unions held $907.9 billion in assets, compared with $13.4 trillion at the 7,760 FDIC-insured institutions. Both agencies can swoop in to shut down or sell financial institutions that aren't adequately capitalized.

Unlike banks that can raise capital to cover losses, credit unions must cut costs and lay off employees to offset rising loan delinquencies and defaults. The credit-union industry also is reeling from the September collapse of three wholesale credit unions, which invest money and provide back-office services for credit unions that deal with retail customers. Other credit unions are being forced to shoulder those losses through special assessments.

Some executives are particularly riled by the agency's approval of $1.2 million in headquarters renovations. Ms. Matz says some of the money will be used to make bathrooms handicapped-accessible. Other funds will be used for painting and repairs.

"The credit unions are putting off building maintenance and upgrades because of their budget constraints," says Bill Cheney, chief executive of the Credit Union National Association, an industry trade group. "They are just asking the agency to make some of the same sacrifices."

The agency's employee pay and benefits are set to climb 12% to $163.2 million in the current fiscal year. Most of the jump is unavoidable because of contractual obligations to unionized employees, who represent about 80% of the NCUA's work force.

Ms. Matz, appointed to the job by President Barack Obama in 2009, isn't getting a raise. Her $165,300-a-year salary is set by Congress.

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