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, asset 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 (1996-2000).

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 entities6

 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

 10FCA 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.

11According 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.

 12We 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

Banksa

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)bPrimary 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

 13FCA 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 expensesa957 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 (Dollars

in millions)

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

 14Personnel 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

 15Economies 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

 1612 U.S.C. 2250(a)(2)(A).

17Currently, 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.

18Risk-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

 19The 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

 2012 U.S.C. 2279aa-11(d) and 2250(a)(C).

21The 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

 22FHFB 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

 23OCC, 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.

24Report 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

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