Farm Credit Administration: Analysis of Administrative Expenses
and Funding Through Assessments (02-AUG-01, GAO-01-949).
The Farm Credit Administration (FCA) regulates the Farm Credit
System. Administrative expenses, which accounted for about 97
percent of FCA's total operating expenses of $34.5 million in
fiscal year 2000, are funded primarily by assessments on the
institutions that make up the System, including the Federal
Agricultural Mortgage Corporation (Farmer Mac). This report (1)
analyses trends in administrative expenses for fiscal years 1996
through 2000 and, (2) compares ways that FCA and other federal
financial regulators calculate the assessments they need to fund
their operations. GAO found that while FCA's administrative
expenditures varied each year between 1996 and 2000, they
remained below 1996 levels and stayed within congressionally
imposed annual spending limits for each year during 1997 through
2000. Overall between 1996 and 2000, the agency experienced a
decline in administrative spending of around $2 million, or 5.8
percent. Personnel costs made up the largest expenditure
category, consistently accounting for more than 80 percent of
administrative spending; thus, a 15 percent staff reduction also
provided the greatest overall savings. FCA funds its operational
budget in much the same way as the other federal financial
regulators included in GAO's study. Unlike many government
agencies whose operations are funded by taxpayers' money, the
federal financial regulators are self-funded agencies that rely
primarily on assessment revenue from the entities they regulate.
In calculating these assessments, FCA and the other federal
financial regulators use separate methodologies for primary and
secondary market entities.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-949
ACCNO: A01510
TITLE: Farm Credit Administration: Analysis of Administrative
Expenses and Funding Through Assessments
DATE: 08/02/2001
SUBJECT: Regulatory agencies
Administrative costs
Cost control
Bank examination
Fees
Financial institutions
Farm credit banks
Financial analysis
Government sponsored enterprises
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GAO-01-949
Report to the Ranking Minority Member, Committee on Agriculture, Nutrition,
and Forestry, U. S. Senate
United States General Accounting Office
GAO
August 2001 FARM CREDIT ADMINISTRATION
Analysis of Administrative Expenses and Funding Through Assessments
GAO- 01- 949
Page i GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Letter 1
Results in Brief 1 Background 2 Scope and Methodology 9 FCA Administrative
Expenses Fell Modestly From 1996 Through
2000, Remaining Within Congressionally Imposed Limits 10 FCA Calculates Its
Assessments in Much the Same Way as Other
Federal Financial Regulators 15 Conclusions 22 Agency Comments 22
Appendix I Comments From the Farm Credit Administration 24
Tables
Table 1: Other Federal Financial Regulators and the Types of Institutions
That They Regulate 8 Table 2: Changes in FCA Administrative Expenses From
Fiscal
Years 1996- 2000, by Expense Category 11 Table 3: FCA Administrative
Expenses, Congressional Ceilings and
Actual Expenditures, Fiscal Years 1996- 2000 15 Table 4: FCA Assessment
Schedule 17
Figures
Figure 1: Flowchart of FCA Regulatory Structure 5 Figure 2: FCA Sources of
Revenue, Fiscal Year 2000 7 Figure 3: Trends in FCA Administrative Expenses,
Fiscal Years
1996- 2000 12 Figure 4: FCA Administrative Expenses, by Expense Category,
Fiscal Year 2000 14 Figure 5: Comparison of Factors Used in Assessment
Calculations
by Regulators 21 Contents
Page ii GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Abbreviations
CAMELS capital adequacy, assess quality, management, earnings, liquidity,
and sensitivity to market risk FCA Farm Credit Administration FDIC Federal
Deposit Insurance Corporation FHFB Federal Housing Finance Board FHLBanks
Federal Home Loan Banks GSE government- sponsored enterprise NCB National
Consumer Cooperative Bank NCUA National Credit Union Administration OCC
Office of the Comptroller of the Currency OFHEO Office of the Federal
Housing Enterprise Oversight OSMO Office of Secondary Market Oversight OTS
Office of Thrift Supervision
Page 1 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
August 2, 2001 The Honorable Richard G. Lugar Ranking Minority Member,
Committee on Agriculture, Nutrition, and Forestry United States Senate
Dear Senator Lugar: This report responds to your December 6, 2000, request
that we provide information on the annual administrative expenses incurred
by the Farm Credit Administration (FCA), the regulator of the Farm Credit
System (System). Administrative expenses, which accounted for about 97
percent of FCA?s total operating expenses of $34.5 million in fiscal year
2000, 1 are funded primarily by assessments on the institutions that make up
the System, including the Federal Agricultural Mortgage Corporation (Farmer
Mac). As agreed with your staff, our objectives were to (1) analyze trends
in administrative expenses for fiscal years 1996 through 2000 and (2)
compare the ways that FCA and other federal financial regulators calculate
the assessments they need to fund their operations.
While FCA?s administrative expenditures varied each year between 1996 and
2000, they remained below 1996 levels and stayed within congressionally
imposed annual spending limits for each year during 1997 through 2000.
(Congress did not set a limit in 1996.) Overall between 1996 and 2000, the
agency experienced a decline in administrative spending of around $2
million, or 5.8 percent. As a point of reference, during this same period,
the price index for federal government expenditures increased 8.59 percent.
2 Personnel costs (staff salaries and benefits) made up the largest
expenditure category, consistently accounting for more than 80 percent of
administrative spending; thus, a 15- percent staff reduction also provided
the greatest overall savings. Among expenditure categories, equipment and
other contractual services accounted for the largest increases over the
study period, primarily because of computer upgrades and purchases and the
installation of a new financial management system.
1 The dates used in this report refer to fiscal years. 2 Bureau of Economic
Analysis?s Price Indexes for Gross Domestic Product and Gross Domestic
Purchases: Federal Government, U. S. Department of Commerce (1996- 200).
United States General Accounting Office Washington, DC 20548
Results in Brief
Page 2 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
FCA funds its operational budget in much the same way as the other federal
financial regulators included in our study. Unlike many government agencies
whose operations are funded by taxpayers? money, the federal financial
regulators are self- funded agencies that rely primarily on assessment
revenue from the entities they regulate. In calculating these assessments,
FCA and the other federal financial regulators use separate methodologies
for primary and secondary market entities. 3 For primary market
institutions, the regulators, with one exception, apply complex formulas
that take into account the size of an institution?s asset holdings, findings
from annual examinations, and other factors. The assessment costs are
applied in increments that decline for institutions with large asset
holdings to reflect reduced incremental supervisory costs. Institutions that
receive low supervisory examination ratings may also have to pay a surcharge
to cover the costs of additional supervision. The formulas for calculating
assessments for secondary market entities involve less complex computations
that take into account various factors, such as the regulator?s direct and
indirect expenses or each institution?s total assets or capital.
We obtained comments on a draft of this report from FCA officials and
officials of the other regulatory agencies included in our study. FCA
officials agreed with the information presented in the draft report and
provided technical clarifications, which we incorporated where appropriate.
FCA?s comment letter is reprinted in appendix I. All of the other federal
financial regulators, except the Office of Federal Housing Enterprise
Oversight (OFHEO), provided technical comments on the draft report, which we
incorporated where appropriate. OFHEO did not provide any comments.
We are not making recommendations in this report. FCA is an independent
federal regulatory agency responsible for supervising, regulating, and
examining institutions operating under the
3 Primary market entities are entities that lend directly to borrowers
(individuals and/ or businesses), provide other financial services to such
borrowers, and/ or engage in other financial activities. Secondary market
entities are entities that buy and sell loans obtained from primary market
entities, either individually or in the form of securities backed by cash
flows from groups or ?pools? of loans. Background
Page 3 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Farm Credit Act of 1971, as amended. 4 The act also authorizes FCA to assess
the institutions it regulates to provide funds for its annual operating
costs and to maintain a reserve amount for contingencies, as applicable. 5
FCA regulations allow several methods for FCA to assess and apportion its
administrative expenses among the various types of institutions it oversees.
These institutions include primary market institutions (banks and
associations) and related entities 6 that collectively comprise the System,
in addition to Farmer Mac (a secondary market entity). As of September 30,
2000, the System (excluding Farmer Mac) included 172 institutions holding
assets of about $91 billion; Farmer Mac?s assets were about $3 billion. The
System is designed to provide a dependable and affordable source of credit
and related services to the agriculture industry.
FCA regulates and examines Farmer Mac, the secondary agricultural credit
market entity, through the Office of Secondary Market Oversight (OSMO),
which is an independent office with a staff of two within FCA. 7 Figure 1
depicts the regulatory relationships among FCA, OSMO, the System, and Farmer
Mac. Farmer Mac was created to provide a secondary market to improve the
availability of agricultural and rural housing
4 12 U. S. C. 2250. Under a separate statute, Congress requires that FCA
also annually examine the National Consumer Cooperative Bank (NCB) and its
affiliate, NCB Development Corporation. Neither entity is affiliated with
the System. These entities reimburse FCA for the cost of their examinations
on the basis of direct examination expenses plus an allocated portion of FCA
indirect expenses that are reasonably related to the services FCA provided
to them.
5 To determine if any reserves are necessary and the amount of such
reserves, FCA would consider the possibility of a major lawsuit outcome or
other expenses or activities that could result in an extraordinary increase
in annual expenses. FCA officials stated that, to date, the agency has not
found it necessary to establish such a reserve.
6 These related System entities provide services to the System?s lending
institutions. They include the Farm Credit Leasing Services Corporation; the
Farm Credit System Financial Assistance Corporation; the Federal Farm Credit
Banks Funding Corporation; the Farm Credit Finance Corporation of Puerto
Rico; Farm Credit Financial Partners, Inc.; and any other institution
statutorily designated as a System institution that is not a bank or
association.
7 In 1992, OSMO was created as a separate office within FCA, reporting
directly to the FCA Board. FCA provides staff resources, for example,
examination, legal, and administrative support staff, to OSMO to assist it
in regulating and supervising Farmer Mac.
Page 4 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
mortgage credit to lenders and borrowers. 8 Both the System and Farmer Mac
are government- sponsored enterprises (GSE). 9
8 Farmer Mac is organized as an investor- owned corporation. It has no
liability for the debts of any other System institution, and other System
institutions have no liability for Farmer Mac?s debts.
9 A GSE is a private institution chartered by Congress to serve the purpose
of facilitating the flow of funds to a particular sector of the economy, in
this case agriculture. For additional information about FCA and Farmer Mac,
see Farm Credit System: Farm Credit Administration Effectively Addresses
Identified Problems (GAO/ GGD- 94- 14, Jan. 7, 1994) and Farmer Mac: Revised
Charter Enhances Secondary Market Activity, but Growth Depends on Various
Factors (GAO/ GGD- 99- 85, May 21, 1999).
Page 5 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Figure 1: Flowchart of FCA Regulatory Structure
Note: OSMO reports to the FCA Chief Executive Officer for administrative
matters. Source: GAO.
Page 6 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Although FCA does not receive any funds from the U. S. Treasury for its
operating budget, its annual budget is subject to the annual congressional
appropriations process, which limits the dollar amount that the agency can
spend on administrative expenses. For 2000, that amount was $35.8 million.
FCA raises operating funds from several sources, but most of these funds are
from assessments on the institutions that it regulates. Assessments
accounted for about 94 percent (including 2 percent for Farmer Mac) of the
funding for the FCA?s 2000 operating budget, with the balance coming from
reimbursable services, investment income, and miscellaneous income (see fig.
2). FCA officials define administrative expenses as generally comprising
personnel compensation, official travel and transportation, relocation
expenses, and other operating expenses necessary for the proper
administration of the act. 10 FCA also has reimbursable expenses, which
include the expenses it incurs in providing services and products to another
entity. 11
10 FCA officials also noted that expenses are categorized by the
classifications specified in Section 83 of the Office of Management and
Budget?s Circular A- 11, Preparation and Submission of Budget Estimates.
11 According to FCA?s Chief Financial Officer, the agency has two types of
reimbursable expense services- those mandated by statute and those performed
under contractual agreements. For example, FCA?s annual examination of NCB
is a statutory reimbursable expense, but its examination of the Small
Business Administration?s Specialized Business Lending Companies is
contractual. For 2000, FCA had reimbursable expenses of about $1. 1 million,
or 3 percent of its total operating expenses.
Page 7 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Figure 2: FCA Sources of Revenue, Fiscal Year 2000
Source: GAO analysis of FCA- provided data.
The five other federal financial regulators discussed in this report have
oversight responsibility for various types of institutions. 12 Table 1 shows
these regulators, along with the types of institutions that they regulate.
12 We did not include the Federal Reserve System (Federal Reserve) and the
Federal Deposit Insurance Corporation (FDIC) in this study because they do
not charge for examinations. The Federal Reserve, in cooperation with state
regulators, examines statechartered Federal Reserve member banks. The
Federal Reserve funds its operations primarily through income on investments
and payments received from the banking industry for services provided to the
industry. FDIC, in cooperation with state regulators, examines state-
chartered nonmember Federal Reserve banks. FDIC funds its operations
primarily through insurance premiums and the investment income derived from
these premiums.
Page 8 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Table 1: Other Federal Financial Regulators and the Types of Institutions
That They Regulate
Regulator Type of regulated institution
Federal Housing Finance Board (FHFB) Primary market institutions. Federal
Home Loan
Banks a National Credit Union Administration (NCUA) Primary market
institutions. Federal credit
unions and state- chartered credit unions that are federally insured;
oversees and administers the National Credit Union Share Insurance Fund
Office of the Comptroller of the Currency (OCC) b Primary market
institutions. National banks and
federal branches and agencies of foreign banks operating in the United
States Office of Thrift Supervision (OTS) b Primary market institutions.
Federally chartered
thrifts and federally insured state- chartered savings associations and
savings and loan holding companies Office of Federal Housing Enterprise
Oversight (OFHEO) c Secondary market entity. Federal National
Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation
(Freddie Mac) a a These entities are GSEs.
b OCC and OTS are independent entities within the Department of the
Treasury. c OFHEO is an independent entity within the Department of Housing
and Urban Affairs.
Source: GAO.
For purposes of comparison, we group the regulators into two categories
according to the types of market primarily or exclusively served by the
institutions they regulate, primary and secondary market entities. Of the
five regulators, four- FHFB, NCUA, OCC, and OTS- regulate primary market
institutions. OFHEO regulates secondary market entities. FHFB regulates the
12 Federal Home Loan Banks (FHLBanks) that lend on a secured basis to their
member retail financial institutions. Under certain approved programs and
subject to regulatory requirements, the FHLBanks also are authorized to
acquire mortgages from their members.
By law, federal financial regulators are required to examine their regulated
institutions on a periodic basis (e. g., annually). The primary purpose of
these supervisory examinations is to assess the safety and soundness of the
regulated institution?s practices and operations. The examination process
rates six critical areas of operations- capital adequacy (C), asset quality
(A), management (M), earnings (E), liquidity (L), and sensitivity to
Page 9 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
market risk (S), or CAMELS. 13 The rating system uses a 5- point scale (with
1 as the best rating and 5 as the worst rating) to determine the CAMELS
rating that describes the financial and management condition of the
institution. Examiners issue a rating for each CAMELS element and an overall
composite rating. The results of an examination, among other things,
determine the extent of ongoing supervisory oversight.
To varying degrees, the regulators also have responsibility for ensuring
their institutions? compliance with consumer protection laws. Moreover, two
GSE regulators (FCA and FHFB) have responsibilities for ensuring compliance
with their respective GSEs? statutory missions. Mission and safety and
soundness oversight for Fannie Mae and Freddie Mac are divided. The
Department of Housing and Urban Development has general regulatory authority
over Fannie Mae and Freddie Mac to ensure compliance with their missions,
while OFHEO has the authority for safety and soundness regulation.
To meet the first objective, we examined agency budget reports and financial
documents and interviewed FCA and Farmer Mac officials. We compared FCA?s
reported actual administrative expenses (total operating expenses less
reimbursable costs) with congressionally imposed limits; reviewed relevant
statutes, legislative history, FCA regulations, and FCA legal opinions; and
developed a 5- year trend analysis.
To address the second objective, we interviewed agency officials, reviewed
relevant statutes and regulations, and analyzed data on operational funding
obtained from FCA and the five other federal financial regulatory agencies.
We selected these five agencies because they use funding mechanisms that are
similar to FCA?s to support their operating budgets. We did not
independently verify the accuracy of the data that the regulators provided
or review any agency?s accounting records.
We obtained comments on a draft of this report from FCA and the five other
federal financial regulatory agencies. FCA?s comments are
13 FCA refers to this rating system as the Financial Institution Rating
System. NCUA uses a CAMEL rating system but presently does not have a
separate rating for market sensitivity (the ?S? component). The regulators
for Farmer Mac, Fannie Mae, and Freddie Mac and the FHLBanks do not use a
CAMELS rating system due to the small number of institutions regulated.
However, they do use categories that classify the level of supervisory
concern of examination findings. Scope and
Methodology
Page 10 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
summarized at the end of this report. Except for OFHEO, all agencies
provided technical comments, which we incorporated as appropriate.
We conducted our work from January to July 2001 at FCA headquarters in
McLean, VA, and at the headquarters of the other five regulators in
Alexandria, VA, and Washington, D. C. We conducted our review in accordance
with generally accepted government auditing standards.
Over the last 5 years, FCA has reduced expenditures for administrative
expenses, reflecting the agency?s success in controlling operating costs.
Staff reductions- due, in part, to consolidation within the System- have
accounted for most of the decline in administrative expenditures. While
actual administrative expenditure amounts have varied from year to year, FCA
has continued to operate below congressionally approved spending levels.
Significant dollar decreases in personnel costs were largely responsible for
the decrease in administrative spending and the 5.8 percent decline compared
with the 8.59 percent growth rate in federal government expenditures.
Despite increases in purchases of other contractual services and equipment,
administrative costs remained below the 1996 level throughout the second
half of the 1990s and into 2000 (see table 2). The decline was not spread
evenly over the 5- year period (see fig. 3). Most of the decline occurred in
1996- 98, and administrative spending has increased each year since then.
For 2001, administrative expenditures are expected to rise by $852,000, or
2.6 percent, over their 2000 level, primarily because of rising costs for
personnel, travel, and transportation. FCA Administrative
Expenses Fell Modestly From 1996 Through 2000, Remaining Within
Congressionally Imposed Limits
FCA Administrative Expenses Were Lower in 2000 Than in 1996
Page 11 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Table 2: Changes in FCA Administrative Expenses From Fiscal Years 1996-
2000, by Expense Category
Dollars in thousands
Expense category Fiscal Year 1996 Fiscal Year
2000 Dollar increase/( decrease) from fiscal year 1996
Percentage increase/ (decrease) from fiscal
year 1996
Personnel costs Salary $24,254 $22,739 ($ 1,515) (6.2) Benefits 7, 253 4,622
(2,631) (36.3)
Subtotal 31,507 27,361 (4,146) (13.2)
Travel and transportation 1,675 1,512 (163) (9.7) Other contractual services
992 2,275 1,283 129.3 Equipment 395 1,452 1,057 267.6 All other expenses a
957 878 (79) (8.3)
Direct administrative expenses $35,526 $33,478 ($ 2,048) (5.8)
Plus: Reimbursable Expenses 251 1,051 800 318.7
Total operating expenses $35,777 $34,529 ($ 1,248) (3.5)
Note: The price index for federal government expenditures increased 8.59
percent for the period of 1996 to 2000. a All other expenses include rent,
communications, and utilities; printing and reproduction; supplies and
materials; and insurance claims. Source: GAO analysis of FCA- provided data.
Page 12 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Figure 3: Trends in FCA Administrative Expenses, Fiscal Years 1996- 2000
Source: GAO analysis of FCA- provided data.
Our analysis of FCA data shows that personnel costs accounted for over 80
percent of the FCA administrative expenses during the 5- year study period.
14 But these costs (staff salaries and benefits) also decreased the most in
dollar and percentage terms during the period, falling by about $4.1 million
(13 percent), and the share of personnel costs in
14 Personnel costs also represent a high percentage (55 to 78 percent for
the year 2000) of the operating expenses at the five other federal financial
regulatory agencies, generally due to the labor intensiveness of
supervision.
Page 13 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
administrative expenditures fell from 88.7 percent to 81.7 percent.
Reductions in benefits were largely responsible for this decline; the amount
spent on staff benefits dropped 36.3 percent, falling from $7.3 million in
1996 to $4.6 million in 2000. Decreases in the relocation allowances,
severance pay, and buyouts necessitated by the consolidation of the System
accounted for most of the decline. FCA officials told us that the number of
employees fell almost 15 percent- from 331 in 1996 to 282 in 2000- in part,
because of the industry consolidation. The number of institutions in the
System dropped by 28 percent, declining from 239 in 1996 to 172 in 2000. For
2001, however, FCA projects personnel costs to increase by 5.3 percent to
about $28.8 million. As a result, our analysis shows that these costs will
continue to account for a substantial percentage of administrative costs.
FCA officials attribute the increase to the rising cost of employee salaries
and performance bonuses.
Equipment purchases and other contractual services accounted for the largest
increases in administrative expenditures in 1996 through 2000. Equipment
purchases experienced the largest growth but fell behind contractual
services in actual dollar increases. Equipment purchases rose about $1.1
million (from $395,000 in 1996 to $1.5 million in 2000), which was about a
268- percent increase over 1996. According to an FCA official, computer
replacements and upgrades, which the agency undertakes every 3 years,
accounted mostly for the increase. FCA officials expect equipment purchases
to decline $202, 000, or about 14 percent, in 2001.
Other contractual services represented a growing percentage of FCA
administrative costs, increasing from 2.8 percent in 1996 to 6.8 percent of
the 2000 total. These expenses consisted mostly of consulting services for a
new financial management system purchased from another government agency.
They accounted for the largest dollar increase (about $1.3 million) and the
second- largest percentage increase (about 130 percent) in administrative
expenditures, climbing from $992,000 in 1996 to $2.3 million in 2000. For
2001, however, FCA expects this cost component to decline by $209,000, or
9.2 percent.
Travel and transportation expenses declined (by about 10 percent) between
1996 and 2000. FCA officials told us the decrease was largely the result of
a decline in the number of employee relocations. For 2001, FCA projects
these costs to decrease by $231,000, or about 15 percent.
All other expenses, a category that includes rent, communications, and
utilities; printing and reproduction; supplies and materials; and insurance
claims and indemnities, decreased by $79,000, or 8.3 percent, over the
Page 14 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
period, primarily because of decreases in supplies and materials. For 2001,
FCA expects these costs to increase by 4.3 percent.
Figure 4 shows FCA administrative expenses for 2000 by expense category.
Figure 4: FCA Administrative Expenses, by Expense Category, Fiscal Year 2000
Source: GAO analysis of FCA- provided data.
Each fiscal year, Congress sets a limit on the amount of money FCA can spend
on administrative expenditures. However, Congress did not set a spending
limit for 1996. For each year from 1997 to 2000, FCA was in compliance with
its budget limits for administrative expenses (see table 3). Actual FCA
Administrative
Expenses Did Not Exceed Congressionally Authorized Spending Levels
Page 15 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Table 3: FCA Administrative Expenses, Congressional Ceilings and Actual
Expenditures, Fiscal Years 1996- 2000
Dollars in thousands
Fiscal year Congressionally
authorized spending level
(ceiling) Actual FCA
administrative expenses Amount under
ceiling Percentage
under ceiling
1996 N/ A $35,526 N/ A N/ A 1997 $37,478 33,506 $3,972 10.6 1998 34,423
31,934 2, 489 7.2 1999 35,800 33,111 2, 689 7.5 2000 35,800 33,478 2, 322
6.5
Legend: N/ A = not applicable Source: GAO analysis of FCA- provided data.
FCA and the other federal financial regulators do not receive any federal
money to fund their annual operating budgets, relying primarily on
assessment revenue collected from the institutions they oversee. In general,
the regulators assess institutions using either complex assetbased formulas
or less complex formulas that are based on other factors, depending on the
type of institution. The different funding methodologies are designed to
ensure that each institution pays an equitable share of agency expenses.
FCA uses two different methods of calculating assessments on the
institutions it regulates- one for all primary market entities and the other
for its secondary market entity, Farmer Mac. The methodology used for
primary market entities, which is complex, is based on the institutions?
asset holdings and economies of scale as well as on the supervisory rating
each institution received during FCA?s last periodic examination. 15 The
methodology used for Farmer Mac is less complex. FCA calculates the
assessment on the basis of its own direct and indirect expenses, rather than
on asset holdings. Direct expenses include the costs of examining and
supervising Farmer Mac, while indirect expenses are the overhead costs
?reasonably? related to FCA?s services. In general, the other federal
15 Economies of scale are based on the notion that the average cost of a
good or service falls as production increases. In this case, an economy of
scale exists for larger institutions because a relatively small number of
regulatory staff can oversee large amounts of assets. FCA uses declining
marginal rates in its assessment computation to account for such supervisory
cost savings. FCA Calculates Its
Assessments in Much the Same Way as Other Federal Financial Regulators
Page 16 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
financial regulators that regulate institutions similar to FCA?s use
comparable methodologies to calculate assessments.
The law requires that the assessments be apportioned ?on a basis that is
determined to be equitable by the Farm Credit Administration.? 16 FCA?s
current assessment regulations for banks, associations, and ?designated
other System entities? were developed in 1993 through the negotiated
rulemaking process. 17 Banks, associations, and the Farm Credit Leasing
Services Corporation (Leasing Corporation) are assessed on the same basis
(i. e., assets). According to an FCA official, the agency periodically
reviews these rules but currently has no plans to modify them. FCA officials
said that these rules are designed to equitably apportion the annual costs
of supervising, examining, and regulating the institutions. For this reason,
the methodology relies on asset ?brackets? that are much like tax brackets
and reflect economies of scale, since the costs of supervision rise as a
regulated institution becomes larger; however, these costs do not increase
as fast as asset growth. FCA ?bills? the institutions annually, and the
institutions pay their assessments on a quarterly basis.
To calculate the assessments for banks, associations, and the Leasing
Corporation, FCA first determines its annual operating budget, which could
include a reserve for contingencies for the next fiscal year, then deducts
the estimated assessments for Farmer Mac, other System entities, and any
reimbursable expenses. What is left- the net operating budget- is the total
amount that will be assessed. This amount is apportioned among the banks,
associations, and the Leasing Corporation using a two- part formula. The net
operating budget is divided into two components of 30 and 70 percent.
(According to an FCA official, the 30/ 70 split was devised during the
negotiated rulemaking process and represents the most equitable way to
assess System institutions.) The first part of the assessment, covering 30
percent of the budget, is spread across institutions on the basis of each
institution?s share of System risk- adjusted assets. 18 For example, an
institution whose assets equal 1 percent of
16 12 U. S. C. 2250( a)( 2)( A). 17 Currently, the only ?designated other
System entities? is the Farm Credit Leasing Services Corporation. It is
included in this category because, according to FCA officials, its assets
are considered similar to those of System banks and associations.
18 Risk- adjusted assets have been weighted for the risk they entail. For
example, an unsecured loan would entail more risk than a mortgage, which is
backed by real property. The FCA Formula for
Assessing Primary Market Entities Considers Assets, Marginal Costs, and
Financial Performance as Well as FCA?s Funding Needs
Page 17 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
System assets will have its assessment equal to 1 percent of this 30 percent
of the FCA budget. The second part of an institution?s assessment is charged
according to a schedule that imposes different assessment rates on assets
over specified levels, with these marginal rates decreasing for higher
levels of assets. For example, the assessment rate that an institution pays
for its assets from over $100 million to $500 million is 60 percent of the
assessment rate that it pays on its first $25 million in assets. Adding the
30- percent amount and the 70- percent amount together equals the general
assessment amount. 19 Table 4 shows the assessment rates for the eight-
asset ?brackets.? The assessment rates percentages are prescribed by FCA
regulation.
Table 4: FCA Assessment Schedule
Dollars in millions
Average risk- adjusted asset size range Assessment rate
Over: To: $0 $25 1.00X 25 50 .85 X 50 100 .75 X 100 500 .60 X 500 1,000 .50
X 1,000 7,000 .35 X 7,000 10,000 .20 X 10,000 - .10 X
Source: Farm Credit Administration.
The general assessment may be subject to these adjustments: a minimum
assessment fee, a supervisory surcharge, or both. The minimum fee of $20,000
applies only to institutions whose assessments are calculated at less than
$20,000; these assessments are scaled upward, and no further charges are
assessed. For institutions with assessments of more than $20,000, FCA may
add a supervisory surcharge that reflects the institution?s financial and
management conditions. The surcharge is based on the institution?s last
supervisory examination rating. These ratings range from a high of 1 to a
low of 5; a rating of 3, 4, or 5 can result in a surcharge ranging from 20
to 40 percent of the general assessment
19 The general assessment amount is the amount that an institution would pay
before any kind of adjustment (e. g., a premium via a supervisory surcharge
to cover increased supervision costs).
Page 18 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
amount. The top- rated institutions (those rated 1 or 2) pay nothing over
the general assessment.
The variables in the formula allow FCA some flexibility in adjusting
assessments to reflect its oversight costs. The formula not only reflects
economies of scale but, by linking assessments with the financial and
managerial soundness of the institutions, also seeks to ensure that the
institutions that cost the most to supervise are paying their share. This
approach relieves other entities within the System of bearing the cost of
this additional oversight. FCA may adjust its assessments to reflect changes
in its actual annual expenses and, if applicable, give institutions a credit
against their next assessment or require them to pay additional assessments.
Any credits are prorated on the basis of assessments paid by an institution.
These credit adjustments are usually done at the end of the fiscal year.
As required by law, FCA assesses Farmer Mac separately and differently from
its primary market institutions. The law specifies that FCA?s assessment of
Farmer Mac is intended to cover the costs of any regulatory activities and
specifically notes a requirement to pay the cost of supervising and
examining Farmer Mac. 20 We could not identify any legislative history that
addressed these provisions. FCA officials told us that they believed the
difference between the statutory provisions for assessing banks,
associations, and the Leasing Corporation and Farmer Mac is due to the
difference in their assets- that is, unlike those institutions, Farmer Mac
does not make loans. FCA developed the current assessment methodology for
Farmer Mac in 1993.
Farmer Mac?s assessment covers the estimated costs of regulation,
supervision, and examination, but Farmer Mac is not assessed a charge for
FCA?s reserve. The assessment includes FCA?s estimated direct expenses for
these activities, plus an allocated amount for indirect or overhead
expenses. In general, FCA uses the same estimated direct expenses and
indirect expense calculations for Farmer Mac as for the ?other System
entities,? such as the Federal Farm Credit Banks Funding Corporation
(Funding Corporation). 21 Estimated direct expenses take into account the
costs incurred in the most recent examination of Farmer Mac and any
20 12 U. S. C. 2279aa- 11( d) and 2250( a)( C). 21 The Funding Corporation
is the entity that manages the sale of Systemwide debt securities to finance
the loans made by System institutions. FCA Assesses Farmer Mac
Using a Less Complex Formula That Is Based on Direct and Indirect Costs
Page 19 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
expected changes in these costs for the next fiscal year. We asked FCA
officials if and how the assessment formula they use for Farmer Mac enables
them to compensate for risks in Farmer Mac?s business activities. They
explained that the amount assessed for direct expenses increases if
additional examination time is needed. FCA officials also noted that, as
their data show, direct costs can rise due to other factors. For example,
from 1999 to 2001, FCA officials noted that they invested considerable
resources in developing a risk- based capital rule for Farmer Mac. During
this time, FCA incurred unique costs that increased Farmer Mac?s assessment
for those years.
A proportional amount of FCA?s indirect expenses- that is, those expenses
that are not attributable to the performance of examinations- is allocated
to Farmer Mac. This amount is calculated as a relationship between the
budget for a certain FCA office and FCA?s overall expense budget for the
fiscal year covered by the assessment. (The proportion for 2000 was 28.9
percent.) Multiplying the percentage by the estimated direct expenses
attributable to Farmer Mac equals the amount of indirect expenses. The
addition of the estimated direct expenses and indirect expenses equals the
estimated amount to be assessed Farmer Mac for the fiscal year. Indirect
expenses would include, for example, the cost of providing personnel
services and processing travel vouchers for OSMO. At the end of each fiscal
year, FCA may adjust its assessment to reflect any changes in actual
expenses.
Other entities in the Farm Credit System, such as the Funding Corporation,
are assessed separately using a methodology similar to the one used for
Farmer Mac. The assets of this group of institutions differ from those of
the previously discussed entities that FCA regulates. These institutions are
assessed for the estimated direct expenses involved in examinations, a
portion of indirect expenses, and any amount necessary to maintain a
reserve. FCA estimates direct expenses for each entity on the basis of
anticipated examination time and travel costs for the next fiscal year.
Allocations for indirect expenses are calculated as a percentage of FCA?s
total budgeted direct expenses (excluding those for Farmer Mac) for the
fiscal year of the assessment. As with its assessments of other entities in
the System, FCA may adjust its assessments to reflect any changes in actual
expenses at the end of the fiscal year. FCA Assesses Other
Entities in the Farm Credit System Much Like It Assesses Farmer Mac
Page 20 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
FCA and regulators of similar types of institutions use assessment formulas
of varying complexity to assess the institutions they oversee. In general,
they use relatively complex formulas for primary market institutions and
less complex formulas for secondary market entities.
FCA?s method for assessing banks, associations, and the Leasing Corporation,
which are all primary market institutions, is similar to most other federal
financial regulators (NCUA, OCC, and OTS) that oversee primary market
institutions. Most of the regulators use complex formulas that take into
account a variety of factors, including the regulator?s budget, the
institution?s asset size and examination rating, and economies of scale (see
fig. 5). Like FCA?s, these assessments generally include a fixed component
that is based on an institution?s asset holdings, plus a variable component
derived by multiplying asset amounts in excess of certain thresholds by a
series of declining marginal rates. The assessment amount may then be
adjusted on the basis of various factors- for example, the institution?s
financial condition. Again like the FCA?s methodology, these formulas
attempt to allocate regulatory costs in a way that reflects the agency?s
actual cost of supervision. Institutions with a low examination rating pay
an additional fee because they are likely to require more supervision than
the top- rated institutions. NCUA and FHFB are the only regulators of
primary market institutions that do not add a supervisory surcharge on the
basis of an examination rating. However, NCUA does use a complex formula to
determine an institution?s assessment amount, whereas FHFB uses a less
complex formula. FHFB calculates assessments for the 12 FHLBanks on the
basis of each bank?s total paid- in capital stock, relative to the total
paid- in capital stock of all FHLBanks. 22
22 FHFB also oversees the fiscal agent for FHLBanks, the Office of Finance.
It does not, however, assess the Office of Finance. Rather, oversight cost
is recovered through assessments paid by the FHLBanks. FCA?s Assessment
Methods
Are Much Like Those of Other Financial Regulators With Similar Institutions
Primary Market Entities
Page 21 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Figure 5: Comparison of Factors Used in Assessment Calculations by
Regulators
Note: All regulators consider their agency?s annual operating budget and
other sources of funding in determining the total amount that needs to be
assessed against their regulated entities. a Risk- adjusted total assets.
b Off- balance sheet assets and liabilities: loans serviced for others,
trust assets administered, recourse obligations, or direct credit
substitutes. c The OTS assessment regulation does not specifically address
inflation; however, OTS has the ability
to adjust for factors such as inflation. d For independent trust banks and
independent credit card banks.
e If necessary and as applicable, federally insured credit unions must also
pay an adjustment to keep their share insurance fund capitalized at 1
percent of their insured shares and pay insurance premiums. Capitalization
fees and insurance premiums are not used to fund NCUA?s operations.
Sources: Agency interviews and GAO review of agency assessment regulations.
FCA is the only primary market regulator that requires its institutions to
pay a fixed minimum assessment amount (i. e., $20,000). 23 Of the five other
regulators we looked at, two- NCUA and OTS- reduce the assessments for
qualifying small institutions. According to the report of the Assessment
Regulations Negotiated Rulemaking Committee that developed the rule, 24
23 OCC, as of January 2001, began charging independent (i. e., not
affiliated with a fullservice national bank) trust banks a minimum
assessment amount. These specialized financial institutions represented 2.2
percent of the banks that OCC regulated at year- end 2000. As of June 2001,
OCC began charging independent credit card banks a minimum assessment
amount.
24 Report of the Assessment Regulations Negotiated Rulemaking Committee to
the Farm Credit Administration, 1992.
Page 22 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
the minimum assessment is required both to pay a share of FCA regulatory
costs and as a necessary cost of doing business as a federally chartered
System institution.
The assessment methods of the two federal regulators that oversee secondary
market entities are less complex than the methods applied to primary market
institutions. For example, OFHEO?s method of assessing Fannie Mae and
Freddie Mac, which is prescribed by law, is based on the ratio of each
entity?s assets to their total combined assets. OFHEO does not regulate any
other entities; thus, this simple formula readily meets the need to
equitably apportion the agency?s operating costs.
FCA administrative expenditures were lower in 2000 compared with 1996, due
in part to reductions in staff because of System consolidation. Although
administrative expenses are projected to increase for 2001 because of rising
personnel and travel costs, they are expected to remain within the
congressional spending ceiling.
FCA is unique among federal financial institution regulators because it
regulates both primary and secondary market entities. The methods FCA uses
to assess the institutions it oversees are analogous to those used by
virtually all of the regulators of similar institutions and are based on the
types of assets the entities hold. FCA?s complex formula for assessing
primary market institutions is comparable to the methods used by most
regulators of other primary market institutions. These regulators oversee
numerous entities of various sizes and complexities, and their complex
assessment methods enable them to consider these attributes in assessing for
the cost of examinations. The few secondary market entities, which include
Farmer Mac, are all assessed using less complex methodologies.
We received written comments on a draft of this report from the Chairman and
Chief Executive Officer of FCA that are reprinted in appendix I. He agreed
with the information presented in the draft report regarding FCA?s
administrative spending between 1996 and 2000. FCA also provided technical
comments that we incorporated where appropriate. The other federal financial
regulators, except for OFHEO, provided technical comments on a draft excerpt
of this report that we shared with them. We incorporated their technical
comments into this report where appropriate. Secondary Market Entities
Conclusions Agency Comments
Page 23 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
We are sending copies of this report to the Chairman of the Senate Committee
on Agriculture, Nutrition, and Forestry; the Chairmen and Ranking Minority
Members of the Senate Committee on Banking, Housing and Urban Affairs, the
House Committee on Financial Services, and the House Committee on
Agriculture; and Michael M. Reyna, Chairman and Chief Executive Officer of
the Farm Credit Administration. The report will be available on GAO?s
Internet home page at http:// www. gao. gov.
If you have any questions about this report, please contact me or M. Katie
Harris at (202) 512- 8678. Joe E. Hunter was a major contributor to this
report.
Sincerely yours, Davi M. D?Agostino Director, Financial Markets and
Community Investment
Appendix I: Comments From the Farm Credit Administration
Page 24 GAO- 01- 949 Administrative Expenses and Funding Through Assessments
Appendix I: Comments From the Farm Credit Administration
(250008)
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