The FDIC抯 2003 Service Line Rates
January 15, 2004
Audit Report No. 04-002
Federal Deposit Insurance Corporation
Office of Audits
Office of Inspector General
Washington, D.C. 20434
DATE: January 15, 2004
MEMORANDUM TO: Mitchell Glassman, Director, Division of Resolutions and Receiverships
and Fred Selby, Director, Division of Finance
FROM: Russell A. Rau [Electronically produced version; original signed by
Stephen M. Beard for Russell Rau], Assistant Inspector General for Audits
SUBJECT: The FDIC抯 2003 Service Line Rates (Audit Report Number 04-002)
This report presents the results of the Federal Deposit Insurance Corporation
(FDIC) Office of Inspector General抯 (OIG) audit of the FDIC抯 development
of service line rates for calendar year 2003. (Note: Service lines group services
performed by the FDIC in the management and liquidation of failed financial
institutions into similar line items by the type of service that is performed.)
The FDIC uses service line rates to bill FDIC receiverships (Note: Receiverships
are failed financial institutions for which the FDIC has been appointed as
receiver to manage the liquidation (asset sales, loan servicing, claims resolution,
etc.) of the institution抯 remaining assets.) for administrative expenses incurred
by the FDIC that cannot be readily attributed to a specific receivership. Service
line rates for 2003 were developed by the Director, Division of Resolutions
and Receiverships (DRR), and were submitted on March 13, 2003 for approval.
The service line rates were approved by the Deputy to the Chairman and Chief
Financial Officer on March 19, 2003.
The objective of this audit was to assess the adequacy of the FDIC抯 process
for developing its 2003 service line rates for the Service Costing Billing
System (SCBS). (Note: The SCBS is the billing component of the Service Costing
System used by the Division of Finance to capture and report budgeted and actual
expense data for the FDIC. The SCBS applies standard rates to workload volumes
extracted from various FDIC data systems to calculate total charges to receiverships
for services provided by the FDIC. ) Specifically, we determined whether 2003
service line rates were fair and reasonable, accurately calculated, and adequately
supported. Although the FDIC uses service line rates as a cost accounting tool,
the audit focused on the FDIC抯 use of service line rates to calculate receivership
billings. From January 1, 2003 to October 31, 2003, the FDIC billed 120 receiverships
a total of $33,142,476 using the approved FDIC service line rates. Additional
details on our objective, scope, and methodology are presented in Appendix
I.
BACKGROUND
When an FDIC-insured institution fails or is closed by a federal or state
regulatory agency, the FDIC is appointed as receiver. The FDIC抯 Receivership Management Program, one of the FDIC抯 three main business lines, includes performing the closing function at the failed institution, maintaining the value of and liquidating any remaining failed institution assets, and distributing any proceeds of the liquidation to those with approved claims of the receivership.
When the FDIC incurs expenses on behalf of a receivership, the FDIC charges
these expenses directly to the receivership. For example, the FDIC may bill
receiverships directly for contractor personnel, equipment, and certain travel
costs for work that is attributable to a particular receivership. However,
many expenses incurred by the FDIC cannot be attributed directly to a single
receivership. The FDIC implemented the SCBS in January 2002, using service
line rates as a mechanism to bill the active receivership population for these
expenses (Note: Active receiverships are those in the process of being liquidated.
Once the receivership has been substantially liquidated, it is placed in terminated
status and becomes inactive. Inactive receiverships are not billed for administrative
expenses.) The FDIC is authorized under Section 11 of the FDI Act, codified
to 12 U.S.C. �21(d)(11), to use amounts realized from the liquidation or other resolution of any insured depository institution to pay administrative expenses of the receiver. Section 12 of the Code of Federal Regulations (12 C.F.R. �0.4), which implements 12 U.S.C. �21(d) (11), requires the FDIC to charge only those expenses that are 搉ecessary and appropriate� to
receiverships (see Appendix I). This regulation also gives the FDIC discretion
in determining expenses that are billable.
Service Line Rates
Service line rates are developed on a variety of bases (per hour, per unit,
etc.), depending on the service line billing drivers. (Note: Billing drivers
are the units of measure used to determine the volume of activity for a particular
service line such as number of hours worked, number of claims processed,
or
number of sales transactions.) For the 2003 billing year, the FDIC
refined service lines and related billing drivers that had been established
in 2002
and established new rates. As shown in table 1, the 2003 service
lines
include: franchise marketing, customer service, valuation, closing, financial
services,
asset sales, subsidiaries management, asset management, litigation,
receivership claims, and receivership oversight. Five of the 2003 service
lines were further
divided into subservice lines, resulting in a total of 21 billing
rates.
Table 1: 2003 Service Lines and Related Billing Drivers and Rates
Service Line
| Billing Driver
| Service Line Rate
|
Franchise Marketing |
Percent of Sales Price |
10 percent to first million
8 percent to second million
6 percent
to third million
4 percent thereafter $50,000 minimum fee
|
Customer Service |
One-Time Fee |
Variable based on Dollar Value |
Valuations |
Labor Hours |
$149 per hour |
Closing Activities |
Labor Hours |
$124 per hour |
Financial Services |
Labor Hours |
$135 per hour |
Asset Sales
Loan Sales
Owned Real Estate Sales
Security Sales
Other
Asset Sales/Managed
|
Basis Points per Sale
Basis Points per Sale
Percent of Sales Price
Percent of Sales Price
|
58 Basis Points
504 Basis Points
50 Basis Points
118 Basis Points
|
Subsidiary Management |
Labor Hours |
$147 per hour |
Asset Management
Loans Managed
Owned Real Estate
Managed
Securities
Managed
Contract Oversight
|
Percent of Outstanding Balance
Flat fee per Property
Percent of Outstanding
Balance
Percent of Invoice to Receivership
|
6.25 percent
$1,000 per Property
1.75 percent
10.50 percent
|
Litigation/Investigations
Receivership Litigation
Investigations
DIR
Research
|
Labor Hours
Labor Hours
Labor Hours
|
$189 per hour
$136 per hour
$105 per hour
|
Receivership Claims
Asset Claims
Other Receivership Claims
|
Per Claim Processed
Per Claim Processed
|
$315 per claim
$2,815 per claim
|
Oversight Operations
Receivership Oversight
Employee Benefits
|
Labor Hours
Number of Participants
|
$138 per hour
$34 per participant
|
Source: FDIC 2003 Service Line Rates Memorandum dated March 13, 2003.
Figure 1 below depicts the FDIC抯 rate-setting process. Each service line is assigned a Service Line Team (SLT) and is managed by a Service Line Owner (SLO). The SLTs are responsible for developing service line rates for their respective service line.
Figure 1: Service Line Rate-Setting Process Flowchart
[D]
Source: FDIC Budget and Business Planning Procedures.
SLOs are in DRR with the exception of the Litigation SLO who is in the
Legal Division. The SLO is responsible for coordinating and managing the activities
of the service line including proposing service line workload assumptions,
budgets, and service line rates to the DRR Director. The DRR Director approves
the proposed service line rates and submits them to the FDIC Chief Financial
Officer for approval. After receiving the Chief Financial Officer抯 approval,
the service line rates are programmed into the SCBS for use during the calendar
year.
The Division of Finance (DOF) uses the Service Costing System to capture
and report budgeted and actual expense data for the FDIC. DOF makes service
line workload and expense information from this system available to the SLTs
on a monthly basis. To support FDIC quarterly variance reporting requirements,
the SLTs provide a summary of the quarterly and year-to-date variance activity
for their respective service lines to the affected FDIC division directors.
The SLTs must also evaluate variances between budgeted and actual workload
and between forecasted and actual receivership billings. Each month, DOF uses
the service line rates to calculate receivership bills. The service line rates
are multiplied by the related service line workload driver. For example, a
monthly charge for asset claims activity would be calculated by multiplying
the service line rate of $315 by 100 asset claims processed on behalf of that
receivership, resulting in a total bill of $31,500.
In preparation for establishing 2003 service line rates, the FDIC contracted
with the American Productivity and Quality Center (APQC) of Houston, Texas.
APQC conducted an assessment of FDIC service lines and benchmarks, taking into
consideration known industry standards and practices. APQC established market-based
benchmark rates for each service line based on surveys of, or interviews with,
private-sector companies or through a process known as Activity Based Costing.
(Note: Activity Based Costing is a cost accounting process that measures and
then 損rices out� all the required resources used for activities that support
the production and delivery of products and services to the FDIC internal and
external customers related to a specific service line.) Activity Based Costing
was used for those service lines for which adequate market-based benchmarks
could not be established. APQC used Activity Based Costing to measure and then
price out all the required resources used for activities that support the production
and delivery of the service line products and services. One of the goals of
the APQC effort was to assist in identifying justifiable and supportable benchmark
rates for billing FDIC receiverships.
The FDIC also independently calculated service line rates based on budgeted
cost. Specifically, DRR SLTs calculated budgeted rates for each service line
by (1)
taking the total budgeted amount for the respective service line, (2) subtracting
costs that were billed directly to the receiverships, and (3) dividing that
amount by the projected unit workload for the service line. DRR SLOs were then
presented with the budgeted rates and the APQC-identified benchmark rates for
review and comment. Based on input from the FDIC Legal Division, which advised
DRR that it should not project a profit on any service line, DRR decided that
the lower of the two rates would be used to calculate receivership bills for
2003.
The SLOs submitted their respective Service Line Rate Case memorandums to
the DRR Director for review and signature. Each rate case provided a description
of the service line, a discussion of the budgeted rate in comparison to the
benchmark rate, and a rationale for the rate proposed. Also, if the SLO抯 submission
proposed using the benchmark rate, the rate case explained that the difference
between the projected recovery based on using the benchmark rate and the greater
projected recovery based on using the budgeted rate was attributable, in part,
to costs related to program maintenance activities. (Note: Program maintenance
relates to service line activities that, although essential to the effective
overall operation of the Receivership Management Program, are not event-driven
and are not as directly related to optimizing specific net cash flow recoveries
for the receiverships. Examples of these activities are statutorily mandated
services such as responding to Freedom of Information Act requests, General
Accounting Office and OIG audits, requests for information from the Congress
and other government agencies, updating policies and procedures, and activities
related to keeping the Receivership Management Program prepared to handle future
workload.) Such program maintenance activities are deemed nonrecoverable from
receiverships according to the FDIC抯 Cost Recovery Principles (Note: The
FDIC抯 Cost Recovery Principles were presented by the Allocation and Recovery
Task Force to the FDIC Operating Committee in March 1998. These principles
identify certain expenses as not being chargeable to receiverships.) (see Appendix
II). Finally, the DRR Director submitted the rate cases to the FDIC Chief Financial
Officer for approval, and the approved rates for each service line were programmed
into the SCBS.
RESULTS OF AUDIT
The FDIC抯 process for developing service line rates for the SCBS has improved.
During 2003, DRR refined service lines, improved service line benchmarks, and
worked with DOF to improve the format of service line reports for SLOs. DRR is
also working to improve procedures related to budget and business planning and
the service costing rate-setting process. However, the 2003 service line rate
methodology did not fully consider the impact that selecting a service line rate
would have on receivership billings and cost recovery. Such a consideration would
enhance the FDIC抯 ability to document that established rates were fair and reasonable.
Specifically,
� DRR抯 methodology for establishing service line rates did not include an
analysis of the variance in recovery depending on use of the benchmark rate
or the budgeted
cost rate. Consequently, the rate cases for 11 service lines did not justify
the reason for service line cost recoveries that ranged from 5 to 95 percent
of the service line budget when the benchmark rate was used. Further, service
line rate cases did not adequately consider the effect of program maintenance
costs on budgeted expenses. Therefore, nine budgeted rates used during 2003
included costs that the FDIC has deemed nonrecoverable from receiverships.
Finally, the
2003 service line rate methodology was to ensure that no service line rate
resulted in projected revenue in excess of the service line budget. However,
excess revenue
is projected in one service line, and the FDIC General Counsel has not formally
opined on the issue of projecting such excess revenue (see Finding A: Service
Line Rate Methodology).
� The Service Costing System has not provided SLOs with adequate cost model
reports of actual expenses incurred by service line. Therefore, SLOs do not
have all the necessary tools to effectively manage and analyze costs related
to their
respective service lines, and the SLOs are not able to adequately monitor receivership
billings. Monitoring receivership billings is warranted given that receivership
billings as of September 30, 2003, totaled $59,643,670 in comparison to actual
costs of $153,919,414 for the Receivership Management Program (see Finding
B: Other Service Line Rate-Setting Matters).
FINDINGS AND RECOMMENDATIONS
FINDING A: SERVICE LINE RATE METHODOLOGY
DRR抯 methodology for establishing 2003 service line rates did not fully consider
the impact that selecting a service line rate would have on receivership billings
and cost recovery. Specifically, DRR抯 methodology for establishing
21 service line rates did not require an analysis of: (1) the difference
in recovery depending
on use of the benchmark rate or the budgeted cost rate for 11 rate
cases, (2) the effect of program maintenance costs for 9 rate cases,
and (3) the potential
for recovering greater than the budgeted cost for 1 rate case. Accordingly,
the
FDIC could improve the methods by which rates are determined to bill
receiverships for administrative expenses that otherwise are paid
by the insurance funds.
Benchmark and Budgeted Rates
The FDIC used two approaches for establishing its calendar year 2003 service
line rates in an attempt to ensure that it set rates that were
fair and reasonable. In one approach, the FDIC contracted with the APQC to
provide
expertise in
developing benchmark service line rates that were supported by
industry standards. Specifically,
from February 2002 to March 2003, the APQC analyzed the FDIC抯
existing service lines, worked with FDIC SLTs to identify rates
and benchmarks that could be
validated with industry standards, conducted nationwide market
research to develop benchmark
rates, and conducted Activity Based Costing to measure and then
price out service lines where market-based rates were not identifiable.
The APQC ensured that
the SLOs agreed that the benchmark rates were based on information
that fairly represented
the service line.
The FDIC also had its SLTs calculate the budgeted rates for each service
line by using the total budget for each service line less directly
billed expenses,
divided by the projected workload for that service line. The
service line budget and projected workload were based on information projecting
failures
and near
failures of financial institutions provided by the FDIC抯
Division of Insurance and Research in consultation with DRR
management.
DRR and DOF staff involved in the service line rate-setting process selected
the lower of the two rates based on input from FDIC Legal Division
counsel, which advised that no service line should project a profit by charging
a benchmark
rate that would recover more revenue than the budgeted service
line cost. As
shown in table 2 below, using the benchmark rate for 11 service
lines resulted in the projected recovery of 5 to 95 percent of the related
budgeted
costs.
However, the rate cases do not provide specific justification for the
lower recovery resulting
from use of the lower benchmark rate.
Table 2: Budgeted and Benchmark Recovery by Service Line
Service Line
| Projected 2003 Recovery Using Budgeted Rate
| Projected 2003 Recovery Using Benchmark Rate
| Basis of Rate Used for 2003 Billings
| Amount Not Recovered Using Benchmark Rate
| Percentage Not Recovered
|
Franchise Marketing |
$ 12,812,461 |
$ 10,262,350 |
Benchmark Rate |
$ 2,550,111 |
20 percent |
Customer Service |
$ 8,273,424 |
$ 3,800,000 |
Benchmark Rate |
$ 4,473,424 |
54 percent |
Valuations |
$ 13,195,008 |
$ 11,843,712 |
Benchmark Rate |
$ 1,351,296 |
10 percent |
Closing Activities |
$ 8,179,509 |
$ 7,742,436 |
Benchmark Rate |
$ 437,073 |
5 percent |
Financial Services |
$ 4,329,045 |
$ 4,906,251 |
Budgeted Rate |
$ 0 |
- |
Asset Sales
Loans
Owned Real Estate Securities
Other Assets |
$ 11,740,538 871,347 2,013,368 3,122,620 |
$ 36,031,307 1,037,318 1,006,684 49,750,223 |
Budgeted Rate Budgeted Rate Benchmark Rate Budgeted
Rate |
$ 0
0
1,006,684
0 |
-
-
50 percent
- |
Subsidiary Management |
$ 3,553,725 |
$ 3,650,425 |
Budgeted Rate |
$ 0 |
100 percent |
Asset Management
Loans
Owned Real Estate Securities
Contract Oversight |
$ 24,741,790 5,361,090 3,542,460 4,182,126 |
$ 8,379,000 5,772,000 182,280
205,752 |
Benchmark Rate Benchmark Rate Benchmark Rate Benchmark
Rate |
$16,362,790 (410,910)a 3,360,180 3,976,374 |
66 percent
-
95 percent
95 percent |
Litigation/Investigations Receivership Litigation Investigations
DIR
Research |
$ 31,870,916 8,425,064 117,915 |
$ 38,907,352 9,602,095 117,915b |
Budgeted Rate Budgeted Rate Budgeted Rate |
$ 0
0
0 |
-
-
- |
Receivership Claims
Asset Claims
Other Receivership |
$ 5,076,444 5,371,621 |
$ 1,049,265 4,287,245 |
Benchmark Rate Benchmark Rate |
$ 4,027,179 1,084,376 |
79 percent
20 percent |
Oversight Operations Receivership Oversight Employee Benefits |
$ 3,977,850 563,760 |
$ 4,352,575 532,440 |
Budgeted Rate Benchmark Rate |
$ 0
31,320 |
-
6 percent |
Total |
$161,322,081 |
$203,418,625 |
|
$38,249,897 |
24 percent |
Source: Approved 2003 Service Line Rates Memorandum dated March
13,
2003.
a. The Owned Real Estate Managed service line rate used the benchmark
rate even though the benchmark rate was higher than the budgeted rate,
as discussed in
Finding A.
b. A benchmark rate was not determined for Research
due to the relatively small dollar value. For comparative purposes, the budgeted
rate
was
used.
The FDIC抯 2003 service line rate methodology ensured that the FDIC would
not fully recover budgeted administrative expenses for those service lines
for which the benchmark rate was lower than the budgeted rate. As a result,
the FDIC
projected
that it would recover $38,249,897 less than the estimated budgeted
cost for all the receivership service lines.
We fully acknowledge that there is nothing inherently wrong with the
FDIC recovering
$38 million less from receiverships than the estimated
budgeted costs for all service lines. If such a difference is due to, for example,
program
maintenance cost, excess capacity, or the FDIC抯 own inefficiencies,
the difference would be appropriate and fair to the receiverships
and the insurance funds. However,
when establishing a service line rate based on a benchmark rate
that is significantly lower than the budgeted rate, the FDIC should
make sure
the rate is fair and
reasonable for both the receiverships and the insurance funds.
Further, analysis of the difference between projected budgeted
costs and projected
recovery would
provide the FDIC greater support in justifying the rate-setting
methodology in
the event of litigation involving charges to the receiverships
for administrative expenses.
Program Maintenance Costs
DRR抯 methodology for establishing service line rates did not provide adequate
analysis of program maintenance costs. Consequently, 9 of the 21 service
line rates are based on budgeted amounts that included costs for work that should
not be billed to receiverships. Inherent in the work of each service
line are
costs deemed nonrecoverable under FDIC Cost Recovery Principles (see
Appendix II). The FDIC Operating Committee has determined that costs related
to program
maintenance are not considered 搉ecessary and appropriate� expenses
and, therefore, should not be billed to the receiverships.
Program maintenance activities include
statutorily mandated services such as responses to Freedom
of Information Act requests and General Accounting Office and
OIG audits; requests
for information
from the Congress and other government agencies; updates of
policies and procedures; and efforts to keep the Receivership
Management Program
prepared to handle
future workload.
For 2002 receivership billings, the FDIC calculated service line budgeted
rates by using the total budgeted cost for each service line
less expenses billed
directly to receiverships. The adjusted budgeted cost was
then reduced by a standard 30
percent in an attempt to account for program maintenance
costs. DRR SLOs stated that the 30-percent reduction used in 2002 was not specifically
calculated
for each service line. Rather, DRR management estimated that
30 percent
was a reasonable
estimate of the amount of work within the Receivership Management
Program that was nonrecoverable under the FDIC抯
Cost Recovery Principles. However, DRR and DOF concluded
that the 30-percent reduction used in the 2002 rate-setting process
was
not an adequate method
for including program maintenance expenses in the rate case
calculations because it was not based on supportable analysis of
the actual program
maintenance
costs
for the specific service lines.
For 2003, DRR did not apply a standard program maintenance reduction
in calculating the budgeted cost for each service line. DRR staff
explained that
the FDIC does
not currently have a mechanism in place to adequately capture
program maintenance expenses. The rate cases for service lines for
which the benchmark
rate
had been selected explained that the difference between the projected
budgeted costs and
the projected recovery using the benchmark rate was due in
part to activities defined as program maintenance. As previously shown in
table 2, the projected
recovery ranged from 5 to 95 percent, depending on the service
line. However, rate cases for the nine service lines for which the
budgeted rate
was selected
did not discuss adjustments for program maintenance. Therefore,
the budgeted rates used in 2003 included program maintenance costs
that should not
be billed to receiverships. Further, the rate cases showing that
the
benchmark rate
had
been selected did not provide a specific analysis to indicate
how much of the difference related to program maintenance.
A comparison of two rate cases illustrates the inconsistency
in the consideration of program maintenance costs among the service
lines. For the Asset Claims
service line, the FDIC selected the benchmark rate of $315 per claim
over the budgeted
rate of $1,524, resulting in a projected nonrecovery of $4,027,179
or 79 percent of the service line budget. The rate case explained that
the difference
between
the benchmark rate and the budgeted cost related, in part, to
program maintenance
activities. For the Receivership Oversight service line, the
benchmark rate of $151 was higher than the budgeted rate of $138; therefore,
the budgeted
rate
was approved for this service line, resulting in a projected
100-percent recovery of the service line budget. However, this case
did not discuss the
impact of
program maintenance costs on the service line.
The DRR decision to use the lower of the benchmark or budgeted rates was
intended to establish rates that were supported either by industry standards
or FDIC-budgeted costs. We recognize that DRR implemented such a
methodology
due
to the advice
of Legal Division counsel. However, in using the benchmark
rates, we believe DRR should conduct an analysis during the rate-setting
process
to identify
the reason for the selection of a rate that does not recover the
service line budget.
Using the benchmark rate without justifying the effect on the
recovery of budgeted costs may not result in fair and reasonable
billings for all service
lines. A
better approach would be for the SLTs to use the benchmark
rate as a basis
to support a proposed rate that is based on an analysis of the difference
between the benchmark rate and budgeted cost recovery. Further, when
budgeted
costs are
not adjusted for program maintenance expenses, service line
budgeted rates may be based on costs that should not be recovered from receiverships.
Excess Revenue
The FDIC established one service line rate projected to generate billings
in excess of the service line budget. The rate used for the Owned
Real Estate Managed service line conflicted with the Legal Division抯 suggestion
that projected revenue should not exceed the service line budgeted costs. For
this rate case,
the FDIC selected the benchmark rate even though it projected revenue
in excess of the budgeted amount by $410,921. Specifically, the budgeted rate,
based
on the projected workload, was $929 per property. However, the benchmark
rate of
$1,000 per property was used for 2003. The rate case did not explain
the reason for selection of the benchmark rate. DRR SLT members explained that
although
they did not technically follow the Legal Division抯 advice,
they selected the benchmark rate because it was considered
to be a defensible rate
based on industry
standards. Further, the projected recovery in excess of budgeted
cost was not considered significant. Although the excess
may not be a significant
amount,
service line rates should be calculated in a consistent manner
to ensure fairness in the overall rate-setting process.
The FDIC抯 decision that the lower of the benchmark rate or budgeted
rate should be used in selecting 2003 service line rates was based
on the Legal Division抯
input that revenue should not be projected in excess of budgeted costs
on any service line. However, DRR did not obtain the General Counsel抯
concurrence on the 2003 rate methodology, and the General
Counsel has not formally opined
as
to whether using a service line rate that projects excess
revenue would hamper the FDIC in the event of litigation
related to administrative
costs billed
to the receiverships. Therefore, the FDIC does not yet have
a formal opinion regarding
a significant aspect of the rate-setting methodology.
Recommendations
We recommend that the Director, DRR, in establishing 2004 service line rates:
(1) Direct SLTs to calculate the service line rate using benchmark rates,
budgeted rates, and other available information that provides a fair
and reasonable cost recovery and to provide an analysis in the rate case
of the
difference
between
the projected recovery and the service line budget.
(2) Direct SLTs, in calculating service line rates, to conduct
the analysis necessary to identify an appropriate reduction in budgeted
service line costs
for program
maintenance activities.
(3) Request an opinion from the General Counsel regarding
the appropriateness of projecting excess revenue in calculating service line
rates, and
once that opinion is received, issue guidance that instructs
SLTs on how to apply the
General Counsel抯 opinion in the
rate-setting methodology.
FINDING B: OTHER SERVICE LINE RATE-SETTING MATTERS
Certain rate-setting matters in addition to those involving the FDIC抯 service
line rate methodology warrant management抯 attention.
Specifically, SLOs have not been able to effectively
monitor their respective service
lines using the
Service Costing System to conduct variance analyses
of budgeted and actual workload and forecasted and
actual billing amounts. Ineffective
monitoring
occurred because
cost model data in the Service Costing System needed
for the SLOs to perform variance analyses are inaccurate
and in a format that does
not facilitate use.
Additionally, the SLTs have not received training
in the use of the Service Costing System Cost Module.
Consequently, SLOs have not proposed
service line
rate adjustments
when cost variances have occurred due to lower than expected
workload.
Variance Analysis and Service Costing System Reports
SLOs have not conducted variance analyses of their respective service lines
as prescribed by the FDIC抯 Budget and Business Planning Procedures
to determine variances between budgeted and actual workload and
forecasted
and actual billing
amounts. The expenses billed to receiverships
are based on the actual workload within each service line multiplied
by the approved service
line rate. However,
costs to the FDIC for work of the respective
service lines relate primarily to salaries and compensation, which
are generally fixed costs. Therefore,
variances between receivership billings and actual
costs will increase to the extent
that
actual workload differs from projected workload.
For example, the rate set for the Asset Claims service line is
based on a projected 2003
workload of
3,331
claims multiplied by the approved rate of $315
per claim for a projected recovery of $1,049,265. However, as of
September 30, 2003, only 652
asset claims had
been processed, and only $205,380 ($315 times
652) had been billed on this service
line in comparison to the total actual cost of
$2,329,067 reported in the Service Costing System.
To ensure that variances between actual costs and receivership billings
can be monitored, the FDIC抯
Budget and Business Planning Procedures
provide that service line workload and expense
information from the Service Costing System
should be available
monthly to SLTs. However, DOF did not input this
information into the Service Costing
System Cost Model until May 2003 because
of ongoing enhancements to the Service
Costing System. Further, the actual expense
data that were input as of May 2003 were not
accurate. Since May 2003, DOF and DRR have
been working together
to
improve the Service Costing System reporting
format and to ensure accuracy of the data. However,
as of September 30, 2003, work to resolve
data and report
format issues was still in progress. Consequently,
SLTs have been unable to perform
effective workload and expense variance
analyses of their respective service lines. As
of September 30, 2003, receivership billings
totaled
$59,643,670 in comparison to actual costs of
$153,919,414 as recorded in the Service Costing
System for the Receivership Management Program.
Service Costing System Training
A lack of SLO training in use of the Service Costing System also may have
negatively affected monitoring of the service lines. Only
5 of the 11 SLOs indicated that
they had attempted to access the Service Costing
System to manage their respective service lines. The primary reason SLOs
gave for not
accessing the
Service Costing
System was that they had not attended training
in use of the system and/or service line reports. Training in use of the
Service
Costing System was provided
by DOF
prior to 2003; however, most of the current Service
Line Owners had not attended those training sessions. The SLOs who had accessed
the Service Costing System
found the data in service line reports to be either inaccurate
or in a
format that was not useful for the analysis necessary to manage their
respective service
lines. The SLOs indicated that Service Costing System training
would facilitate their ability to monitor their respective service
lines once the
formatting
and data accuracy deficiencies are corrected.
Recommendations
We recommend that the Director, DRR:
(4) Ensure that service line cost data necessary for SLOs to monitor
service lines are available and that adjustments can
be made to receivership billing records in a timely manner.
(5) Provide training to SLOs, in coordination
with DOF, on use of the Service Costing System Cost Model and/or other
service line
data made available
upon
completion of ongoing efforts to resolve data
and report formatting issues.
CORPORATION COMMENTS AND OIG EVALUATION
On January 12, 2004, the DRR and DOF Directors provided a joint written
response to the draft report. The response is presented
in Appendix III to this report. In their written response, DRR and DOF
management concurred
with each
of the
recommendations. These recommendations are
considered resolved but will remain undispositioned and open until we have
determined
that
agreed-to corrective
actions
have been completed and are effective. The
responses to the recommendations are summarized below along with our evaluation
of
the responses.
Recommendation 1: Direct SLTs to calculate the service line rate
using benchmark rates, budgeted rates, and other available
information that provides a fair and reasonable cost recovery and to provide
an analysis
in the rate
case
of the difference
between projected recovery and the service
line budget.
DRR agrees with this recommendation. DRR stated that it considered
all available information, including benchmarks
and budgeted rates, for setting
2003 billing
rates. In its rate-setting analysis for 2004,
DRR will document more clearly in its cases an analysis of the difference
between projected
recovery
and
the service line budget for its various rate options.
DRR expects to complete this
process by March 31, 2004.
This recommendation is resolved but will
remain undispositioned and open until we have determined that agreed-to corrective
action
has been completed
and is
effective.
Recommendation 2: Direct SLTs, in calculating service line rates, to conduct
the analysis necessary to identify an appropriate
reduction in budgeted service line costs for program maintenance activities.
DRR agrees with the need to identify an appropriate reduction in budgeted
service line costs for program maintenance activities.
However, the
joint response
states that it is not currently possible to accurately
estimate an appropriate deduction from service line budgets for program maintenance
activities. According
to FDIC management, as the Corporation moves
into monitoring and
capturing costs at the activity level, it will
then be able to more accurately estimate
a proper deduction for program maintenance costs.
This will be possible with the implementation of New Financial Environment
(NFE) cost management.
In
the interim, pending NFE cost management implementation,
by December 31, 2004, DRR and DOF will explore options for estimating the
costs
of these activities
and determining reasonable adjustments for such costs.
We accept management抯 position and proposed timing for DRR and DOF
to explore options for estimating program
maintenance costs. This recommendation is resolved
but will remain undispositioned and
open until we have determined that agreed-to corrective action has been completed
and is effective.
Recommendation 3: Request an opinion from the General Counsel regarding
the appropriateness of projecting excess revenue
in calculating service line rates,
and once that
opinion is received, issue guidance that instructs
SLTs on how to apply the General Counsel抯
opinion in the rate-setting methodology.
In conjunction with its 2004 rate-setting analysis, DRR will
consult with the Legal Division on its proposed
rates and obtain an opinion regarding
the
appropriateness
of projecting excess revenue in setting a
billing rate. DRR expects to complete this process by March 31, 2004.
This recommendation is resolved but will
remain undispositioned and open until we have determined that agreed-to corrective
action
has been completed
and is
effective.
Recommendation 4: Ensure that service line
cost data necessary for SLOs to monitor service lines are available and that
adjustments
can be made to
receivership billing records in a timely manner.
DRR is currently working on establishing
a process where cost data will be supplied
to SLOs on a monthly basis. This will enable
SLOs to monitor their service lines more closely and recommend billing adjustments
in a timely manner. DRR
expects
to complete this process by June 30, 2004.
This recommendation is resolved but will
remain undispositioned
and open until we have determined that agreed-to
corrective action has been completed.
Recommendation 5: Provide training to SLOs,
in coordination with DOF, on use
of the Service Costing System cost model
and/or other service line data made available upon completion of ongoing
efforts to resolve
data and report
formatting
issues.
DRR is currently working on establishing
a process where billing and cost data will be provided to SLOs on a monthly
basis. This information
will
come
from
a variety of data sources and will provide
SLOs with the ability to monitor closely the performance of their service lines. As soon
as the reports are available, DRR, in conjunction with DOF, will conduct
training to explain the
reports
and
what is expected of SLOs in monitoring their service lines. DRR
expects to complete this process by June 30, 2004.
This recommendation is resolved but will remain undispositioned
and open until we have determined that agreed-to
corrective action has been completed
and is
effective.
Appendix IV contains a summary chart of management抯 responses
to the recommendations in this report.
APPENDIX I:
OBJECTIVE, SCOPE, AND METHODOLOGY
The objective of the audit was to assess the adequacy of the FDIC抯 process
for developing 2003 Service Line Rates for the Service Costing System.
Specifically, we determined whether 2003
service line rates were fair and reasonable, accurately
calculated, and adequately supported.
Our audit scope included service line rates established for calendar year 2003.
We performed our work from May
through
November
2003 in accordance with generally
accepted government auditing standards. To accomplish our objectives, we reviewed
the following:
- 2003 Service Line Rate Cases
- FDIC Budget and Business Planning Procedures
- Service Costing System Cost
Model System Users Manual
- FDIC Service Billing and Payment Procedures Users
Manual
- Service Costing 2002 Rates for the Receivership Management Program
- Statement of Work for the APQC contract related to developing 2003 Service
Line Benchmark Rates
- APQC Reports
issued from March 2002 to March 2003
We interviewed SLOs in DRR and the Legal
Division, Legal Division Counsel, DOF and DRR managers and staff members
involved in the service line rate-setting process, and the APQC Project
Manager who worked on the 2003 rate-setting
process for the FDIC. We reviewed, analyzed,
and recalculated 2003 Service Line Rate
Cases and supporting documentation,
verified supporting documentation related to indirect cost allocations,
traced budget templates to approved service
line
rate cases, and compared data used
in calculating service line rates to actual expenses recorded in the Service
Costing System.
Performance Management
To determine whether DRR had any performance measures that we should consider
in this audit, we reviewed DRR抯 2003 Strategic Plan and the FDIC抯
2002 Annual Performance Plan. DRR抯 2003 Strategic Plan does not include
any measures related to the service line rate-setting process. Although
the 2002 Annual Performance
Plan lists goals for the Receivership Management Program, none are
directly related to the service line rate-setting process. However,
the Annual Performance
Plan
includes the following as a major initiative: 揇uring 2003, receivership
management personnel will examine those areas in which FDIC costs significantly
exceed
benchmarks and, where necessary, implement appropriate cost-reduction
measures to address
those cost differentials.� The Budget and Business Planning procedures
drafted during 2003 include procedures to examine areas in which costs
significantly
exceed benchmarks and to implement cost-reduction measures. The procedures
had not been completed at the time of this audit.
Reliance on Computer-Generated Data
We relied on computer-processed data that we determined to be sufficiently
reliable for the purposes of this audit.
The data were processed by commercial-off-the shelf software, including Microsoft
Excel, Microsoft Access Database,
Pillar, and Metify. Although
we did not perform specific tests to determine the reliability
of computer-processed data,
we recomputed data related to budget rate calculations that had been processed
using the Metify software and
noted no exceptions.
Internal Management
Controls
The Director, DOF, and the Director, DRR, are responsible for setting service
line rates. During our review,
a directive was in draft to establish procedures for planning and managing
service line expenses, including
the development
and implementation of service
line rates. We considered the procedures in our audit
work and tested compliance
with them to the extent possible. Certain controls related to conducting variance analyses had not been implemented
due to Service
Costing System enhancements that were still in process. These enhancements
need to be completed for internal management controls to be effective.
Summary of Prior Audit Coverage
On March 31, 2003, the OIG issued a report entitled, The Division of Resolutions
and Receiverships� Controls Over Data Input to the Service Costing
System (Audit Report No. 03-027). The report identified data quality
issues related to the
accuracy and completeness of data used to update the Service Costing
System and the need for additional controls to adequately validate
and verify data
in systems
that update the Service Costing System. As of September 30, 2003, DRR
and DOF had completed corrective action on two of the report抯 seven
recommendations and were taking corrective actions to resolve the remaining
recommendations.
Pertinent Laws and Regulations
Federal Deposit Insurance
Act
12 U.S.C. � 1821(d)(11)(A) Depositor Preference
Subject to section 1815(e)(2)(C) of this title, amounts realized from the
liquidation or other resolution of any insured depository institution by any
receiver
appointed for such institution shall
be distributed to pay claims (other than secured
claims to the extent of any
such security) in the following order of priority: (i) Administrative
expenses of the receiver.
FDIC Rules and Regulations
12 C.F.R. � 360.3 Priorities
Unsecured claims against an association or the receiver that are proved to
the satisfaction of the receiver shall have priority beginning with administrative
expenses of the receiver,
including the costs, expenses, and debts
of the receiver. Under the provisions
of section 11(d)(11) of the Act (12 U.S.C. �21(d)(11),
the provisions of this �0.3 do not apply to any receivership established
and liquidation or other resolution occurring after August 10, 1993.
12 C.F.R. � 360.4 Administrative Expenses
The priority for 揳dministrative expenses of the receiver,� as that term is used
in section 11(d)(11) of the Federal Deposit Insurance Act (12 U.S.C. �21(d)(11)),
shall include those necessary expenses incurred by the receiver in
liquidating or otherwise resolving the affairs of a failed insured
depository institution.
Such expenses shall include pre-failure and post-failure obligations
that the receiver determines are necessary and appropriate to facilitate
the smooth
and orderly liquidation or other resolution of the institution.
APPENDIX II
FDIC RECOVERY PRINCIPLES
As applied
to recoveries from receiverships:
- Applied consistently to all costs, costs are non-recoverable from
receiverships if related to Corporate
responsibilities and separate from the expenses which are 搮 necessary and appropriate to facilitate the smooth and
orderly liquidation or other resolution of the institution.�/li>
- Costs are not recoverable from receiverships if related to maintaining
the readiness of the
Corporation to discharge its insurance function.
- Consistent with prudent application,
costs are not recoverable
from receiverships if they
are associated with managing imbalances (for example, staffing imbalances).
- Costs are not recoverable if they are related to public policy functions
which provide
no tangible benefits to individual receiverships.
- Costs are not recoverable
from
receiverships if they are systems
or other capital-oriented
expenses whose benefits will be realized in future periods,
subject to the
following conditions:
a) the costs are below designated capitalization and
depreciation/amortization thresholds with
the future periods benefited extending significantly
beyond the estimated
remaining lives of the receiverships in existence at the time the
costs
are incurred
such that there is substantively no cause-and-effect linkage with particular
receiverships;
or
b) the costs
are above designated capitalization and depreciation/amortization thresholds;
yet, nonetheless fail to satisfy the requirement that there
be a cause-and-effect
basis existing at the receivership level (i.e., these costs will be capitalized;
however, the related depreciation or rental charge will
not be recovered
from receiverships without a cause-and-effect linkage).
APPENDIX
III
CORPORATION COMMENTS
Federal Deposit Insurance
Corporation Washington, DC
20429
Office of the Director Division of Resolutions and
Receiverships
January 12, 2004
TO: Stephen M. Beard, Deputy Assistant Inspector General for Audits, Office of
Inspector General (OIG)
FROM: Mitchell L. Glassman [Electronically produced version;
original signed by Mitchell L. Glassman], Director, Division of
Resolutions and Receiverships
and
Fred Selby, [Electronically produced version; original signed by Fred Selby], Director, Division of Finance
SUBJECT: Response to Draft Report Entitled: FDIC's 2003 Service Line Rates
(Assignment Number 2003-022)
Following is the response to recommendations made in the OIG抯 report, FDIC抯
2003 Service
Line Rates.
Recommendations:
(1) Direct Service Line Teams (SLTs) to calculate the service line rate
using benchmark
rates,
budgeted rates, and other available information that provides a fair
and reasonable cost recovery and to provide an analysis in the
rate
case
of the difference between projected recovery and the service line budget.
DRR agrees
with
this recommendation. DRR did consider all available information including
benchmarks and budgeted rates for setting its 2003 billing
rates. In its
rate setting
analysis for 2004, DRR will document more clearly in its
rate
cases
an analysis of the difference between projected recovery and the service
line budget for
its various rate options. DRR expects to complete
this process
by
3/31/04.
(2) Direct SLTs, in calculating service line rates, to conduct the
analysis necessary
to identify an appropriate reduction in budgeted service line costs
for program
maintenance
activities. DRR agrees with the need to identify an appropriate reduction
in
budgeted
service line
costs for program maintenance activities. However, it is not currently possible
to
accurately
estimate an appropriate deduction from service
line budgets for
program
maintenance activities.
As the FDIC moves
into monitoring
and capturing costs at the activity
level,
it will then be able to more accurately
estimate
a proper
deduction for
program maintenance
costs. This will
be
possible with the implementation
of NFE cost management.
In the interim,
pending NFE cost
management
implementation,
by 12/31/04, DRR and DOF will explore
options
for
estimating
the
costs of these
activities and
determining reasonable
adjustments
for such costs.
(3)
Request an opinion
from the General
Counsel regarding
the appropriateness of projecting
excess revenue
in calculating service line rates,
and
once
that opinion
is received,
issue guidance
that instructs
SLTs on how to apply the
General
Counsel抯
opinion
in the rate setting
methodology.
In conjunction
with its 2004
rate setting
analysis, DRR
will consult
with the
Legal
Division on its
proposed
rates
and obtain an
opinion regarding
the appropriateness
of projecting
excess
revenue
in setting a
billing rate.
DRR expects
to
complete
this
process by 3/31/04.
(4)
Ensure
that service
line billing
and
cost
data necessary
for
Service
Line Owners (SLOs)
to monitor
service
lines is available
and that
adjustments
can
be
made to receivership
billing
records in a
timely manner.
DRR
is currently
working
on establishing
a process
where billing
and
cost
data will be
supplied to
SLOs
on a monthly
basis. This will
enable
SLOs to
monitor
their
service lines
more closely
and recommend
billing adjustments
in
a timely
manner. DRR expects
to
complete
this process
by 6/30/04.
(5) Provide training to SLOs, in coordination with DOF, on use of
the Service
Costing System
and/or other
service
line data made
available
upon
completion of
ongoing efforts
to resolve
data
and report
formatting issues.
DRR
is currently
working on establishing
a process
where
billing
and cost data
will be provided
to SLOs
on a monthly
basis.
This information
will
come from a variety
of
data
sources and
will
provide SLOs
with the ability
to monitor
closely
the performance
of their
service lines.
As soon
as the
reports
are available,
DRR
in conjunction
with
DOF, will conduct
training
to explain
the reports and
what
is expected
of SLOs in monitoring
their
service lines.
DRR expects
to
complete
this
process
by 6/30/04.
cc: Michael
MacDermott
Thomas Peddicord
James
Seegers
Peter Hull
Giovanni
Recchia
Carlos Fiol
Michael Duncan
APPENDIX IV
MANAGEMENT RESPONSES
TO RECOMMENDATIONS
The following presents
the management
responses
that have been
made
on recommendations
in our
report and the
status of recommendations
as of
the date
of
report issuance.
The information
is based
on management抯
written
response to our
report (and
subsequent
communication
with
management representatives).
Please note the following definitions that relate to the management responses
to
the recommendations:
Resolved: (1) Management concurs with the recommendation and
the planned corrective
action
is consistent
with the recommendation.
(2) Management
does
not concur
with
the recommendation
but planned
alternative action
is
acceptable
to
the OIG. (3)
Management agrees
to the
OIG monetary
benefits
or a different
amount,
or no ($0) amount.
Monetary
benefits
are considered
resolved
as long as management
provides
an amount.
Dispositioned:
The agreed-upon
corrective action
must be implemented,
determined
to
be effective,
and the
actual amounts
of monetary
benefits
achieved through
implementation
identified.
The
OIG is
responsible for
determining
whether
the documentation
provided
by management
is adequate
to
disposition
the recommendation.
Once
the OIG dispositions
the recommendation,
it can
then
be closed.
Rec. Number |
Corrective Action: Taken or Planned/Status: |
Expected Completion Date |
Monetary Benefits: |
Resolved � Yes or No: |
Dispositioned � Yes or No |
Open or Closed: |
1 |
In its rate-setting analysis for 2004, DRR will document more clearly
in its rate cases an analysis of the difference between projected recovery
and the service line budget for its various rate options. |
March 31, 2004 |
N/A |
Yes |
No |
Open |
2 |
DRR and DOF will explore options for estimating budgeted service line
program maintenance costs and determining reasonable adjustments for such
costs |
December 31, 2004 |
N/A |
Ye |
No |
Open |
3 |
In conjunction with its 2004 rate-setting analysis, DRR will consult
with the Legal Division on its proposed rates and obtain an opinion regarding
the appropriateness of projecting excess revenue in
setting a billing rate |
March 31, 2004 |
N/A |
Yes |
No |
Open |
4 |
DRR is currently working to establish a process where billing and cost
data will be supplied to SLOs on a monthly basis.
This will enable SLOs to monitor their service lines more closely
and
recommend
billing
adjustments in a timely manner. |
June 30, 2004 |
N/A |
Yes |
No |
Open |
5 |
DRR is working on a process where billing and cost data will be provided
to SLOs on a monthly basis. When the reports are available, DRR, in conjunction
with DOF, will conduct training to explain the reports and what is expected
of SLOs in monitoring their service lines. |
June 30, 200 |
N/A |
Yes |
No |
Open |
|