Detailed Information on the
Share Insurance Fund Assessment

As one of its "Executive Director Measures," NCUA has committed to track the rate of losses incurred by the insurance fund as a percent of the assets of the failed credit union. This metric will help to measure the effectiveness of NCUA's role as a receiver for failed credit unions, and allow for benchmarking of NCUA's performance in this area.

NCUA has committed to track the time necessary to return insured deposits in the case of a credit union failure, and set benchmarks to ensure that service to credit union members continues to be conducted rapidly and effectively.

NCUA has requested revisions to the Federal Credit Union Act to allow greater flexibility in the level of risk-based capital that NCUA can require a credit union to hold. This will allow NCUA to adjust the amount of capital a credit union must hold according to its risk profile, and would help to introduce a method of risk-based "deductibles" for NCUSIF deposit insurance.

Measure: Maintain equity ratio above 1.25%

Explanation:

Measure: Percentage of adequately and well capitalized federally insured credit unions (FICUs) to all FICUs

Explanation:The leading indicator of safety and soundness for the credit union industry via capital adequacy

Measure: Percentage of FICU assets with a CAMEL rating of 1 or 2

Explanation:Strategic level indicator of safety and soundness for the credit union system

Measure: Percentage of FICU assets with low or moderate risk ratings in the four institutional risk areas

Explanation:Indicator of acceptable risk levels in the following areas: Reputation, Strategic, Transaction, Compliance -Target is based on the average of these four areas

Measure: Percentage of FICU assets with a CAMEL "Management" rating of 1 or 2

Explanation:Indicator of the credit union system's ability to manage risks

Measure: The percentage of FICU assets with a CAMEL "Liquidity/ALM" rating of 1 or 2 above 90%

Explanation:

Measure: The percentage of FICU assets with a CAMEL "Earnings" rating of 1 or 2 above 75%

Explanation:

Measure: The percentage of FICU assets with a CAMEL "Asset Quality" rating of 1 or 2 above 90%

Explanation:

Measure: Percentage of total NCUA operating expenses to total federally insured credit union assets

Explanation:Strategic level measure of overall agency effeciency

Is the program purpose clear?

Explanation: Congress established the National Credit Union Share Insurance Fund (insurance fund) under Title II of the Federal Credit Union Act to contribute to the stability of the national economy by ensuring the continued viability of the credit union system. Among other responsibilities, Title II directs the NCUA to insure member share deposit accounts at federally insured credit unions and to use the insurance fund to provide special assistance to troubled credit unions.

Evidence: Federal Credit Union Act (Act), Title II; Sections 201, 206, 208 - http://www.ncua.gov/RegulationsOpinionsLaws/fcu_act/fcu_act.pdf ; NCUA Mission Statement, NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf

Does the program address a specific and existing problem, interest, or need?

Explanation: The insurance fund's health directly contributes to NCUA's mission to assist in the stability of the national economic system. A financially sound insurance fund instills consumer (member) confidence in the viability of the cooperative credit union system, which consists of approximately 8,600 federally insured credit unions with over $860 billion in assets and 84 million members. NCUA was charged with this responsibility in the Federal Credit Union Act of 1934, and its mission was reaffirmed by the Credit Union Membership Access Act of 1998 (CUMAA). The credit union industry differs from the banking and thrift industry in that credit unions are cooperative, nonprofit institutions. Depositors (members) hold voting rights and "shares" in the credit union, while for-profit banks and thrifts are owned by equity shareholders, not the depositors.

Evidence: FCU Act, Sections 203, 204, 216 -http://www.ncua.gov/RegulationsOpinionsLaws/fcu_act/fcu_act.pdf ; NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA 2005 Annual Report pages 1-3 - http://www.ncua.gov/ReportsAndPlans/annualrpt/2005AR.pdf ; CUMAA of 1998 - http://www.ncua.gov/letters/1998/98-cu-16.html

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: Depositors may hold their deposits in credit union accounts insured by NCUA or the privately held American Share Insurance Company (available in 8 states), as well as in a bank or thrift where deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The insurance type depends on the type of charter chosen by the financial institution. Although deposit insurance for credit unions and for other depository institutions is currently separated by federal law, from the depositors' perspective the coverage is essentially identical. For state credit unions in the eight states that allow private insurance, private deposit (share) insurance is offered as an alternative to federal deposit insurance, sometimes with higher coverage limits. There has been some debate whether private deposit insurance provides the same robustness of coverage as federally backed insurance. Congress has recently passed legislation that requires notice be clearly given to depositors that a particular institution is not federally insured, however it is yet unclear whether such a distinction has made much difference to the investing public.

Evidence: GGD-91-85, July 1991 - http://archive.gao.gov/d19t9/144377.pdf; GAO-04-91, October 2003, pages 49-50, 62-63 - http://www.gao.gov/new.items/d0491.pdf; NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf; FDIC Strategic Plan: 2005-2010 - http://www.fdic.gov/about/strategic/strategic/strategic_plan05_10.pdf. Financial Services Regulatory Relief Act of 2006 (P.L. 109-351) http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=109_cong_bills&docid=f:s2856enr.txt.pdf

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: A 2003 GAO report is critical of the Federal Credit Union Act, which requires that all federally insured credit unions contribute 1 percent of insured assets to the insurance fund, on the basis that this flat rate charge for insurance does not account for the risk posed by individual institutions. Although the 1 percent contribution does eliminate the potential for an institution to "free-ride" by benefiting from insurance coverage without paying premiums for that coverage, there is no mechanism for risk differentiation in this framework. In contrast, both FDIC and American Share Insurance price insurance using a system of risk-based premiums that depends on the risk of individual institutions. In order to introduce greater flexibility to risk in pricing insurance, NCUA has been seeking to apply a risk-based capital standard to the credit union industry. Because the capital held in reserve by credit unions is used first in resolving any potential losses, adjusting capital levels according to risk would have the effect of "adjusting the deductible" for deposit insurance dependent upon a credit union's risk profile. This could be an adequate proxy for risk-based pricing, however the NCUA is constrained in the degree of risk-adjustment to capital levels that it is able to implement under current law. Current law caps the amount of risk-based capital a credit union may be required to hold at the "adequately capitalized" level of 6 percent of total assets. This cap means that the vast majority (about 99 percent) of credit unions are only required to hold 6 percent capital, regardless of their risk profile. The NCUA wishes to revise the statute to allow its supervisors greater flexibility in requiring credit unions to hold higher levels of capital if their risk profiles demand such adjustment, however Congress has not yet implemented the changes necessary to make this a reality. In addition, under Title III of the Federal Credit Union Act the NCUA administers the Central Liquidity Facility(CLF). This facility was established to provide immediate liquidity to the credit union industry in the event of a market disruption or "liquidity crunch" within the industry. The facility had been left unused for several years, until a $4 million loan was made during 2006. Despite this relative lack of use, the facility maintains the authority to borrow up to 12 times its equity from the US Treasury. The GAO and Treasury have both called for the dissolution of the CLF as unnecessary, on the grounds that the Federal Reserve discount window is also available for liquidity purposes, and that other avenues are available to provide liquidity. The NCUA has countered that as many as one-half of all credit unions (primarily the smallest institutions) are not eligible for the Fed's discount window due to a lack of electronic payment infrastructure, and that the NCUA's Board exerts adequate control over the CLF. Still it remains that the CLF has authority to borrow from the taxpayer without formal Congressional oversight.

Evidence: GAO-04-91, October 2003, pages 49-50, 62-63 - http://www.gao.gov/new.items/d0491.pdf; GGD-91-85, July 1991 - http://archive.gao.gov/d19t9/144377.pdf pages 198-209; Department of the Treasury, December 1997, http://www.treas.gov/press/releases/docs/cu_study.pdf pages 124-125; OIG-05-06, NCUA's Process for Reviewing Federally Insured State Chartered Credit Unions - http://www.ncua.gov/OIG/Reports/2005/FISCU_0506.pdf; Federal Deposit Insurance Reform Act, PL 109-171, Sec. 2105, Feb. 8, 2006. Federal Credit Union Act, U.S.C - Title 12, Chapter 14, Title II, Section 202 - http://www.ncua.gov/RegulationsOpinionsLaws/fcu_act/fcu_act.pdf

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The NCUA's examination staff split their time between each of the agency's major programs, supervision and insurance. Examiners scrutinize institutions for financial and managerial soundness to determine whether they pose a risk to the insurance funds. At the same time, they assess credit unions' compliance with requirements on disclosures to consumers, lending to communities, and anti-money laundering statutes. Each year, the agency conducts a survey to determine how much examiner time is devoted to insurance-related activities versus other supervisory activities. This information is then integrated into a formula (called the Overhead Transfer Rate) to determine how much should be charged to the insurance funds to cover the costs of overhead for insurance activities conducted by the NCUA. In past years, the method of calculation for this formula was somewhat opaque, but in recent years NCUA has made efforts to disclose its methodology and increase the transparency of this process. The costs incurred by the NCUA in its insurance function are then drawn from the assets of the Share Insurance Fund. NCUA's supervisory costs are covered by a separate assessment charge levied on federally-chartered credit unions. Some observers (including the Treasury Department) have pressed the NCUA to more formally separate its supervisory and insurance functions along the lines of the FDIC, which has separate divisions for insurance and regulatory supervision. This would more clearly delineate the NCUA's insurance function from its supervisory function. The NCUA has argued that its smaller staff means that it is more efficient for the NCUA to have the same staff cover both functions rather than trying to maintain separate staff for each program. Regardless of whether the divisions are integrated or separate, it is important for the NCUA to maintain rigor in its oversight of the industry, remain vigilant about reducing potential liability to the insurance fund, and ensure that its activities preserve the public interest rather than the preferences of the credit union industry.

Evidence: NCUA Board Decision Memo on Overhead Transfer Rate: http://www.ncua.gov/ncuaboard/draftboardactions/Item3.pdf Department of the Treasury, December 1997, http://www.treas.gov/press/releases/docs/cu_study.pdf

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: NCUA's Strategic Goal 1, "A safe, sound and healthy credit union system," is supported by four long-term performance measures that quantify industry risk, the health of the insurance fund, NCUA's ability to provide customer service, and NCUA's fulfillment of its responsibilities as a receiver of failed institutions. These four measures include the overall credit union CAMEL ratings, the insurance fund's equity ratio, the time it takes to return insured deposits after a credit union failure, and the rate of loss to the insurance fund from resolving failed credit unions. 1) Overall CAMEL rating: The CAMEL rating system is based upon an evaluation of five critical elements of a credit union's operations: Capital Adequacy, Asset Quality, Management, Earnings, and Asset/Liability Management. This rating system is designed to take into account and reflect all significant financial, operational, and management factors that examiners use to assess a credit union's performance and risk profile. The overall CAMEL rating is a composite of these individual measures that assigns a rating from 1 (excellent) to 5 (poor). 2) Equity ratio: The insurance fund's equity ratio is the amount of fund assets compared to total insured deposits. This ratio represents the fund's ability to cover insured losses in the event of a credit union failure. For example, a ratio of 1.30 percent means that the insurance fund holds $1.30 for every $100 of insured deposits. NCUA has recently begun updating this information on a quarterly basis, and we encourage them 3) Time required to return insured deposits: When a credit union becomes insolvent, NCUA may close the institution or a healthy credit union may absorb its assets and liabilities. During this time, it is important to limit the number of days that customers do not have access to their accounts. If customers were forced to wait several days or weeks to withdraw funds, they would lose faith in the credit union system and deposit insurance. NCUA has a policy of providing funds within 5 days, and during the most recent failure provided funds within 2 days. As a result of this review, NCUA has agreed to include this performance measure as part of its annual performance budget. 4) Insurance fund losses as a percentage of assets of failed institutions: When a credit union does fail, NCUA is responsible for managing the resolution of that credit union's liabilities. A measure of the recorded losses to the share insurance fund compared with the assets of the failed institutions is one indicator of the effectiveness of NCUA in acting as a receiver to these failed institutions. For the period of 1984-2004, NCUA's average loss per dollar of assets insured in failed credit unions averaged 14%, which was comparable to the FDIC's average loss rate over the same period. In addition to an existing semi-annual report on losses from insured credit unions, NCUA has agreed to track this indicator in its annual performance budget. It is difficult to define quantifiable outcome measures for an insurance fund, because results often depend on outside influences such as the economy. For example, independent of NCUA's actions, the insurance fund may experience an increase in losses during a recession when more consumers are unable to pay back loans and credit unions fail at a higher rate. This apparent decline in performance has more to do with economic conditions than the actual effectiveness of NCUA's insurance program. In addition, insurers must manage risk, but their goal is never to completely eliminate risk because the cost to do so is prohibitive. NCUA would have to establish an insurance fund equity ratio of 100% or expend an unreasonable amount of resources to monitor each individual credit union. Given these complexities, NCUA's output measures listed above serve as an adequate proxy for outcomes.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf.; NCUA 2005 Annual Report http://www.ncua.gov/ReportsAndPlans/annualrpt/2005AR.pdf;

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: As part of the Annual Performance Budget, NCUA outlines quantifiable targets for each of its long-term performance measures. Targets are established based on historical levels that have successfully minimized past insurance fund losses. Through looking at past experience, NCUA will identify appropriate targets for the new measures that they have agreed to include as a result of this review. While NCUA's long-term targets do not allow for yearly improvement, maintaining the prescribed level of performance over the long-term is an ambitious goal. NCUA must strike a balance between protecting fund assets from losses and enabling the credit union industry to take calculated risks and to grow. For example, an ever increasing insurance fund equity ratio may reduce the risk of insolvency, but holding excess assets in the fund limits the industry's ability to make loans.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: As discussed in 2.1, it is difficult to define quantitative outcome measures for an insurance fund. However, NCUA has identified key output measures that are directly linked to its long-term goals. The overall CAMEL rating is comprised of individual component ratings: Capital, Asset Quality, Management, Earnings and Liquidity, which NCUA monitors and evaluates through its examination process. NCUA establishes targets for each factor in the CAMEL rating system. NCUA measures efficiency as the ratio of total operating expenses to total federally insured credit union assets. Operating expenses are primarily driven by NCUA's examination and supervision program which is essential to ensuring the health of the credit union system and the insurance fund. The annual efficiency measure allows NCUA to assess how efficiently they perform these operations.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: NCUA's annual performance measures are similar to its long-term measures in that the goal is not necessarily yearly improvement. Instead, NCUA identifies appropriate targets based on a combination of historical performance and economic factors. These targets seek to minimize the risk to the insurance fund, while still enabling credit unions to take positive risks. Unlike the other annual measures, the efficiency measure requires a yearly reduction in the ratio of total operating expenses to federally insured credit union assets.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Internally NCUA's annual and long-term goals are supported through operating budgets for each region and office within NCUA. Regions and offices develop their operating budgets with goals and strategies designed to contribute to the success of agency wide goals. The operating budget for each office or region will vary based on their respective role in achieving annual and long-term goals. The state supervisory authorities assist in annual and long-term goal achievement though performance of examinations in accordance with NCUA's examination procedures. NCUA's examination procedures are designed to minimize risk to the credit union system and the insurance fund. Through NCUA developed training and computer applications, the state supervisory authorities provide safety and soundness oversight consistent with established examination procedures.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: The GAO and the Office of the Inspector General routinely evaluate NCUA's programs. In 1991, the GAO conducted a comprehensive study of the credit union industry, which included a review of NCUA and the share insurance fund. In 2003, the GAO issued a follow-up report to reevaluate the industry and NCUA's progress toward implementing suggested improvements. Likewise, the NCUA's OIG produces a semi-annual report for Congress that highlights audit results, investigative activities, and legislative and regulatory reviews. In 2005, the OIG audited the share insurance fund's financial statements and conducted a study of insurance fund losses. The OIG offered two recommendations to improve the reporting of losses for the share insurance fund.

Evidence: GAO Report - GAO-04-91, October 2003, Credit Unions; GAO Report - GAO-040977 September 2004, Corporate Credit Unions; NCUA Examiner's Survey Results; NCUA OIG, July 2005, Process for Reviewing Federally Ensured State Chartered Credit Unions - http://www.ncua.gov/OIG/Reports/2005/FISCU_0506.pdf ; NCUA OIG Semi-Annual Report to Congress - http://www.ncua.gov/OIG/SemiAnnRpts.htm ; NCUA Quality Control Review Process http://www.ncua.gov/GuidesManuals/examiners_guide/chapters/chapter22.pdf ; NCUA Share Insurance Fund Audits - http://www.ncua.gov/OIG/Reports/2006/2005FinancialStmtAuditReport0601-0604.pdf

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: NCUA's Annual Performance Budget allocates full cost amounts and Full-Time Equivalents (FTE) to each of its three strategic goals. Allocations are based on the impact that existing and emerging risks will have on goal achievement. Furthermore, NCUA publishes an annual budget briefing that details the proposed budget by expenditure. NCUA also holds an annual public hearing on its budgetary projections, where it explains its budget and anticipated fee schedules to the credit union industry and interested citizens.

Evidence: NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf; NCUA 2006 Budget Briefing - http://www.ncua.gov/ReportsAndPlans/special/budget/2006BudgetBriefing.pdf. See NCUA Instruction 9501 for planning process and NCUA Budget Instructions for budget process. NCUA Budget Instructions are published annually to initiate that aspect of the NCUA budget development process. See also NCUA Annual Planning Guidance Letter 2006.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: NCUA Annual Performance Budget 2006 and NCUA Strategic Plan 2006-2011 mark a notable change from prior annual budgets and strategic plans. The change involves the use of quantifiable, measurable short-term and long-term goals. This change came as a result of revised guidance in OMB Circular A-11, feedback from NCUA's most recent PART evaluations, and analysis gained from the Annual Performance Report.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: NCUA collects quarterly financial and statistical reports from all federally insured credit unions. This data is used by NCUA and state supervisors to assess credit union performance and the potential risks to the insurance fund. NCUA and the state supervisors conduct risk-focused examinations at credit unions, with troubled credit unions receiving more timely examinations and additional onsite follow-up. NCUA reviews all examination reports completed by the state supervisors to assess risk to the insurance fund. This data is also used by both federal and state examiners to focus examinations on the areas of highest potential risk posed by individual credit unions and the credit union system. As mentioned in section 1.4, the Office of the Inspector General reviewed this process and determined that NCUA adequately manages the risk posed by state supervisor and state-chartered credit unions. NCUA uses both current and historical data during its performance planning and budgeting cycle to establish the baseline and subsequent performance goals and measures. To ensure validity of the data, it is reviewed quarterly at a minimum of three management levels within the agency and compared against historical averages. Annually, regional offices use the data assessment results to develop their examination and supervision hours and develop their budget submissions.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf , NCUSIF Operating Reports - http://www.ncua.gov/OIG/FinAudits.htm ; NCUA Risk Trends Reports

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: NCUA and its state supervisory partners are responsible for the overall health and safety of the system and thus the health of the insurance fund. The responsibilities for conducting the safety and soundness function of the program are clearly defined with each management level being held accountable for the assessment and evaluation of the data and the insured institutions themselves. Overall regional management performance is assessed by the Executive Director. Credit union examination/supervision reports are reviewed successively at each management level with the lower level being held responsible for data accuracy, risk assessment, and the potential impact on the insurance fund. Annual performance ratings are based on the quality of these reports. Annually each Region and program related Central Office develops an operating plan which clearly lays out the goals and measures to which personnel are held accountable. The evaluation of management's effectiveness, as well as that of the field examiners, correlates with the merit increase received based on a pay-for-performance system.

Evidence: NCUA Examiners Guide Chapter 22 - http://www.ncua.gov/GuidesManuals/examiners_guide/chapters/chapter22.pdf ; NCUA Personnel Manual Chapter 6 Performance Management Program OIG: NCUA's Process for Reviewing Federally Insured State Chartered Credit Unions -http://www.ncua.gov/OIG/Reports/2005/FISCU_0506.pdf.

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Internal controls at the regional and central offices, such as transaction authorization and monitoring, ensure that obligations and outlays are executed on time and in accordance with the approved budget. The Chief Financial Office reviews internal control procedures on an annual basis. Monthly insurance fund financial statements containing actual and budgetary information are posted on the agency's website. NCUA does not distribute funds to its partners. Operating funds charged to the insurance fund are determined by the Overhead Transfer Rate (OTR), a transparent method of assessing the time spent by staff on insurance fund related matters. Transfers are made monthly and are based on actual, not budgeted expenditures. The monthly financial and statistical reports, in addition to the Internet posting, are briefed quarterly at the public NCUA Board meetings. The financial statements are validated through annual independent financial audits.

Evidence: NCUSIF Financial Highlights http://www.ncua.gov/ReportsAndPlans/ncusif/ncusif.html; 2005 Annual Report, page 25 -http://www.ncua.gov/ReportsAndPlans/annualrpt/2005AR.pdf.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: In 2001, NCUA began a risk-based examination and supervision program with the goal of focusing examination resources on those institutions that pose the greatest risk to the insurance fund. In addition, a recently completed initiative resulted in a reduction of regional offices, realignment of central office duties, and a reduction in staff. NCUA measures efficiency as total NCUA operating expenses to insured assets.

Evidence: Efficiency Measure: operating expenses/insured assets; NCUA 2005 Budget Briefing; NCUA Management Automated Resource System - It provides both a Supervisory Examiner Management information system and an automated system for budget management and resource allocation; NCUA Examiner's Guide: Chapter 2 Scope Development - http://www.ncua.gov/GuidesManuals/examiners_guide/chapters/chapter2.pdf ; AIM Study; AIM 2 Study; Examination Survey; NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Does the program collaborate and coordinate effectively with related programs?

Explanation: The agency coordinates safety and soundness oversight of the credit union system with the state supervisors. The NCUA provides the examination software and hardware platform used by all except one state supervisor to ensure greater consistency between examinations. In addition, NCUA provides training to state regulatory staff to further improve their skills and knowledge of the credit union system. At the federal level, the regulatory process is coordinated among federal financial regulators through the Federal Financial Institutions Examination Council (FFIEC). For example, through the FFIEC the federal regulatory agencies jointly issued the Bank Secrecy Act/Anti-Money Laundering Examination Manual to guide examiners as they assess depository institutions for compliance.

Evidence: www.FFIEC.gov; NASCUS Document of Cooperation - http://www.nascus.org/pdf/CooperationDoc.pdf ; NCUA Examiners' Guide: Chapter 26 Federally Insured State Chartered Credit Unions - http://www.ncua.gov/GuidesManuals/examiners_guide/chapters/chapter26.pdf FFIEC BSA/AML Examination Manual - http://www.ffiec.gov/bsa%5Faml%5Finfobase/documents/BSA_AML_Man.pdf.

Does the program use strong financial management practices?

Explanation: Since 1983 the insurance fund has received unqualified audit opinions of its financial statements from independent accounting firms. The insurance fund releases monthly financial statements detailing revenues, expenses, yields, and the fund's equity ratio. Although the NCUA's record in maintaining the insurance fund has been good and it has improved some of its policies, there remain a few discrepancies. The NCUA's Inspector General noted in a 2005 audit that NCUA failed to accurately report losses due to federally insured credit union failures. While this was not considered a material weakness, the Inspector General found that the reported number of failed credit unions varied between 18 and 21, with losses from the failures ranging from $12.9 million to $14.1 million. NCUA has argued that this was a misunderstanding related to accounting for past failures still under resolution. However since these are important statistics in regard to the viability of the share insurance fund, clarifying their reporting should be a focus of continued attention for NCUA. Overall however, the NCUA maintains a series of practices that demonstrate effective management of the insurance fund within current statutory constraints. The NCUSIF has a formalized policy on investment of its existing resources, and in accordance with statutes governing the activities of the fund, the NCUA invests the entire equity of the fund in a portfolio of U.S. government securities - a very secure and liquid investment. The NCUA does not yet have a developed policy about when and how to collect premiums to replenish the share insurance fund while the equity ratio is within the range where they have discretion over that decision (1.20%-1.30%). This seems to be partially a side-effect of the narrow statutory range in which NCUA is allowed to charge premiums, but NCUA has been working to develop and implement a set of defined criteria and established procedures related to what should be the appropriate level of the equity ratio, as well as when and how premiums should be assessed to ensure that the fund remains adequately capitalized. As part of this effort, NCUA has performed some stress-testing of its fund under various conditions and found that even under quite adverse economic conditions the fund would be likely to remain solvent. In sum, although the financial condition of the share insurance fund has been stable for much of the past decade, there remain some areas where management of the fund can be improved, and NCUA has demonstrated commitment in working on those areas.

Evidence: 2005 OIG Financial Audit - http://www.ncua.gov/OIG/FinAudits.htm; OIG NCUA OIG, July 2005, Process for Reviewing Federally Ensured State Chartered Credit Unions - http://www.ncua.gov/OIG/Reports/2005/FISCU_0506.pdf2005 OIG-05-10, October 2005, Audit Survey of Share Insurance Fund Losses - access restricted; GAO-04-91, October 2003 - http://www.gao.gov/new.items/d0491.pdf.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: In its latest report on the share insurance fund in 2003, GAO criticized NCUA's methods for reserving for insurance fund losses. The GAO noted that loss estimates do not consider current economic conditions or the specific loss rates for troubled credit unions. This oversimplified methodology could lead NCUA to over or underestimate probable losses to the insurance fund. In response to that report, in 2004 NCUA implemented a new method for reserving for potential losses to the insurance fund. This new method used a more sophisticated approach to anticipate potential losses, and NCUA decided to hold reserves at the upper end of the potential range of losses predicted by the new model. In addition, in 2003 GAO issued a follow-up report to its 1991 study on NCUA and the credit union industry. According to the 2003 report, NCUA had implemented the majority of GAO's recommendations. However, there are still significant issues in regard to the management of the Share Insurance Fund that remain in need of attention: for example, a policy on collection of premiums when the NCUA has discretion to do so, which NCUA has pledged to develop.

Evidence: GAO-04-91, October 2003, pages 101-112, http://www.gao.gov/new.items/d0491.pdf; GAO: GGD-91-85, July 1991, http://archive.gao.gov/d19t9/144377.pdf; AIM Study; AIM 2 Study, AMAC 2005 Annual Report (confidential). OMB PART on NCUA's Regulatory-based program (2005) http://whitehouse.gov/omb/expectmore/detail.10004453.2005.html 2005 OIG Financial Audit - http://www.ncua.gov/OIG/Reports/2006/2005FinancialStmtAuditReport0601-0604.pdf

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: Over the past 5 years, the credit union system has exceeded the targeted capital levels and overall CAMEL ratings that are necessary to support the health of the insurance fund. However, the insurance fund's equity ratio, while it has exceeded the statutory minimum, has only very recently met the 1.30 percent threshold established by NCUA's Board. See the long-term program performance measures for historical goal attainment. In addition, NCUA has recently agreed to include performance measures on the the time required to return deposits and the loss rate on insured deposits in failed credit unions. Although performance on these measures has historically been good, we want to ensure that NCUA continues to meet and exceed its goals in these new areas.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Does the program (including program partners) achieve its annual performance goals?

Explanation: Over the past 5 years, NCUA and the credit union system have exceeded the established annual performance goals. See the annual program performance measures for annual goal attainment.

Evidence: NCUA Strategic Plan 2006-2011 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/StrategicPlan2006-2011.pdf ; NCUA Annual Performance Budget 2006 - http://www.ncua.gov/ReportsAndPlans/plans-and-reports/2006/AnnualperformanceBudget2006.pdf

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: NCUA initiated a cost cutting program discussed in 3.4 that will result in an estimated savings of $27 million over 10 years. Likewise, agency-wide authorized full-time equivalent (FTE) positions declined from 927 in 2003 to 911 in 2005. NCUA's primary efficiency measure, total operating expenses to insured assets, has declined steadily from 0.026 percent in 2001 to 0.020 percent in 2005. These reductions occurred while insurance losses stayed below the 2003 level of $38 million or 0.63 percent of the fund balance.

Evidence: Evidence: NCUA 2005 Annual Report - http://www.ncua.gov/ReportsAndPlans/annualrpt/2005AR.pdf

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The insurance fund is comparable to the Federal Deposit Insurance Corporation's (FDIC) Deposit Insurance fund. Over the past 5 years, NCUA and FDIC have maintained similar insurance fund equity ratios, with both insurers exceeding their respective statutory requirements. FDIC's equity ratio varied more over the past 5 years with an overall downward trend, while NCUA's ratio steadily increased over the same period. However, the equity ratio is only one measure of an insurance fund's performance and does not capture risk to the fund. FDIC employs staff economists and applies more advanced risk modeling techniques to their deposit insurance fund than NCUA. Given NCUA's expressed preference for maintaining the combination of its insurance and supervisory functions and the continued lack of a mechanism to price risk in the Share Insurance Fund, we expect NCUA to be especially vigilant in its oversight of the credit union industry. A lack of vigilance could result in even greater liability to the NCUSIF (and the Federal taxpayer), and as such we will follow NCUA's oversight program closely, and encourage similar vigilance by the Congress, GAO and the NCUA's Office of Inspector General.

Evidence: NCUA 2005 Annual Report - http://www.ncua.gov/ReportsAndPlans/annualrpt/2005AR.pdf FDIC Quarterly Banking Profile: http://www2.fdic.gov/qbp/2006mar/qbp.pdf.

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: Numerous evaluations conducted by the GAO, the Department of the Treasury, and the Office of the Inspector General have determined that the agency is achieving its overall mission to ensure the viability of the credit union system. As mentioned in 2.6, the GAO conducted a comprehensive study in 1991 and a follow-up study in 2003. The 2003 update concluded that the insurance fund "appears to be in satisfactory financial condition." GAO and NCUA's OIG have identified a few areas of potential improvement in the share insurance fund which NCUA has not yet acted upon, such as more robust estimation of potential losses. Based on independent evaluations and the recent performance of the insurance fund measured by its equity ratio, it appears that the insurance fund is effective, but there are areas where NCUA can make additional efforts to reduce risk to the insurance fund and credit union industry. As mentioned above, given NCUA's expressed preference for combining its insurance and regulatory functions, insightful and effective oversight by independent evaluators is especially important to ensure the NCUSIF's continued strength. In addition, we recommend that Congress enact reforms to allow for greater flexibility in risk-based capital requirements, which would allow NCUA to more effectively price risk to the Share Insurance Fund.

Evidence: GAO: GGD-91-85, July 1991, http://archive.gao.gov/d19t9/144377.pdf; GAO-04-91, October 2003, http://www.gao.gov/new.items/d0491.pdf; Department of Treasury Study: Comparing Credit Unions with Other Depository Institutions, January 2001, http://www.ncua.gov/ReportsAndPlans/special/TresRpt.pdf; OIG: Semi-Annual Report to Congress, March 2006, http://www.ncua.gov/OIG/Reports/2006/Semiannual2006Mar.pdf