By Ray Birch
LOS ANGELES—That the minimum wage is rising across the country—sharply in some cities—isn’t in doubt. What’s less certain, however, is that smaller credit unions are going to have the biggest challenges in responding to the increased wage demands, and that there could be fallout for loans to small businesses, as well.
Credit union executives interviewed by CUToday.info over the rising minimum wage standards being set across the country noted that smaller credit unions typically pay lower wages than medium-size and large credit unions, placing more entry-level workers at or near minimum wage and therefore in line for a pay increase. The larger CUs, too, have greater ability to spread costs related to higher wages.
There are concerns, as well, for how the wage hikes will impact the performance of CU loans to small businesses that employ minimum-wage workers, or the willingness of those small businesses to borrow.
Several cities across the country have either passed laws or are seeking passage of rules to increase minimum wage in their towns over and above current state or federal levels. Large cities including Los Angeles, San Francisco, Seattle, Chicago, Washington and Oakland, Calif. have all put minimum wage hikes in place. Most of the increases are set to gradually rise on an annual basis until each city’s wage target is reached. The current federal minimum wage is $7.25 per hour.
Minimum Wage To Reach $15/Hour
In Los Angeles, the minimum wage is set to begin increasing next year from the state’s $9-per-hour standard to $15 by 2020 for most employers. Businesses with less than 50 staff have until 2021.
Ida Chapko, CEO of the $43-million Cal State L.A. FCU here, said wage hikes like the one in her city come at a time when many small credit unions—as they fight to keep members—can’t afford to make pricing changes such as adding fees or reducing services to cover a payroll increase.
“Tough choices are ahead for small credit unions that are faced with these minimum wage increases,” said Chapko.
Chapko said Cal State L.A. FCU has some staff close to minimum wage and that a pay hike is in order, and increases will be stair-stepped up the line to all 15 staff who work for her.
“This is not as simple as just raising the wage for employees who are close to minimum wage,” said Chapko. “You do that and everyone else will have to be moved up in pay by a corresponding amount or your entire salary scale will be skewed. And it’s not just the compensation costs, but the taxes and benefits too.”
$30,000 More Annually
Chapko sees her credit union having to budget an additional $30,000 annually by 2021 as a result of the wage increases, and that does not include taxes and benefits. The CEO acknowledged that this was not an expenditure for which the credit union had budgeted.
“We had been aware a minimum wage increase was coming, but not this much,” she said. “This is substantial.”
Chapko said her credit union is fortunate to be in a good financial position, steadily making money in recent years and building capital to 10%.
“We also have a good loan-to-share ratio, and I am not concerned that as this minimum wage increase begins next year that it will have any immediate threat to our net worth,” she said. “But it will certainly make an impact on our numbers overall.”
Chapko said the situation has motivated the CU to grow to help absorb the pay increase—increasing loan penetration, bringing in new members and developing the “relationships we need to sustain us long term.”
The wage increase may someday lead Cal State L.A. to increase fees or add new ones, said Chapko, who emphasized the credit union won’t cut services or employee benefits to compensate.
“Those things would be a last resort,” said Chapko, who acknowledged that small CUs struggling to get by might have to make those choices, which could have an impact on their viability.
Wage Hike Not An Issue
At the $544-million Water and Power Community CU here, the effects of the wage increase are not a major concern. CEO Carl Stewart said entry level positions at his credit union are well above the current minimum wage now and above the $15 per hour set to take effect in six years.
“When 2021 does arrive, I am sure we will continue to add a buttress to make sure our entry-level positions are not at or near minimum wage,” said Stewart. “That might mean a little upward pressure in our entry-level positions. But it’s not like a large portion of our positions would be directly impacted
But the wage increases in cities across the country could drive more deposits into credit unions from lower-income members who will have more savings, asserted Stewart. “And a bigger income also means greater ability to borrow.”
Stewart said that in cities where wage increases take effect, credit union commercial loan officers should pay careful attention to small businesses that employ minimum-wage workers.
“These small businesses could find their profit margins squeezed with this gradual increase in their labor rates, and probably have to make some astute business decisions—the most obvious being to increase prices of goods and services to absorb the higher labor costs,” said Stewart.
Robert Carmichael, SVP of HR and training at the $301-million Maine Savings FCU in Hampden, Maine, holds similar concerns for credit union business lending in cities impacted by the wage hikes.
Small Biz A Concern
Carmichael said loan officers should look closely at the income and financial statements of businesses that employ a large number of minimum-wage workers.
“How will this impact their cash flow?” said Carmichael, a member of the CUNA HR & Organizational Development Council. “It could have a significant effect, depending on the number of minimum-wage employees a small business has.”
Carmichael said his city is not currently seeking an increase in minimum wage, but if one were to be enacted in his town he said his entry-level staff are paid well above the current minimum wage that it would not impact the credit union.
Chapko noted that the payroll increase her credit union is facing may help in one respect—attracting talent from outside L.A. County, where minimum wage will be lower.
“I know some people do not like driving into the city where we are located, all the traffic,” said Chapko. “But if we are paying more than others outside L.A., we might see more applicants.”