The 1980 election of Ronald Reagan brought a spirit of hope and joy for some. For others , deep concern about the future of the federal government’s role.
Recall Reagan’s policy priorities: Supply side economics-tax cuts, defense spending to counter the Soviet Union, tighter money supply, reducing the rate of government spending and deregulation. In August 1981, one of his first dramatic actions was firing 11,345 striking air traffic controllers and banning them from federal service for life after they refused to return to work following a contract dispute. Federal agencies and employees were worried about their future.
A specific initiative that has parallels with Trump’s appointment of the Musk-Ramasamy duo to reduce government spending was the Grace Commission. Here is a summary of its role:
The Private Sector Survey on Cost Control (PSSCC), commonly referred to as the Grace Commission, was an investigation requested by President Reagan authorized in Executive Order 12369 on June 30, 1982. In doing so President Reagan used the now famous phrase, “Drain the swamp“.[1] The focus was on eliminating waste and inefficiency in the United States federal government. The head of the commission, businessman J. Peter Grace,[2] asked the members of that commission to “Be bold and work like tireless bloodhounds, don’t leave any stone unturned in your search to root out inefficiency.”[3] (Wikipedia)
A year later when the Commission issued its report it called NCUA Board Chairman Edgar Callahan a “role model” for government agency executives. It noted that, “in one year, NCUA cut Agency staff 15% and its budget by 2.5% while maintaining their commitment to preserving the safety and soundness of the credit union industry.” (NCUA 1983 Annual Report page 3). What was this transformation like?
How NCUA and Credit Unions Fared During Reagan’s First Term
When Reagan took office, inflation for the prior year 1980 was 13.5%. The short-term Fed Funds rate was 13%. Federal Reserve President Volker’s goal was to drive inflation down by raising rates further if necessary.
The NCUA’s new Chairman was Edgar Callahan, whose immediate prior responsibility was over five years as Director of the Department of Financial Institutions in Illinois. DFI supervised over 1,000 state chartered credit unions. At the February 1982 GAC conference, the primary concern for the audience of national attendees was industry survival. Callahan said the response was to put responsibility for fundamental business decisions in the hands of credit union boards and managers, not the regulator. He called this multi-faceted change “deregulation.”
During the next three years NCUA became what the Grace commission described as a model for effective governmental performance.
The following are highlights of how NCUA changed from a November 15, 1984 agency press release titled: FCU Operating Fee Scale Slashed 24%; Third cut in Three Years
The excerpts from this two-page, detailed release describe how this unprecedented reduction was achieved.
The NCUA Board today slashed by 24% the operating fee scale for federal credit unions in 1985, bringing to 64% the fee scale cuts over the past three years.
The dramatic 24% cut will save federal credit unions more than $4.3 million in 1985 and has saved them $14 million since 1983, the first year in NCUA’s history that the fee scale was cut.
“For the third straight year, the efficient operation of the Agency has allowed us to put money into the pockets of federal credit unions, “ said NCUA Chairman Edgar Callahan. “It’s an impressive track record, one that the agency and entire credit union system can be proud of.”
“NCUA is the only federal financial regulatory agency that is assessing its constituents less this year, than it did three years ago and I think that is a tremendous accomplishment,” said NCUA Board Vice Chair P.A. Mack.
Federal credit union operating fees, which are pegged to a sliding scale based on federal credit unions’ assets, are the primary source of funding for the Agency’s operating budget. The fee pays for the Agency’s annual examinations of each federal credit union as well as its chartering, supervisory and administrative activities. NCUA receives no tax dollars. Operating fees, the earnings on the investments of those fees, and insurance premiums are the sole sources of funding for the agency.
(The next six paragraphs show the specific dollar impact on credit unions of different asset sizes including Ft Shafter, Hawaii Federal and State Employees and Navy Federal Credit Unions.)
Continued cost cutting efforts at NCUA, coupled with a projection for robust federal credit union asset growth and increased earnings on NCUA investments are the key elements that made a third consecutive operating fee scale cut possible.
The NCUA board attributed the Agency’s success in keeping costs down to high productivity by NCUA staff, personnel reductions and the shifting of resources from the central offie to the field where they are needed most.
For example, NCUA for the second consecutive year has completed an annual examination of each federal credit union, and achievement not seen since the mid-1970’s. Although total agency employment has been reduced by 15%, the number of examiners has increased to an all-time high (369). Getting back to a once-per-year exam cycle exemplifies the Board’s desire to promote safety and soundness while leaving the management decisions in the hands of each credit union.
The resulting gains in efficiency enabled the Board to reduce the Agency’s fiscal 1984 budget by 4.9%-the biggest cut in the Agency’s history. It was the third straight year the Board approved a total agency budget that was below the previous year’s request.
Federal Credit unions in the six months ended June 30, 1984 had grown 12.5% from $55.5 billion to $61.3 billion.
Taken together, the budget cuts, investment income and credit union growth are expected to leave NCUA’s operating fund with substantially more than it needs to meet its expenses. By slashing 24% from its operating fee schedule, the board is effectively eliminating a $3.4 million surplus. “We believe in returning as much as possible to credit unions,” Chairman Callahan said.
This action is another in a series fiscal and operational improvements the NCUA Board has approved of in the past three years. . . most recently the adoption of rules to revitalize the National Credit Union Share Insurance Fund (NCUSIF) transforming it from the lowest reserved to the strongest of the three federal deposit insurance funds. (End quote)
Some of the Lessons
Chairman Callahan’s leadership at the agency was based on professional competence, experience and pragmatic solutions. Some of his colleagues had worked with him on credit union issues for over five years. Internally Callahan placed responsibility for problem solving with the six regional directors. The agency had become top heavy in D.C. where issues got bogged down between 16 separate offices. He streamlined this structure into two primary responsibilities: an office of administration and the office of programs.
Resources were moved to the field so that an annual exam became the minimum standard for performance. Competence, not seniority or appointment status, were the criteria for responsibility. Mike Riley went from head office to become RD of the largest and most problem challenged region as the youngest RD ever. Rosemary Hardiman was board secretary and Joan Pinkerton, and Sandy Beach led public information and congressional affairs—all were appointees chosen by the previous Chair Larry Connell.
Money was not the most critical resource; it was management talent and willingness to innovate to resolve problems with effective supervision. Staff was provided enhanced training that included Video Network recordings such as Rex Johnson of Lending Solutions, leading sessions with examiners to identify sound and unsound loan underwriting. Another video session was a case study of an actual credit union problem for the agency led by a business school professor.
These efforts were supported by disciplined research, constant dialogue with credit unions and open, frequent communications. New data analytical tools (financial performance reports) from the call report were provided for both examiners and credit unions. NCUA board meetings were taken on the road so credit unions could attend and speak directly with senior staff and board members.
NCUA and credit unions worked collaboratively to transform both the agency-the CLF, the NCUSIF and the exam program-and the credit union system to the new world of open market-based competition. These institutional changes have endured even when subsequent Chairman were chosen from individuals with no coop experience, and several who had just lost a recent election (Senator Jepsen and Congressman Norm D’Amours). The agency staff and administration were comfortable working with the industry even when board members had little or no relevant credit union, regulatory or leadership experience.
Celebrating Success
The high point of this collaborative approach was the largest ever regulator-credit union conference held in December 1984 in Las Vegas, organized by NCUA. All state regulators and examiners and NCUA staff met with over 2,500 credit union attendees to hear from experts and debate the future. I will write more about this seminal event that has never been repeated.
The conference demonstrated the power of cooperatives to share and learn from each other. This was a summit that ushered in over three decades of credit union expansion and resilience as the S&L industry failed and the banking system and FDIC went through multiple bailouts.
The bottom line: as shown by this 1981 transition, new faces can be opportunities for creative leadership and strategic change that enable NCUA and credit unions to become financial pacesetters for their members and the country.
One would hope for such critical appointments and effective leadership in this transition.