III. Budget Results - Third Quarter 2006

Modifications to Approved Budgets/Authorized Staffing

The Chief Financial Officer approved various modifications to the 2006 Corporate Operating Budget and/or authorized staffing during and subsequent to the third quarter, in accordance with authority delegated to him by the Board of Directors in the 2006 Budget Resolution:

• Authorized staffing was increased by a net of 24 positions for the following divisions: the Division of Supervision and Consumer Protection (19 positions), the Division of Information Technology (2 positions), the Division of Insurance and Research (2 positions), the Division of Resolutions and Receiverships (1 position), the Corporate University (1 position), and the Legal Division (minus 1 position). All of the new positions were filled by surplus staff through voluntary and involuntary reassignments, similar to the authorization of 13 new positions for the Division of Administration approved and reported to the Board for the second quarter. These reassignments were part of a comprehensive effort to resolve as many employee surpluses as possible by assigning employees to new positions where new work has emerged for which there is insufficient authorized staffing. Many of the new positions authorized involve high-profile areas of the FDIC’s mission, including consumer protection, Gulf Coast relief activities, Money Smart financial education, the New Alliance Task Force, and the Corporate Employee Program. No additional funds will be required in 2006 for this staffing increase.

• Authorized staffing was increased by a net of one position for the Office of Diversity and Economic Opportunity. Two new positions for sign language interpreters were approved to meet the needs of FDIC hearing impaired employees. That increase was offset by an earlier decision to abolish a Senior EEO Specialist position. No additional funding is required in 2006 for this staffing increase, because the additional funds required for the new sign language interpreters will be more than offset by savings from contracted sign language interpreter services.

• The transfer of four authorized staffing positions from the Division of Insurance and Research to the newly-created Office of International Affairs (OIA) was approved. (A request for two additional authorized positions for OIA will be included in the 2007 Corporate Operating Budget proposal submitted to the Board of Directors for consideration in December.)

• The transfer of one authorized staffing position from the Legal Division to the Corporate University (CU) in conjunction with a transfer of responsibility for the Legal Division’s continuing legal education program to CU was approved.

• A mid-year Corporate Operating Budget adjustment was approved to reallocate funds among several division and office budgets and multiple expense categories. Most notable was the reallocation of $5.7 million to the Division of Information Technology (DIT), largely for the funding of planned systems development projects and to complete the transition to the new Information Technology Application Services (ITAS) contracts. This mid-year adjustment impacted all major expense categories except Salary and Compensation and Buildings. It was funded from the Corporate-Unassigned budget. (Note: Due to delays in getting task orders in place to start projects, DIT subsequently determined that it would be unable to fully utilize all of the reallocated funds and reprogrammed the funds to purchase equipment and software that would be needed for many of these projects when they are placed into production in 2007.)

• We previously reported in the 2nd Quarter CFO Report to the Board that we would perform an analysis in October of salaries and fringe benefit expenses and, if necessary, realign the budget accordingly. Subsequent to the end of the third quarter of 2006, the Chief Financial Officer (CFO) approved a Corporate Operating Budget realignment of $2.25 million to the Salary and Compensation expense category to meet projected budgeted shortfalls in several divisions and offices due to the under-estimation of regular salary and fringe benefit costs when the 2006 budget was formulated and to cover substantial charges to the Corporate University (CU) salary and benefit accounts by employees on detail to CU to perform special projects. The CFO also approved additional budget adjustments among expense categories and divisions and offices as follows: the Salary and Compensation budget was increased by $2.18 million to cover the cost of executive bonuses paid earlier this year that were not accrued at the end of 2005; the Division of Information Technology budget was increased by $2 million to purchase servers in 2006 rather than 2007 (the proposed 2007 budget was reduced by an equal amount); the Outside Services – Personnel budget of the Division of Resolutions and Receiverships budget was increased by $600 thousand for contract services related to an update of receivership service billing benchmarks; the budget for Government Litigation was reduced by $7 million and reprogrammed for other uses based upon information received from the Department of Justice that indicated that these funds would not be used in 2006; and the $33 thousand remaining in the funds set aside in the Corporate-Unassigned budget was reprogrammed for other purposes.

Status of Spending for the Implementation of Deposit Insurance Reform

The Board of Directors approved in March 2006 a $9.05 million increase in the 2006 Corporate Operating Budget for unbudgeted expenses related to the implementation of Deposit Insurance Reform. This included $6.5 million for system changes, $2.25 million for the printing and distribution of revised deposit insurance brochures for banks and the public; and $0.3 million to fill two new staff positions in the Division of Insurance and Research (DIR). The status of these funds through September 30, 2006, was as follows:

• Approximately $3.8 million was spent for system development and enhancement activities related to deposit insurance reform as of September 30, 2006. DIT continues to estimate that about $5.7 million of the $6.5 million in 2006 funding approved for this purpose will be spent this year. Funding for continuing systems development and enhancement activities to be undertaken next year in support of deposit insurance reform will be included in the 2007 Corporate Operating Budget request submitted later this year.

• Approximately $1.8 million was spent for the 2006 printing and distribution of updated deposit insurance brochures and no further spending is anticipated in 2006. Additional funds to further update the brochures once all rulemaking for deposit insurance reform has been completed will be included in the proposed 2007 Corporate Operating Budget.

• No funds have yet been spent for additional staff to support deposit insurance pricing. DIR is awaiting the completion of rulemaking activities before determining what additional skills will be needed. No funds are expected to be spent for this purpose in 2006, but funding for the two additional staff positions in DIR will be included in the proposed 2007 Corporate Operating Budget.

Spending Variances

Significant spending variances by major expense category and division/office are discussed below. Significant spending variances for the nine months ending September 30, 2006, are defined as those that either (1) exceed the YTD budget by $1 million and represent more than 2 percent for a major expense category or for a division/office; or (2) are under the YTD budget for a major expense category or division/office by an amount that exceeds $2 million and represents more than 4 percent of the major expense category or total division/office budget.

Significant Spending Variances by Major Expense Category

Ongoing Operations

There were two major expense categories in which a significant spending variance occurred through the third quarter in the Ongoing Operations component of the Corporate Operating Budget:

• Outside Services-Personnel expenditures were $26 million, or 23 percent, less than budgeted, largely due to delays in starting several IT projects; delays in rolling out the Identity Theft and other media campaigns; delays in the Money Smart initiative; and, lower-than-anticipated expenses for the national administrative services contract and human resource contracts for benefits and consulting.

• Equipment expenditures were $4 million, or 13 percent, less than budgeted, largely due to delays in purchasing security-related equipment and mainframe software; and savings associated with on-line library services due to vendor competition.

Receivership Funding

The Receivership Funding component includes budgeted funding for non-personnel expenses that are incurred in conjunction with an institution failure and the subsequent management and disposition of the assets and liabilities of the ensuing receivership. There were three major expense categories in which a significant spending variance occurred through the third quarter in the Receivership Funding component of the Corporate Operating Budget. All of these variances were attributable to the limited receivership and resolution activity that occurred during the year. The major expense categories were:

• Salary and Compensation¹ ($3 million, or nearly 100 percent, less than budgeted).
• Outside Services-Personnel ($37 million, or 79 percent, less than budgeted).
• Travel ($4 million, or 83 percent, less than budgeted).

Significant Spending Variances by Division/Office²

There were five organizations that had significant spending variances through the third quarter:

• The Division of Resolutions and Receiverships (DRR) spent $35 million, or 48 percent, less than budgeted. This significant spending variance was fully attributable to under spending in the Receivership Funding component of DRR’s operating budget and was primarily due to the declining resolution and receivership management workload and a corresponding need for less contract support than budgeted through the third quarter.

• The Division of Information Technology spent $20 million, or 14 percent, less than budgeted, including under spending of $17 million for Ongoing Operations and $3 million for approved Investment projects. The variance in Ongoing Operations was primarily due to delays in starting several IT projects. The Investment Budget variance resulted from lower-than-estimated expenditures for the Asset Servicing Technology Enhancement Project (ASTEP) through the third quarter. The ASTEP project now anticipates using less funds than previously estimated in 2006, but plans on spending those funds in 2007.

• The Legal Division spent $12 million, or 18 percent, less than budgeted. Approximately $10 million of the variance was in the Receivership Funding component of its operating budget and was largely due to the declining resolution and receivership management workload, which was reflected primarily in reduced outside counsel expenses.

• The Office of Inspector General spent $2 million, or 13 percent, less than budgeted. This was mostly due to a large number of vacancies in budgeted positions within the office.

• The Division of Administration (DOA) spent $1 million, or 8 percent, more than estimated for Investment Budget spending in 2006 on the Virginia Square - Phase II investment project due to the negotiated cost of change order requests during the final months of construction. While this amount technically falls within our reportable variance criteria, it is not a true variance since the Board resolution permits the project manager to shift authorized funds among years, and it is not anticipated that this project will exceed its total authorized multi-year budget. A detailed quarterly report is provided separately to the Board by DOA for the Virginia Square – Phase II project.

___________________________________________________
¹Overtime is the only account budgeted in the Salary and Compensation expense category of the Receivership Funding component of the Corporate Operating Budget in 2006. All staff salaries are budgeted and expensed in the Ongoing Operations budget component.
²Information on division/office variances reflects variances in both the Corporate Operating and Investment Budgets.