Good morning Mr. Chairman and members of the Subcommittee.

I appear before you this morning to answer any questions you may have about the operation of the National Credit Union Administration (the "NCUA") and the

September 8, 1997 report issued by the Office of Personnel Management (hereinafter referred to as "OPM") on the hiring practices of the NCUA. Your letter of invitation asked each of the three Board Members to submit a written statement addressing three areas. My responses are set forth below.

The OPM Report of a Delegated Examining Oversight Review (the "Report") was delivered on September 8, 1997 to each NCUA Board Member. Ms. Carol Okin of the OPM advised us that the Report was also simultaneously referred to the Office of Special Counsel for their review and consideration.

The Report sets forth serious allegations regarding the hiring activities of the NCUA which, according to the Report, "involved prohibited personnel practices; violated merit system principles; and in general failed to comply with laws, rules, and regulations." The Report also reached the following conclusions: (i) the NCUA has used false duty locations which resulted in the improper hiring of sixteen individuals; (ii) records were falsified in order to accomplish the use of false duty stations; (iii) the Agency has improperly used the Outstanding Scholar Appointing Authority to hire a minimum of 49 persons since 1994; (iv) employment of these prohibited hiring practices violated the NCUA's delegated competitive examining agreement with OPM; and (v) these hiring activities precluded veterans and Interagency Career Transition Assistance Program for Displaced Employees (ICTAP) eligibles from fair and competitive employment opportunities.

In the Report, the OPM requires specific corrective action. The NCUA must and shall immediately take actions to complete the following corrective actions within the time frames set forth in the Report.

1) Review all selections identified by the OPM as false duty locations for actual duty stations or where the employees worked for the first 90 days or until they were reassigned.

2) Contact all those individuals identified in the Report who lost appointment opportunities to identify those interested in receiving employment consideration.

3) Review each certificate for actual duty locations for those cases involving false duty locations to ensure that all selections are made in accordance with the "rule of three" and veterans preference; make bona fide offers of employment to all candidates listed ahead of the NCUA employee hired as a result of the false duty locations; and separate current NCUA employees if necessary.

4) Correct all Outstanding Scholar appointments to the 570 series which are invalid. For those not involving a false duty location, the NCUA will announce the vacancy. The Outstanding Scholar appointee will receive no credit for the experience gained under the invalid appointment. Bona fide offers of employment must be made to all candidates listed ahead of the NCUA employee hired under the Outstanding Scholar appointment. Separate employees the under invalid Outstanding Scholar appointment, if necessary.

5) Verify and correct current pay for employees hired using false duty locations.

As mentioned previously, the Report was delivered to the Office of Special Counsel (OSC). The OSC has opened an investigation of the allegations set forth in the Report and an OSC investigator has initiated contact with our staff. We support and intend to fully cooperate with the OSC investigation and have issued a written statement directing all personnel implicated in the Report to assure that all personnel related records are retained, including any records that would otherwise be discarded or archived in the normal course of business. The additional investigation into our practices and procedures is welcome and obviously overdue. Had the OSC chosen not to investigate this matter, the Inspector General of the NCUA was (and still is) prepared to immediately move forward with such an investigation. Pending completion of the OSC investigation, the Inspector General will initiate an internal audit of the Office of Human Resources, previously scheduled to occur in 1998.

Based on a preliminary assessment of the OPM Report, both our Chief Financial Officer and the Director of Examination and Insurance agree that the Agency should expect a significant budgetary impact for 1997 and 1998. In fact, due to ongoing training for new hires, the loss of productivity of senior examiners as well as the forecasted attrition rate, the budget impact may be significant well past the year 2000. Both senior financial officers have raised safety and soundness concerns upon their review of initial information compiled. The ability of the Agency to complete the examination program in a timely manner must now be re-evaluated taking into account the mandated corrective actions as well as other significant budgetary items such as the Year 2000 project.

The corrective actions mandated by the OPM Report raise hiring and separation of employee issues. Our legal counsel is trying to determine the extent to which the Agency may be liable to current employees who were improperly hired and to persons who were not hired as a result of improper hiring practices.

The NCUA should expect to address negative employee morale as a result of past practices as well as corrective actions needed to be taken. Historically, the Agency's attrition rate has approached 10 percent in the examiner ranks. The 65 individuals (all examiners) potentially impacted by the corrective actions represent 12 percent of the examiner force. Attrition and corrective action, taken together, place a major strain on our examination program.

The NCUA has a rigorous training program in the first year for new examiners. Other than fairly simple examinations, it takes two full years of classroom and on-the-job training before an examiner reaches full productivity. The Agency also suffers a loss of productive examination program hours from the senior examiners who are mentoring and providing on-the-job training for new hires. A reduction of experienced staff with a simultaneous influx of new hires places additional strain on the current field staff who will be asked to put in additional travel and/or over-time hours in order to complete the examination program in all parts of the country.

Hiring new staff takes considerable staff time and resources. We have received assurances from the OPM that they have assigned personnel to work with NCUA staff who are cognizant of our needs. We look forward to working with whomever has been assigned at the OPM to oversee our efforts to take the immediate corrective action and to provide guidance for future hiring.

The NCUA Board met on September 25, 1997, and took the following actions:

1. The NCUA will seek third party professionals to assist the Agency in taking the corrective actions recommended by the OPM.

2. The Board created a Task Force, independent of any established chain of command, which will report directly to the Board with recommendations for Board policies to respond to the Report and to take the necessary corrective actions.

3. The Executive Director and the Director of Human Resources were placed on administrative leave with pay, pending the investigation of the matters set forth in the OPM Report.

4. The Board ordered all Regional Directors to withdraw from any further involvement in matters directly related to the OPM Report.

5. The Board announced the selection of Regional Director Daniel Murphy to serve as Acting Executive Director.

6. The Board agreed to designate an Acting Director of the Office of Human Resources from outside the Agency.

Additional internal review is needed of the practices and procedures which permitted such hiring practices to occur. As mentioned, the Inspector General has already committed resources to complete an internal audit as soon as the OSC investigation is completed. In addition, professionals hired from outside the NCUA will assist in the development of new procedures or changes to written policies as required to correct objectionable practices and accurately reflect the legal and administrative rules governing Federal hiring, including the merit system principles. Finally, NCUA will provide training to all managers and appointing officials to ensure that their actions comport with merit system principles and avoid any further prohibited personnel practices.

The NCUA Board fully understands and supports the merit system principles and is now fully engaged in making the decisions necessary to address future hiring needs, to correct the problems and to create an environment which guarantees fair and open competition for all future federal government employees.

The NCUA Board is responsible for upholding federal hiring guidelines and merit system principles and will hold accountable those individuals specifically assigned to carry out the personnel functions of this Agency.