WASHINGTON-All of the discussion, debate and threats surrounding the federal sequestration and potential cuts to agencies and personnel had credit unions scrambling to make tentative plans to respond last week.
The sequestration, which was set to kick in on March 1, would immediately cut federal government spending by $85 billion and mean furloughs or layoffs for thousands of workers. In the final days of February, credit unions throughout Washington and across the country were putting measures into place to protect members should sequestration go into effect, including offers of emergency assistance.
"Unfortunately it appears like it is going to happen," said Peter Sainato, CEO at Justice FCU.
Like a number of other CUs with high concentrations of federal employees, Justice FCU, which serves employees in the Department of Justice, has set up a sequester assistance program for members affected by the cuts, including skip-a-payment plans and the option to modify loans if necessary. Loans of up to $10,000 (with specific amounts based on the member's monthly net pay deposit) are also available at 0% for the first 60 days, after which they convert to 4.90% for 24 months. Many CUs have also done in-house training to help MSRs work with affected members affected, and some are also allowing members to tap CDs prior to maturity without incurring a penalty.
"We know from our membership that about half of them will be affected," said Sainato, whose CU serves 55,000 members. "That doesn't translate into half participating in this program, but we do expect a robust participation."
Who Takes A Hit?
The issue of who will be affected and to what extent is one that has plagued credit unions as they try to plan for sequestration. At Pentagon FCU, EVP of Business and Development James Schenck said that he expects only a "small subset" of its 1.3-million member base to be impacted, in large part because active duty and retired military members are exempt. Schenck said he expects that civilian employees of the Department of Defense will be the ones to take the biggest hit.
"The biggest impact potentially would be those within the defense community here in Northern Virginia and elsewhere that support the government," said Schenck. "If you had a member that was an employee of a defense contractor where there were job cuts, that could have greater impact, and that's where we think programs like consolidation loans and tapping into CDs are going to have a potentially greater impact."
It's that same exclusion of military members that is helping to shield Vienna, Va.-based Navy FCU, the nation's largest credit union, from potentially feeling more negative fallout. Jeanette Mack, manager of corporate communications at the $52-billion Navy Federal, said that it expects "upwards of 200,000 members may be affected." NFCU serves more than 4.2 million members.
Little Confidence In Forecasts
Most CU executives who spoke to Credit Union Journal said they had largely given up hope that sequestration could be avoided before the March 1 deadline, but few were confident enough to predict how long it might last.
A key issue remains how an extended sequestration starts hitting at the bottom lines of affected credit unions.
"We've done some base calculations that it could run into the tens of millions," said Justice FCU's Sainato. "It's just hard to assess at this point. Right now the government is handing out these furloughs of 21 or 22 days, and the presumption is that there will be no agreement through the end of the fiscal year, which is Sept. 30."
Many CUs, including Navy FCU, echoed Sainato in that the long-term impacts may be hard to predict.
Treasury Department FCU CEO Alfred Scipio, however, said that while his credit union has not done any calculations to that effect, many government agencies have strict requirements as to how their employees manage their credit scores, and so those workers "aren't going to allow their loans to be negatively impacted; they will be stressed because of a loss of pay to make the payments, but I'm fairly sure they'll continue to do so."
Schenck said Pentagon Federal has done extensive liquidity shock modeling and even retained third party analysts to look at how it might fare during a protracted scenario.
"We have ample cash in our portfolio, and have access to FHLB and the Fed's Discount Window," said Schenck. "I don't see sequestration as having an impact on us, even if it's an extended period, from the asset-management side of the house. We're very liquid right now to prepare for this situation."
What's Old Is New Again
Sequestration may be the buzzword d'jour, but it's hardly the first time many of these credit unions have traveled this road. Debbie Ames Naylor, EVP of mortgage and credit risk at Pentagon Federal, has been with the credit union for 31 years, including during the protracted government shutdown in the mid-1990s. Many of the programs PenFed has put in place this time around were also used then.
While CUs today are rolling out programs to help members prepare sequestration, members en masse don't yet seem to be taking advantage of the assistance.
"I don't anticipate that we'll see anyone take advantage of the program until after there's actually some notification of when their furloughs will take place," said Treasury Department Federal Credit Union's Scipio. "At that point people will see how it impacts them and will be looking at different things in order to be able to weather the storm."
