FCA is an independent federal regulatory agency responsible for supervising, regulating, and examining institutions operating under the Farm Credit Act of 1971, as amended. 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.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 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.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 mortgage credit to lenders and borrowers. Both the System and Farmer Mac are government-sponsored enterprises (GSE). 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. FCA also has reimbursable expenses, which include the expenses it incurs in providing services and products to another entity. The five other federal financial regulators discussed in this report have oversight responsibility for various types of institutions. Table 1 shows these regulators, along with the types of institutions that they regulate. 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 market risk (S), or CAMELS. 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 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. 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. 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 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 period, primarily because of decreases in supplies and materials.