We have reviewed the draft report entitled Follow-up Evaluation of the FDIC’s Corporate Planning Cycle (Assignment No. 2005-010). This follow-up evaluation was conducted at the request of the Chief Financial Officer, who was primarily interested in determining whether the Division of Finance (DOF) had been successful in reducing the resources devoted to the Corporation’s annual planning and budget formulation process and in integrating the planning and budget formulation processes.

We were pleased to note that your report confirmed that DOF had been successful in meeting both of these objectives:

• Page 7 of your draft report notes that DOF “reduced the cycle time for the budget formulation exercise from over six months for the 2001 budget to three months for the 2005 budget” and that “most divisions and offices reported that they had dedicated fewer resource” to the 2005 planning and budget formulation process than in prior years.
• Page 20 of your draft report states that the FDIC in 2005 “used a more integrated planning and budget process that was an improvement over the process used in 2001 wherein the staffing, budgeting, and planning processes overlapped and were not well integrated.”

As you know, the Chief Financial Officer has publicly indicated on several occasions that he believes that the FDIC has been a leader in integrating its planning, budget, cost management, and performance management activities, consistent with the President’s Management Agenda (PMA), despite the fact that the Corporation is not subject to the formal PMA reporting requirements of the Office of Management and Budget.

I am attaching our responses to the specific recommendations in the draft report. In addition, we have provided you separately a set of corrections to specific references in the report.

If you have questions, please contact Thomas E. Peddicord at X62427.

Attachment

Attachment

Comments on Draft Recommendations

1. Revise DOF budget instructions to divisions and offices to more clearly describe the detailed support and methodology for developing the Non-CIRC IT allocation; the procedure for communicating the approved allocations to divisions and offices: and the requirement that divisions and offices obtain DIT concurrence and signature to approve (a) reductions of the maintenance/Sustaining base and (b) proposed initiatives to be pursued by each division/office with its discretionary funds.

   Although the 2006 planning and budget formulation process was initiated prior to receipt of the draft report, DOF has devoted considerable effort this year to improved communications with both DIT and divisions/offices regarding how non- CIRC IT allocations were developed and the procedures to be followed by division/office in reviewing them and determining how they will be used. This was particularly complex because of a number of unique factors that affected the 2006 non-CIRC IT allocations. Numerous meetings were held with division/office budget contacts, selected division/office IT liaison staff, and DIT representatives for this purpose, and the requirement for DIT concurrence on the division/office submission was emphasized. Although the actual budget instructions were not substantially revised, we believe that these steps have fully addressed the OlG’s concerns in this area.

2. Revise DOF budget instructions to more clearly describe the detailed support and methodology for developing the external training allocation and the procedure for communicating approved allocations to divisions/offices.

   Due to the widespread discontent with the process used to determine 2005 external training allocations, DQF and the CFO had initially decided to integrate the funding for external training back into the general baseline budget allocations, which would have permitted all divisions/offices to determine their own budgetary requirements for external training. However, the Corporate University (CU) Governing Board on July 25, 2005, approved, in concept, a proposal to fully phase out all Type I and 2 training by 2007, to be replaced by a new Personal Learning Account program that will be governed by procedures to be issued by CU. Accordingly, we do not think this recommendation is applicable any longer. Nonetheless, as with non-CIRC IT allocations, DOF has devoted considerable effort to effective communications with divisions/offices regarding this new initiative and its impact on their proposed 2006 budgets.

3. Provide the division and office planning and budget representatives the results and accompanying benefits of the plus/minus 10-percent exercise for the 2004 and 2005 budget cycles, provide more detailed guidance for identifying budget increase or decrease proposals for future budget cycles, and revise DOF budget instructions to describe how the approved plus/minus proposals will be communicated to the division and office planning and budget representatives.

   The plus/minus 10-percent exercise was designed to ensure that senior management carefully considered possible significant changes in corporate spending priorities during the annual budget formulation process. The concept was “borrowed” from the Federal Reserve Board as a device to stimulate discussion of overall corporate spending priorities, since the baseline budgeting methodology would otherwise result in little or no change in those priorities from year-to-year. These proposals were, by definition, beyond what divisions/offices felt they needed to accomplish their basic missions (any shortfall in funding for that purpose should be submitted as a requested adjustment to the DOF- proposed budget). Hence, there was never an expectation that there would be a detailed accounting for each proposal.

   The exercise was employed with only limited success during the 2004 planning and budget formulation process, as documented in the DOF post-mortem on that process. The process was revised somewhat for the 2005 process, based on discussion at the Operating Committee. In addition, prior to the 2005 Planning and Budget Conference, the Chief Operating Officer and the CFO culled through the ideas submitted by divisions/offices and selected those that they felt were the most significant and worthy of discussion at the conference. As the draft report notes, these decisions were communicated in writing by DOF to divisions/offices prior to the conference.

   Thus, this recommendation appears to address only the need for post- conference communications with division/office planning and budget representatives. As we advised the OIG evaluation team, DOF believes that primary responsibility lies with division/office directors attending the conference to communicate to their staffs the results of the conference discussions. Nonetheless, following the 2006 Planning and Budget Conference, DOF will issue a summary of the disposition of the ideas submitted in response to the plus/minus 10-percent exercise. However, we see no purpose in reconstructing such documents for the 2004 and 2005 conferences, nor do we see the need for any revisions to the budget instructions as they relate to the plus/minus 10- percent exercise.

4. Develop and issue a corporate directive that establishes management’s expectations for the corporate planning and budget process.

   As the draft report notes, DOF issued detailed written guidance to divisions and offices on both the 2004 and 2005 planning and budget processes. Thus, this recommendation relates only to the absence of a formal directive within the Corporation’s directives system. Such a directive would necessarily be very high level, and we do not believe that it would significantly enhance division/office understanding of the process or their roles and responsibilities in it. Nevertheless, by the end of the first quarter of 2006, DOF will prepare and circulate for comment a draft directive on the planning and budget process that will cover all or most of the recommended content. This will continue to be supplemented by detailed annual instructions for divisions/offices.