III. Budget Results - Fourth Quarter 2006

Modifications to Approved Budgets/Authorized Staffing

One modification was made to the 2006 Corporate Operating Budget, in accordance with delegated authority by the Board of Directors in the 2006 Budget Resolution, since the Third Quarter 2006 CFO Report to the Board:

• The Division of Information Technology reallocated $6.5 million from Outside Services – Personnel to the Equipment expense category. This re-distribution of budgeted funds was for the expansion of the mid-tier/UNIX computing environment in support of existing and developing application systems and is part of the Corporation’s target enterprise architecture. Funds were available in the Outside Services – Personnel category for reallocation due to the delays in the award of contracts and task orders for systems development work.

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 December 31, 2006, was as follows:

• Approximately $4.9 million was spent for system development and enhancement activities related to deposit insurance reform as of December 31, 2006. About $0.7 million of additional work was approved by the Change Control Board, but will occur in 2007. Funding for continuing systems development and enhancement activities to be undertaken during 2007 in support of deposit insurance reform is included in the 2007 Corporate Operating Budget.

• Approximately $1.8 million was spent through December 31, 2006, for printing and distribution of updated deposit insurance brochures. Additional funds to further update the brochures following the completion of all rulemaking for deposit insurance reform are included in the 2007 Corporate Operating Budget approved by the Board on December 5, 2006.

• No funds were spent in 2006 for the additional staff that the Board authorized to support deposit insurance pricing. The Division of Insurance and Research (DIR) deferred hiring for those positions until final determinations were made about the new deposit insurance assessment system. The 2007 Corporate Operating Budget and authorized staffing included staffing and related funding for this purpose.

Spending Variances

Significant spending variances by major expense category and division/office are discussed below. Significant spending variances for the twelve months ending December 31, 2006, are defined as those that either (1) exceed the annual authorized budget by any amount for a major expense category or for a division/office; or (2) are under the annual authorized budget for a major expense category or division/office by an amount that exceeds $1 million and represents more than 3 percent of the major expense category or total division/office budget.

Significant Spending Variances by Major Expense Category

Ongoing Operations

There were four major expense categories in which a significant spending variance occurred for the year in the Ongoing Operations component of the Corporate Operating Budget:

• Outside Services-Personnel expenditures were $16 million, or 10 percent, less than budgeted, largely due to contracting delays that impacted several large IT projects; delays in initiating contract requests to support the Identity Theft Media Campaign, the revised Money Smart curriculum, and the Gulf Coast Recovery initiative; lower-than-anticipated expenses for corporate services and human resource contracts for benefits and consulting; and a delay in rewriting the Acquisition Policy Manual.

• Equipment expenditures were $1 million, or 3 percent, more than budgeted because the Division of Information Technology (DIT) exceeded its Equipment budget by $2.6 million. Due to growing corporate-wide user demands to store information electronically, DIT decided in late 2006 to acquire additional, unbudgeted data storage equipment when it became apparent that it would not spend all of its Outside Services – Personnel budget. This equipment would otherwise have had to be purchased in 2007. Although DIT exceeded its budget for the Equipment category, it did not exceed its total 2006 operating budget. Furthermore, the overspending by DIT in this category was partially offset in the overall corporate budget for Equipment by the Division of Administration’s deferral of regional furniture, fixtures and equipment (FF&E) purchases until 2007.

• Outside Services-Other expenditures were $1.5 million, or 11 percent, less than budgeted, largely due to increased utilization of in-house printing rather than outside printing services and printing orders placed but not received by year end.

• Other Expenses were $2 million, or 18 percent, less than budgeted, largely due to lower-than-anticipated expenses for training.

Receivership Funding

The Receivership Funding component includes budgeted funding for non-personnel expenses that are incurred in conjunction with an institution failure and the management and disposition of the assets and liabilities of the ensuing receivership. There were five major expense categories in which a significant spending variance occurred for the year 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 ($51 million, or 82 percent, less than budgeted).
• Travel ($5 million, or 83 percent, less than budgeted).
• Buildings ($2 million, or 93 percent, less than budgeted).
• Other Expenses ($1 million, or 89 percent, less than budgeted).

Significant Spending Variances by Division/Office²

There were seven organizations that had significant spending variances for the year:

• The Division of Resolutions and Receiverships (DRR) spent $48 million, or 49 percent, less than budgeted. This variance was fully attributable to under spending in the Receivership Funding component of DRR’s operating budget and was primarily due to declining resolution and receivership management workload and a corresponding need for less contract support than budgeted for the year.

• The Legal Division spent $16 million, or 18 percent, less than budgeted. More than $13 million of the variance was in the Receivership Funding component of its operating budget and was largely due to declining resolution and receivership management workload, which was reflected primarily in reduced outside counsel expenses.

• The Division of Administration (DOA) spent $6 million, or 4 percent, less than budgeted, including under spending of $7.5 million for corporate operations. DOA spent less than anticipated for national administrative services; human resources education and training services; equipment; printing; and administrative activities related to the resolution of failed institutions. DOA also spent $1.3 million more than estimated in 2006 from its budget for 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 the reportable variance criteria, it is not a true variance since the Board resolution permits the project manager to shift authorized funds among years, and this now-completed project did not exceed its total authorized multi-year budget.

• The Corporate University spent $4 million, or 12 percent, less than budgeted. This was mostly due to projects being deferred until 2007 and anticipated relocation and travel costs for the Corporate Employee Program that were not claimed in 2006.

• The Division of Insurance and Research spent $3 million, or 7 percent, less than budgeted. This was due to lower-than-anticipated spending in both the Investment Budget and Corporate Operating Budget on enhancements to and maintenance and operations of the Central Data Repository.

• The Executive Offices spent $66 thousand, or 1 percent, more than budgeted. This was largely due to the cost of the GAO annual audit being somewhat greater than anticipated.

• In the Investment Budget, the Division of Information Technology spent $2 million, or 18 percent, less than estimated for various projects in 2006. 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 carry over unused authorized budgeted funds into future years to complete the project. A detailed quarterly report is provided separately to the Board by the Capital Investment Review Committee for all information technology investment projects.

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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.