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Federal Reserve Banks Combined Financial Statements

The combined financial statements of the Federal Reserve Banks were audited by PricewaterhouseCoopers LLP, independent auditors, for the years ended December 31, 2006 and 2005.

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Report of Independent Auditors

To the Board of Governors of the Federal Reserve System and the Board of Directors of the Federal Reserve Banks:

We have audited the accompanying combined statements of condition of the Federal Reserve Banks (the "Reserve Banks") as of December 31, 2006 and 2005, and the related combined statements of income and changes in capital for the years then ended, which have been prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System. These combined financial statements are the responsibility of the Reserve Banks' management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 3, these combined financial statements were prepared in conformity with the accounting principles, policies, and practices established by the Board of Governors of the Federal Reserve System. These principles, policies, and practices, which were designed to meet the specialized accounting and reporting needs of the Federal Reserve System, are set forth in the Financial Accounting Manual for Federal Reserve Banks and constitute a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Reserve Banks as of December 31, 2006 and 2005, and the combined results of their operations for the years then ended, on the basis of accounting described in Note 3.

PriceWateHouseCoopersLLP Signature

March 30, 2007
Washington, D.C.

Federal Reserve Banks
Combined Statements of Condition (in millions)
December 31,
2006 2005
Assets  
Gold certificates $11,037 $11,039
Special drawing rights certificates 2,200 2,200
Coin 801 686
Items in process of collection 3,486 5,930
Loans to depository institutions 67 72
Securities purchased under agreements to resell 40,750 46,750
U.S. government securities, net 783,619 750,202
Investments denominated in foreign currencies 20,482 18,928
Accrued interest receivable 6,761 5,874
Bank premises and equipment, net 2,376 2,252
Other assets 1,785

3,394

Total assets $873,364


$847,327


Liabilities and Capital  
Liabilities  
Federal Reserve notes outstanding, net $783,019 $758,359
Securities sold under agreements to repurchase 29,615 30,505
Deposits    
Depository institutions 18,699 19,043
U.S. Treasury, general account 4,708 4,573
Other deposits 349 393
Deferred credit items 3,813 5,039
Interest on Federal Reserve notes due to U.S. Treasury 908 1,784
Accrued benefit costs 1,314 913
Other liabilities 291

281

Total liabilities 842,716


820,890


Capital  
Capital paid-in 15,324 13,536
Surplus (including accumulated other comprehensive loss of $1,849 million at December 31, 2006) 15,324

12,901

Total capital 30,648

26,437

Total liabilities and capital $873,364


$847,327


The accompanying notes are an integral part of these combined financial statements.

Federal Reserve Banks
Combined Statements of Income
(in millions)
For the years ended December 31,
2006 2005
Interest income
Interest on U.S. government securities $36,452 $28,959
Interest on investments denominated in foreign currencies 369 283
Interest on loans to depository institutions 12

7

Total interest income 36,833

29,249

Interest expense    
Interest expense on securities sold under agreements to repurchase 1,342

809

Net interest income 35,491

28,440

Other operating income (loss)    
Income from services 908 901
Reimbursable services to government agencies 426 396
Foreign currency gains (losses), net 1,186 (2,723)
Other income 144 131
Total other operating income (loss) 2,664 (1,295)
Operating expenses    
Salaries and other benefits 1,880 1,709
Occupancy expense 240 228
Equipment expense 212 198
Assessments by the Board of Governors 793 743
Other expenses 835

747

Total operating expenses 3,960

3,625

Net income prior to distribution $34,195


$23,520


Distribution of net income    
Dividends paid to member banks $871 $781
Transferred to surplus 4,272 1,271
Payments to U.S. Treasury as interest on Federal Reserve notes 29,052

21,468

Total distribution $34,195


$23,520


The accompanying notes are an integral part of these combined financial statements.


Federal Reserve Banks
Combined Statements of Changes in Capital
for the years ended December 31, 2006 and 2005
(in millions)
Surplus
Capital paid-in Net income retained Accumulated other
comprehensive loss
Total surplus Total capital
Balance at January 1, 2005 (238 million shares) $11,914 $11,630 $... $11,630 $23,544
Net change in capital stock issued (32 million shares) 1,622 ... ... ... 1,622
Transferred to surplus ...

1,271

... 1,271 1,271
Balance at December 31, 2005 (270 million shares) $13,536 $12,901 $...F

$12,901

$26,437

Net change in capital stock issued (36 million shares) 1,788 ... ... ... 1,788
Transferred to surplus ... 4,272 ... 4,272 4,272
Adjustment to initially apply FASB Statement No. 158 ...

...

(1,849)

(1,849)

(1,849)

Balance at December 31, 2006 (306 million shares) $15,324


$17,173


$(1,849)


$15,324


$30,648


The accompanying notes are an integral part of these combined financial statements.


Notes to the Combined Financial Statements of the Federal Reserve Banks

(1) Structure

The twelve Federal Reserve Banks ("Reserve Banks") are part of the Federal Reserve System ("System") created by Congress under the Federal Reserve Act of 1913 ("Federal Reserve Act"), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a unique set of governmental, corporate, and central bank characteristics.

In accordance with the Federal Reserve Act, supervision and control of each Reserve Bank are exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman, are appointed by the Board of Governors of the Federal Reserve System ("Board of Governors") to represent the public, and six directors are elected by member banks. Banks that are members of the System include all national banks and any state-chartered banks that apply and are approved for membership in the System. Member banks are divided into three classes according to size. Member banks in each class elect one director representing member banks and one representing the public. In any election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.

The System also consists, in part, of the Board of Governors and the Federal Open Market Committee ("FOMC"). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of the Board of Governors, the president of the Federal Reserve Bank of New York ("FRBNY"), and on a rotating basis four other Reserve Bank presidents.

(2) Operations and Services

The Reserve Banks perform a variety of services and operations. Functions include participation in formulating and conducting monetary policy; participation in the payments system including large-dollar transfers of funds, automated clearinghouse ("ACH") operations, and check collection; distribution of coin and currency; performance of fiscal agency functions for the U.S. Treasury, certain federal agencies, and other entities; serving as the federal government's bank; provision of short-term loans to depository institutions; service to the consumer and the community by providing educational materials and information regarding consumer laws; and supervision of bank holding companies, state member banks, and U.S. offices of foreign banking organizations. The Reserve Banks also provide certain services to foreign central banks, governments, and international official institutions.

The FOMC, in the conduct of monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and annually issues authorizations and directives to the FRBNY for its execution of transactions. The FRBNY is authorized and directed by the FOMC to conduct operations in domestic markets, including the direct purchase and sale of U.S. government securities, the purchase of securities under agreements to resell, the sale of securities under agreements to repurchase, and the lending of U.S. government securities. The FRBNY executes these open market transactions at the direction of the FOMC and holds the resulting securities, with the exception of securities purchased under agreements to resell, in the portfolio known as the System Open Market Account ("SOMA").

In addition to authorizing and directing operations in the domestic securities market, the FOMC authorizes and directs the FRBNY to execute operations in foreign markets for major currencies in order to counter disorderly conditions in exchange markets or to meet other needs specified by the FOMC in carrying out the System's central bank responsibilities. The FRBNY is authorized by the FOMC to hold balances of, and to execute spot and forward foreign exchange ("FX") and securities contracts for, nine foreign currencies and to invest such foreign currency holdings ensuring adequate liquidity is maintained. The FRBNY is authorized and directed by the FOMC to maintain reciprocal currency arrangements ("FX swaps") with two central banks, and "warehouse" foreign currencies for the U.S. Treasury and Exchange Stabilization Fund ("ESF") through the Reserve Banks. In connection with its foreign currency activities, the FRBNY may enter into transactions that contain varying degrees of off-balance-sheet market risk that results from their future settlement and counter-party credit risk. The FRBNY controls credit risk by obtaining credit approvals, establishing transaction limits, and performing daily monitoring procedures.

Although the Reserve Banks are separate legal entities, in the interests of greater efficiency and effectiveness they collaborate in the delivery of certain operations and services. The collaboration takes the form of centralized operations and product or service offices that have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management models are used and are supported by service agreements between the Reserve Bank providing the service and the other eleven Reserve Banks. In some cases, costs incurred by a Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are billed for services provided to them by another Reserve Bank.

During 2005, the Federal Reserve Bank of Atlanta ("FRBA") was assigned the overall responsibility for managing the Reserve Banks' provision of check services to depository institutions and, as a result, recognizes total System check revenue on its Statements of Income. Because the other eleven Reserve Banks incur costs to provide check services, a policy was adopted by the Reserve Banks in 2005 that required that the FRBA compensate the other Reserve Banks for costs incurred to provide check services. In 2006 this policy was extended to the ACH services, which are managed by the FRBA, as well as to Fedwire funds transfer and securities transfer services, which are managed by the FRBNY. The FRBA and the FRBNY compensate the other Reserve Banks for the costs incurred to provide these services.

(3) Significant Accounting Policies

Accounting principles for entities with the unique powers and responsibilities of the nation's central bank have not been formulated by various accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and practices that it considers to be appropriate for the nature and function of a central bank, which differ significantly from those of the private sector. These accounting principles and practices are documented in the Financial Accounting Manual for Federal Reserve Banks ("Financial Accounting Manual"), which is issued by the Board of Governors. All of the Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with the Financial Accounting Manual and the financial statements have been prepared in accordance with the Financial Accounting Manual.

Differences exist between the accounting principles and practices in the Financial Accounting Manual and generally accepted accounting principles in the United States of America ("GAAP"), primarily due to the unique nature of the Reserve Banks' powers and responsibilities as part of the nation's central bank. The primary difference is the presentation of all securities holdings at amortized cost, rather than using the fair value presentation required by GAAP. Amortized cost more appropriately reflects the Reserve Banks' securities holdings given their unique responsibility to conduct monetary policy. While the application of current market prices to the securities holdings may result in values substantially above or below their carrying values, these unrealized changes in value would have no direct effect on the quantity of reserves available to the banking system or on the prospects for future Reserve Bank earnings or capital. Both the domestic and foreign components of the SOMA portfolio may involve transactions that result in gains or losses when holdings are sold prior to maturity. Decisions regarding securities and foreign currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, market values, earnings, and any gains or losses resulting from the sale of such securities and currencies are incidental to the open market operations and do not motivate these activities or policy decisions.

In addition, the Board of Governors and the Reserve Banks have elected not to present a Statement of Cash Flows because the liquidity and cash position of the Reserve Banks are not a primary concern given their unique powers and responsibilities. A Statement of Cash Flows, therefore, would not provide any additional meaningful information. Other information regarding the Reserve Banks' activities is provided in, or may be derived from, the Statements of Condition, Income, and Changes in Capital. There are no other significant differences between the policies outlined in the Financial Accounting Manual and GAAP.

The preparation of the financial statements in conformity with the Financial Accounting Manual requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts relating to the prior year have been reclassified to conform to the current-year presentation. Unique accounts and significant accounting policies are explained below.

(A) Gold and Special Drawing Rights Certificates

The Secretary of the U.S. Treasury is authorized to issue gold and special drawing rights ("SDR") certificates to the Reserve Banks.

Payment for the gold certificates by the Reserve Banks is made by crediting equivalent amounts in dollars into the account established for the U.S. Treasury. The gold certificates held by the Reserve Banks are required to be backed by the gold of the U.S. Treasury. The U.S. Treasury may reacquire the gold certificates at any time and the Reserve Banks must deliver them to the U.S. Treasury. At such time, the U.S. Treasury's account is charged, and the Reserve Banks' gold certificate accounts are reduced. The value of gold for purposes of backing the gold certificates is set by law at $42 2/9 a fine troy ounce. The Board of Governors allocates the gold certificates among Reserve Banks once a year based on the average Federal Reserve notes outstanding in each Reserve Bank.

SDR certificates are issued by the International Monetary Fund ("Fund") to its members in proportion to each member's quota in the Fund at the time of issuance. SDR certificates serve as a supplement to international monetary reserves and may be transferred from one national monetary authority to another. Under the law providing for United States participation in the SDR system, the Secretary of the U.S. Treasury is authorized to issue SDR certificates, somewhat like gold certificates, to the Reserve Banks. When SDR certificates are issued to the Reserve Banks, equivalent amounts in dollars are credited to the account established for the U.S. Treasury, and the Reserve Banks' SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at the direction of the U.S. Treasury, for the purpose of financing SDR acquisitions or for financing exchange stabilization operations. At the time SDR transactions occur, the Board of Governors allocates SDR certificate transactions among Reserve Banks based upon each Reserve Bank's Federal Reserve notes outstanding at the end of the preceding year. There were no SDR transactions in 2006 or 2005.

(B) Loans to Depository Institutions

Depository institutions that maintain reservable transaction accounts or nonpersonal time deposits, as defined in regulations issued by the Board of Governors, have borrowing privileges at the discretion of each of the Reserve Banks. Borrowers execute certain lending agreements and deposit sufficient collateral before credit is extended. Outstanding loans are evaluated for collectibility, and currently all are considered collectible and fully collateralized. If loans were ever deemed to be uncollectible, an appropriate reserve would be established. Interest is accrued using the applicable discount rate established at least every fourteen days by the Board of Directors of the Reserve Bank, subject to review and determination by the Board of Governors.

(C) U.S. Government Securities and Investments Denominated in Foreign Currencies

U.S. government securities and investments denominated in foreign currencies comprising the SOMA are recorded at cost, on a settlement-date basis, and adjusted for amortization of premiums or accretion of discounts on a straight-line basis. Interest income is accrued on a straight-line basis. Gains and losses resulting from sales of securities are determined by specific issues based on average cost. Foreign-currency-denominated assets are revalued daily at current foreign currency market exchange rates in order to report these assets in U.S. dollars. Realized and unrealized gains and losses on investments denominated in foreign currencies are reported as "Foreign currency gains (losses), net" in the Statements of Income.

Activity related to U.S. government securities, including the premiums, discounts, and realized and unrealized gains and losses, is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of interdistrict clearings that occurs in April of each year. The settlement equalizes Reserve Bank gold certificate holdings to Federal Reserve notes outstanding in each District. Activity related to investments denominated in foreign currencies is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31.

(D) Securities Purchased under Agreements to Resell, Securities Sold under Agreements to Repurchase, and Securities Lending

The FRBNY may engage in tri-party purchases of securities under agreements to resell ("tri-party agreements"). Tri-party agreements are conducted with two commercial custodial banks that manage the clearing and settlement of collateral. Collateral is held in excess of the contract amount. Acceptable collateral under tri-party agreements primarily includes U.S. government securities, pass-through mortgage securities of the Government National Mortgage Association, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association, STRIP securities of the U.S. Government, and "stripped" securities of other government agencies. The tri-party agreements are accounted for as financing transactions, with the associated interest income accrued over the life of the agreement.

Securities sold under agreements to repurchase are accounted for as financing transactions and the associated interest expense is recognized over the life of the transaction. These transactions are reported in the Statements of Condition at their contractual amounts and the related accrued interest payable is reported as a component of "Other liabilities."

U.S. government securities held in the SOMA are lent to U.S. government securities dealers in order to facilitate the effective functioning of the domestic securities market. Securities-lending transactions are fully collateralized by other U.S. government securities and the collateral taken is in excess of the market value of the securities loaned. The FRBNY charges the dealer a fee for borrowing securities and the fees are reported as a component of "Other income."

Activity related to securities sold under agreements to repurchase and securities lending is allocated to each of the Reserve Banks on a percentage basis derived from the annual settlement of interdistrict clearings. Securities purchased under agreements to resell are allocated to the FRBNY and not to the other Reserve Banks.

(E) FX Swap Arrangements and Warehousing Agreements

FX swap arrangements are contractual agreements between two parties, the FRBNY and an authorized foreign central bank, to exchange specified currencies, at a specified price, on a specified date. The parties agree to exchange their currencies up to a pre-arranged maximum amount and for an agreed-upon period of time (up to twelve months), at an agreed-upon interest rate. These arrangements give the FOMC temporary access to the foreign currencies it may need to intervene to support the dollar and give the authorized foreign central bank temporary access to dollars it may need to support its own currency. Drawings under the FX swap arrangements can be initiated by either party acting as drawer, and must be agreed to by the drawee party. The FX swap arrangements are structured so that the party initiating the transaction bears the exchange rate risk upon maturity. The FRBNY will generally invest the foreign currency received under an FX swap arrangement in interest-bearing instruments.

Warehousing is an arrangement under which the FOMC agrees to exchange, at the request of the U.S. Treasury, U.S. dollars for foreign currencies held by the U.S. Treasury or ESF over a limited period of time. The purpose of the warehousing facility is to supplement the U.S. dollar resources of the U.S. Treasury and ESF for financing purchases of foreign currencies and related international operations.

FX swap arrangements and warehousing agreements are revalued daily at current market exchange rates. Activity related to these agreements, with the exception of the unrealized gains and losses resulting from the daily revaluation, is allocated to each Reserve Bank based on the ratio of each Reserve Bank's capital and surplus to aggregate capital and surplus at the preceding December 31. Unrealized gains and losses resulting from the daily revaluation are allocated to the FRBNY and not allocated to the other Reserve Banks.

(F) Bank Premises, Equipment, and Software

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, which range from two to fifty years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and minor replacements are charged to operating expense in the year incurred.

Costs incurred for software during the application development stage, either developed internally or acquired for internal use, are capitalized based on the cost of direct services and materials associated with designing, coding, installing, or testing software. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software applications, which range from two to five years. Maintenance costs related to software are charged to expense in the year incurred.

Capitalized assets including software, buildings, leasehold improvements, furniture, and equipment are impaired when events or changes in circumstances indicate that the carrying amount of assets or asset groups is not recoverable and significantly exceeds their fair value.

(G) Federal Reserve Notes

Federal Reserve notes are the circulating currency of the United States. These notes are issued through the various Federal Reserve agents (the chairman of the board of directors of each Reserve Bank and their designees) to the Reserve Banks upon deposit with such agents of specified classes of collateral, typically U.S. government securities. These notes are identified as issued to a specific Reserve Bank. The Federal Reserve Act provides that the collateral tendered by the Reserve Bank to the Federal Reserve agent must be equal to the sum of the notes applied for by such Reserve Bank.

Assets eligible to be pledged as collateral include all of the Reserve Banks' assets. The collateral value is equal to the book value of the collateral tendered, with the exception of securities, for which the collateral value is equal to the par value of the securities tendered. The par value of securities pledged for securities sold under agreements to repurchase is deducted.

The Board of Governors may, at any time, call upon a Reserve Bank for additional collateral for the Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks. Finally, Federal Reserve notes are obligations of the United States and are backed by the full faith and credit of the United States government.

"Federal Reserve notes outstanding, net" in the Statements of Condition represents Federal Reserve notes outstanding, reduced by the currency issued to the Reserve Banks but not in circulation, of $175,661 million and $148,152 million at December 31, 2006 and 2005, respectively.

At December 31, 2006, all Federal Reserve notes were fully collateralized. All gold certificates, all special drawing right certificates, and $769,782 million of domestic securities and securities purchased under agreements to resell were pledged as collateral. At December 31, 2006, no loans or investments denominated in foreign currencies were pledged as collateral.

(H) Items in Process of Collection and Deferred Credit Items

"Items in process of collection" in the Statements of Condition primarily represents amounts attributable to checks that have been deposited for collection and that, as of the balance sheet date, have not yet been presented to the paying bank. "Deferred credit items" are the counterpart liability to "items in process of collection," and the amounts in this account arise from deferring credit for deposited items until the amounts are collected. The balances in both accounts can vary significantly.

(I) Capital Paid-In

The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Banks in an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting with a par value of $100 and may not be transferred or hypothecated. As a member bank's capital and surplus changes, its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid-in and the remainder is subject to call. By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in capital stock. This cumulative dividend is paid semiannually. A member bank is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.

(J) Surplus

The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in as of December 31 of each year. This amount is intended to provide additional capital and reduce the possibility that the Reserve Banks would be required to call on member banks for additional capital.

Accumulated other comprehensive income is treated as a component of surplus in the Statements of Condition and the Statements of Changes in Capital. The balance of accumulated other comprehensive income is comprised of expenses, gains, and losses related to defined benefit pension plans and other postretirement benefit plans that under accounting principles are included in comprehensive income but excluded from net income. Additional information regarding the classifications of accumulated other comprehensive income is provided in Notes 8, 9, and 10.

(K) Interest on Federal Reserve Notes

The Board of Governors requires the Reserve Banks to transfer excess earnings to the U.S. Treasury as interest on Federal Reserve notes, after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate surplus with capital paid-in. This amount is reported as a component of "Payments to U.S. Treasury as interest on Federal Reserve notes" in the Statements of Income and is reported as a liability in the Statements of Condition. Weekly payments to the U.S. Treasury may vary significantly.

In the event of losses or an increase in capital paid-in at a Reserve Bank, payments to the U.S. Treasury are suspended and earnings are retained until the surplus is equal to the capital paid-in.

In the event of a decrease in capital paid-in, the excess surplus, after equating capital paid-in and surplus at December 31, is distributed to the U.S. Treasury in the following year.

Due to the substantial increase in capital paid-in at one Reserve Bank, surplus was not equated to capital at December 31, 2005. The amount of additional surplus required due to these events exceeded the Bank's earnings in 2005.

(L) Income and Costs Related to U.S. Treasury Services

The Reserve Banks are required by the Federal Reserve Act to serve as fiscal agents and depositories of the United States. By statute, the Department of the Treasury is permitted, but not required, to pay for these services.

(M) Assessments by the Board of Governors

The Board of Governors assesses the Reserve Banks to fund its operations based on each Reserve Bank's capital and surplus balances as of December 31 of the previous year. The Board of Governors also assesses each Reserve Bank for the expenses incurred for the U.S. Treasury to issue and retire Federal Reserve notes based on each Reserve Bank's share of the number of notes comprising the System's net liability for Federal Reserve notes on December 31 of the previous year.

(N) Taxes

The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property and sales taxes on certain construction projects. Real property taxes were $33 million and $32 million for the years ended December 31, 2006 and 2005, respectively, and are reported as a component of "Occupancy expense."

(O) Restructuring Charges

In 2003, the Reserve Banks began the restructuring of several operations, primarily check, cash, and U.S. Treasury services. The restructuring included streamlining the management and support structures, reducing staff, decreasing the number of processing locations, and increasing processing capacity in some locations. These restructuring activities continued in 2004 through 2006.

Note 11 describes the restructuring and provides information about the Reserve Banks' costs and liabilities associated with employee separations and contract terminations. The costs associated with the impairment of certain of the Reserve Banks' assets are discussed in Note 6. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY as discussed in Note 8. Costs and liabilities associated with enhanced post-retirement benefits are discussed in Note 9.

(P) Implementation of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans

The Reserve Banks initially applied the provisions of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, at December 31, 2006. This accounting standard requires recognition of the overfunded or underfunded status of a defined benefit postretirement plan in the Statements of Condition, and recognition of changes in the funded status in the years in which the changes occur through comprehensive income. The transition rules for implementing the standard require applying the provisions as of the end of the year of initial implementation with no retrospective application. The incremental effects on the line items in the Statement of Condition at December 31, 2006, were as follows (in millions):

Before Application
of Statement 158
Adjustments After Application
of Statement 158
Other Assets $3,277

$(1,492)

$1,785

Total assets $874,856


$(1,492)


$873,364


Accrued benefit costs 957

357

1,314

Total liabilities $842,359


$357


$842,716


Surplus 17,173

(1,849)

15,324

Total capital $32,497


$(1,849)


$30,648


(4) U.S. Government Securities, Securities Purchased under Agreements to Resell, Securities Sold under Agreements to Repurchase, and Securities Lending

The FRBNY, on behalf of the Reserve Banks, holds securities bought outright in the SOMA.

Total securities held in the SOMA at December 31, were as follows (in millions):

2006 2005
Par value
U.S. government    
Bills $277,019 $271,270
Notes 402,367 380,118
Bonds 99,528

92,827

Total par value 778,914 744,215
Unamortized premiums 8,708 8,813
Unaccreted discounts (4,003)

(2,826)

Total $783,619


$750,202


At December 31, 2006 and 2005, the fair value of the U.S. government securities held in the SOMA, excluding accrued interest, was $795,900 million and $767,472 million, respectively, as determined by reference to quoted prices for identical securities.

Although the fair value of security holdings can be substantially greater or less than the carrying value at any point in time, these unrealized gains or losses have no effect on the ability of the Reserve Banks, as a central bank, to meet its financial obligations and responsibilities, and should not be misunderstood as representing a risk to the Reserve Banks, their shareholders, or the public. The fair value is presented solely for informational purposes.

The maturity distribution of U.S. government securities bought outright, securities purchased under agreements to resell, and securities sold under agreements to repurchase, that were held in the SOMA at December 31, 2006, was as follows (in millions):

U.S. government
securities (Par value)
Securities purchased
under agreements
to resell (Contract amount)
Securities sold
under agreements to repurchase
(Contract amount)
Within 15 days $40,588 $40,750 $29,615
16 days to 90 days 180,893 . . . . . .
91 days to 1 year 185,132 . . . . . .
Over 1 year to 5 years 224,177 . . . . . .
Over 5 years to 10 years 67,645 . . . . . .
Over 10 years 80,479

. . .

. . .

Total $778,914


$40,750


$29,615



At December 31, 2006 and 2005, U.S. government securities with par values of $6,855 million and $3,776 million, respectively, were loaned from the SOMA.

At December 31, 2006 and 2005, the total contract amount of securities sold under agreements to repurchase was $29,615 million and $30,505 million, respectively. At December 31, 2006 and 2005, securities sold under agreements to repurchase with a par value of $29,676 million and $30,559 million, respectively, were outstanding. The contract amount for securities sold under agreements to repurchase approximates fair value.


(5) Investments Denominated in Foreign Currencies

The FRBNY, on behalf of the Reserve Banks, holds foreign currency deposits with foreign central banks and with the Bank for International Settlements and invests in foreign government debt instruments. Foreign government debt instruments held include both securities bought outright and securities purchased under agreements to resell. These investments are guaranteed as to principal and interest by the issuing foreign governments.

Total investments denominated in foreign currencies, including accrued interest, and valued at current foreign currency market exchange rates at December 31, were as follows (in millions):

 
2006 2005
European Union euro
Foreign currency deposits $6,242 $5,424
Securities purchased under agreements to resell 2,214 1,928
Government debt instruments 4,074 3,561
Japanese yen  
Foreign currency deposits 2,601 2,618
Government debt instruments 5,351

5,397

Total $20,482


$18,928


At December 31, 2006 and 2005, the fair value of the total System investments denominated in foreign currencies, including accrued interest, was $20,434 million and $18,965 million, respectively. The fair value of government debt instruments was determined by reference to quoted prices for identical securities. The cost basis of foreign currency deposits and securities purchased under agreements to resell, adjusted for accrued interest, approximates fair value. Similar to the U.S. government securities discussed in Note 4, unrealized gains or losses have no effect on the ability of a Reserve Bank, as a central bank, to meet its financial obligations and responsibilities.

The maturity distribution of investments denominated in foreign currencies at December 31, 2006, was as follows (in millions):

 
European
euro
Japanese
yen
Total
Within 15 days $4,359 $2,601 $6,960
16 days to 90 days 2,378 1,208 3,586
91 days to 1 year 2,442 2,213 4,655
Over 1 year to 5 years 3,351 1,930 5,281
Over 5 years to 10 years . . . . . . . . .
Over 10 years . . .

. . .

. . .

Total $12,530


$7,952


$20,482


At December 31, 2006 and 2005, there were no material open foreign exchange contracts.

At December 31, 2006 and 2005, the warehousing facility was $5,000 million, with no balance outstanding.

(6) Bank Premises, Equipment, and Software

A summary of bank premises and equipment at December 31 is as follows (in millions):

2006 2005
Bank premises and equipment
Land $306 $295
Buildings 1,817 1,787
Building machinery and equipment 393 387
Construction in progress 220 86
Furniture and equipment 1,156

1,162

Subtotal 3,892 3,717
Accumulated depreciation (1,516)

(1,465)

Bank premises and equipment, net $2,376


$2,252


Depreciation expense, for the year ended December 31 $186


$175


The Federal Reserve Bank of Kansas City (FRBKC) is constructing a new building to replace its head office. Approximately $29 million of costs associated with the acquisition of land and site preparation for the new building are included in the "Land" account, and approximately $114 million of costs associated with the construction of the new building are included in the "Construction in progress" account. In July 2005, the FRBKC completed the sale and leaseback of its head office, and will lease the space from the purchaser until the new building is completed in 2008.

Bank premises and equipment at December 31 include the following amounts for leases that have been capitalized (in millions):

2006 2005
Leased premises and equipment under capital leases $12 $10
Accumulated depreciation (6)

(5)

Leased premises and equipment under capital leases, net $6


$5


Certain of the Reserve Banks lease space to outside tenants with remaining lease terms ranging from one to fourteen years. Rental income from such leases was $25 million and $23 million for the years ended December 31, 2006 and 2005, respectively, and is reported as a component of "Other income." Future minimum lease payments that the Bank will receive under noncancelable lease agreements in existence at December 31, 2006, are as follows (in millions):

 
2007 $23
2008 23
2009 22
2010 21
2011 18
Thereafter 70

Total $177


The Reserve Banks have capitalized software assets, net of amortization, of $155 million and $162 million at December 31, 2006 and 2005, respectively. Amortization expense was $66 million and $55 million for the years ended December 31, 2006 and 2005, respectively. Capitalized software assets are reported as a component of "Other assets" and the related amortization is reported as a component of "Other expenses."

Several of the Reserve Banks have impaired assets as a result of the System's restructuring plan, as discussed in Note 11. Impaired assets include software, buildings, leasehold improvements, furniture, and equipment. Asset impairment losses related to the check and cash restructurings of $15 million and $50 million for the periods ending December 31, 2006 and 2005, respectively, were determined using fair values based on quoted market values or other valuation techniques and are reported as a component of "Other expenses."

(7) Commitments and Contingencies

At December 31, 2006, the Reserve Banks were obligated under noncancelable leases for premises and equipment with remaining terms ranging from one to approximately seventeen years. These leases provide for increased rental payments based upon increases in real estate taxes, operating costs, or selected price indices.

Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment (including taxes, insurance and maintenance when included in rent), net of sublease rentals, was $31 million and $26 million for the years ended December 31, 2006 and 2005, respectively. Certain of the Reserve Banks' leases have options to renew.

Future minimum rental payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one year or more, at December 31, 2006 are as follows (in millions):

Year Operating
2007 $12
2008 9
2009 8
2010 8
2011 7
Thereafter 102

Future minimum
rental payments
$146


At December 31, 2006, the Reserve Banks had other commitments and long-term obligations extending through the year 2017 with a remaining amount of $336 million. As of December 31, 2006, commitments of $219 million were recognized. Purchases of $92 million and $98 million were made against these commitments during 2006 and 2005, respectively. These commitments are for goods and services to maintain currency machines, for software licenses and maintenance, for services related to check processing equipment and transportation, and have variable and/or fixed components. The variable portion of the commitments is for additional services above fixed contractual service limits. The fixed payments for the next five years under these commitments are as follows (in millions):

Year Fixed commitment
2007 $30
2008 36
2009 32
2010 28
2011 29

The Reserve Banks are involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these actions, in management's opinion, based on discussions with counsel, the aforementioned litigation and claims will be resolved without material adverse effect on the financial position or results of operations of the Reserve Banks.


(8) Retirement and Thrift Plans

Retirement Plans

The Reserve Banks currently offer three defined benefit retirement plans to their employees based on length of service and level of compensation. Substantially all of the Reserve Banks', Board of Governors', and the Office of Employee Benefits of the Federal Reserve System's employees participate in the Retirement Plan for Employees of the Federal Reserve System ("System Plan"). Employees at certain compensation levels participate in the Benefit Equalization Retirement Plan ("BEP") and certain Reserve Bank officers participate in the Supplemental Employee Retirement Plan ("SERP").

The System Plan is a multi-employer plan with contributions funded by participating employers. Participating employers are the Federal Reserve Banks, the Board of Governors, and the Office of Employee Benefits of the Federal Reserve Employee Benefits System. No separate accounting is maintained of assets contributed by the participating employers. The FRBNY acts as the sponsor of the System Plan and the costs associated with the Plan are not redistributed to other participating employers.

Following is a reconciliation of the beginning and ending balances of the System Plan benefit obligation (in millions):

 
2006 2005
Estimated actuarial present value of projected benefit obligation at January 1 $4,785 $4,524
Service cost--benefits earned during the period 134 123
Interest cost on projected benefit obligation 278 263
Actuarial loss 132 125
Contributions by plan participants 3 3
Special termination benefits loss 3 6
Benefits paid (254) (259)
Plan amendments 66

. . .

Estimated actuarial present value of projected benefit obligation at December 31 $5,147


$4,785


Following is a reconciliation of the beginning and ending balance of the System Plan assets, the funded status, and the prepaid pension benefit costs (in millions):

2006 2005
Estimated fair value of plan assets at January 1 $5,868 $5,887
Actual return on plan assets 713 237
Contributions by the employer . . . . . .
Contributions by plan participants 3 3
Benefits paid (254)

(259)

Estimated fair value of plan assets at December 31 $6,330 $5,868


Funded status $1,183


$1,083
Unrecognized prior service cost 149
Unrecognized net actuarial loss 1,496
Prepaid pension benefit costs $2,728


Amounts included in accumulated other comprehensive loss (in millions)  
Prior service cost (191)
Net actuarial loss (1,301)

Total accumulated other comprehensive loss $(1,492)


 


Prepaid pension benefit costs are reported as "Other assets" in the Statements of Condition.

The accumulated benefit obligation for the System Plan, which differs from the estimated actuarial present value of the projected benefit obligation because it is based on current rather than future compensation levels, was $4,522 million and $4,162 million at December 31, 2006 and 2005, respectively.


The weighted-average assumptions used in developing the projected pension benefit obligation for the System Plan as of December 31 were as follows:

2006 2005
Discount rate 6.00% 5.75%
Rate of compensation increase 4.50% 4.50%

Net periodic benefit expenses are actuarially determined using a January 1 measurement date. The weighted-average assumptions used in developing net periodic benefit expenses for the System Plan for the years at January 1 were as follows:

 
2006 2005
Discount rate 5.75% 5.75%
Expected asset return 8.00% 8.25%
Rate of compensation increase 4.50% 4.25%

Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due. The expected long-term rate of return on assets was based on a combination of methodologies including the System Plan's historical returns, surveys of other plans' expected rates of return, building a projected return for equities and fixed income investments based on real interest rates, inflation expectations, equity risk premiums, and, finally, surveys of expected returns in equity and fixed income markets.

The components of net periodic pension benefit expense (credit) for the System Plan for the years ended December 31 are shown below (in millions):

 
2006 2005
Service cost--benefits earned during the period $134 $123
Interest cost on projected benefit obligation 278 263
Amortization of prior service cost 23 24
Amortization of actuarial loss 75 49
Expected return on plan assets (460)

(476)

Net periodic pension expense/(credit) 50 (17)
Special termination benefits losses 3

6

Total periodic pension expense/(credit) $53


$(11)


Estimated amounts that will be amortized from
accumulated other comprehensive loss into net
periodic pension expense in 2007 (in millions):
Prior service cost $29
Actuarial loss 66

Total $95


The recognition of special termination benefits losses is the result of enhanced retirement benefits provided to employees during the restructuring described in Note 11.

Following is a summary of expected benefit payments (in millions):

 
Year Expected benefit payments
2007 $260
2008 270
2009 281
2010 294
2011 306
2012--2016 1,764

Total $3,175


The Federal Reserve System's pension plan weighted-average asset allocations at December 31, by asset category, were as follows:

 
2006 2005
Equities 64.3% 66.2%
Fixed income 34.4% 31.7%
Cash 1.3%

2.1%

Total 100.0%


100.0%



The System's Committee on Investment Performance (CIP) contracts with investment managers who are responsible for implementing the System Plan's investment policies. The managers' performance is measured against a trailing 36-month benchmark of 60 percent of a market value weighted index of predominantly large capitalization stocks trading on the New York Stock Exchange, the American Stock Exchange, and the National Association of Securities Dealers Automated Quotation National Market System and 40 percent of a broadly diversified investment-grade fixed income index (rebalanced monthly). The managers invest plan funds within CIP-established guidelines for investment in equities and fixed income instruments. Equity investments can range between 40 percent and 80 percent of the portfolio. Investments, however, cannot be concentrated in particular industries and equity securities holdings of any one company are limited. Fixed income securities must be investment grade and the effective duration of the fixed income portfolio must remain within a range of 67 percent and 150 percent of a broadly diversified investment-grade fixed income index. CIP guidelines prohibit margin, short sale, foreign exchange, and commodities trading as well as investment in bank, bank holding company, savings and loan, and government securities dealers' stocks. In addition, investments in non-dollar denominated securities are prohibited; however, a small portion of the portfolio can be invested in American Depositary Receipts/Shares and foreign-issued dollar-denominated fixed income securities.

Contributions to the System Plan may be determined using different assumptions than those required for financial reporting. The System does not expect to make a cash contribution to the System Plan during 2007.

The Reserve Banks' projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31, 2006 and 2005, and for the years then ended, are not material.

Thrift Plan

Employees of the Reserve Banks may also participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System ("Thrift Plan"). The Reserve Banks' Thrift Plan contributions totaled $66 million and $63 million for the years ended December 31, 2006 and 2005, respectively, and are reported as a component of "Salaries and other benefits" in the Statements of Income. The Reserve Banks match employee contributions based on a specified formula. For the years ended December 31, 2006 and 2005, the Reserve Banks matched 80 percent on the first 6 percent of employee contributions for employees with less than five years of service and 100 percent on the first 6 percent of employee contributions for employees with five or more years of service.

(9) Postretirement Benefits Other Than Pensions and Postemployment Benefits

Postretirement Benefits Other Than Pensions

In addition to the Reserve Banks' retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical benefits and life insurance coverage during retirement.

The Reserve Banks fund benefits payable under the medical and life insurance plans as due and, accordingly, have no plan assets.

Following is a reconciliation of beginning and ending balances of the benefit obligation (in millions):

 
2006 2005
Accumulated postretirement benefit obligation at January 1 $947 $869
Service cost--benefits earned during the period 27 32
Interest cost of accumulated benefit obligation 54 49
Actuarial loss 188 45
Contributions by plan participants 13 11
Benefits paid (60) (59)
Plan amendments (5)

. . .

Accumulated postretirement benefit obligation at December 31 $1,164


$947


At December 31, 2006 and 2005, the weighted-average discount rate assumptions used in developing the postretirement benefit obligation were 5.75 percent and 5.50 percent, respectively.

Discount rates reflect yields available on high quality corporate bonds that would generate the cash flows necessary to pay the plan's benefits when due.

Following is a reconciliation of the beginning and ending balance of the plan assets, the unfunded postretirement benefit obligation, and the accrued postretirement benefit costs (in millions):

 
2006 2005
Fair value of plan assets at January 1 $ . . . $ . . .
Contributions by the employer 47 48
Contributions by plan participants 13 11
Benefits paid (60)

(59)

Fair value of plan assets at December 31 $ . . .


$ . . .


Unfunded postretirement benefit obligation $1,164


$947
Unrecognized prior service cost 105
Unrecognized net actuarial loss (277)
Accrued postretirement benefit costs $775


Amounts included in accumulated other comprehensive loss (in millions):
Prior service cost $85
Net actuarial loss (443)
Deferred curtailment gain 1

Total accumulated other comprehensive loss $(357)


Accrued postretirement benefit costs are reported as a component of "Accrued benefit costs" in the Statements of Condition.


For measurement purposes, the assumed health care cost trend rates at December 31 are as follows:

 
2006 2005
Health care cost trend rate assumed for next year 9.00% 9.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00% 5.00%
Year that the rate reaches the ultimate trend rate 2012 2011

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects for the year ended December 31, 2006 (in millions):

 
One percentage
point increase
One percentage
point decrease
Effect on aggregate of service and interest cost components of net periodic postretirement benefit expense $12 $(10)
Effect on accumulated postretirement benefit obligation 128 (111)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December 31 (in millions):

 
2006 2005
Service cost--benefits earned during the period $27 $32
Interest cost on accumulated benefit obligation 54 49
Amortization of prior service cost (23) (21)
Amortization of actuarial loss 22

13

Total periodic expense 80 73
Curtailment gain . . .

(5)

Net periodic postretirement benefit expense $80 $68
Estimated amounts that will be amortized
from accumulated other comprehensive loss
into net periodic benefitexpense in 2007(in millions):
Prior service cost (22)
Actuarial loss 45

Total $23

Net postretirement benefit expense is actuarially determined using a January 1 measurement date. At January 1, 2006 and 2005, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit expense were 5.50 percent and 5.75 percent, respectively.

Net periodic postretirement benefit expense is reported as a component of "Salaries and other benefits" in the Statements of Income.

The 2005 service cost contains an adjustment by one Reserve Bank that resulted from a review of plan terms and assumptions. A plan amendment that modified the credited service period eligibility requirements created curtailment gains in 2005. A deferred curtailment gain, which was recorded in 2006 as a component of accumulated other comprehensive loss, is expected to be recognized in net income in 2008 when the related employees terminate employment.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under Medicare ("Medicare Part D") and a federal subsidy to sponsors of retiree health care benefit plans that provide benefits that are at least actuarially equivalent to Medicare Part D. The benefits provided under the Reserve Banks' plan to certain participants are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy, retroactive to January 1, 2004, are reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.

The Reserve Banks account for the Medicare subsidies as a reduction to benefits payments. The Reserve Banks expect to receive approximately $4 million in subsidies in the year ending December 31, 2007 that relate to benefit payments made in the year ended December 31, 2006.

Following is a summary of expected postretirement benefit payment (in millions):

 
Without subsidy With subsidy
2007 $63 $58
2008 68 62
2009 73 68
2010 79 72
2011 84 77
2012-2016 476

430

Total $843


$767


Postemployment Benefits

The Reserve Banks offer benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a December 31, 2006 measurement date and include the cost of medical and dental insurance, survivor income, and disability benefits. The accrued postemployment benefit costs recognized by the Reserve Banks at December 31, 2006 and 2005 were $126 million and $124 million, respectively. This cost is included as a component of "Accrued benefit costs" in the Statements of Condition. Net periodic postemployment benefit expense included in 2006 and 2005 operating expenses was $20 million and $14 million, respectively, and is recorded as a component of "Salaries and other benefits" in the Statements of Income.


(10) Accumulated Other Comprehensive Income

Following is a reconciliation of beginning and ending balances of accumulated other comprehensive loss:

 
Amount Related to Defined Benefit Retirement Plans Amount Related to Postretirement Benefits Other than Pensions Total Accumulated Other Comprehensive Loss
Balance at
December 31, 2005 $. . . $. . . $. . .
Adjustment to
initially apply
FASB Statement No. 158
(1,492)

(357)

(1,849)

Balance at December 31, 2006 $(1,492)


$(357)


$(1,849)


Additional detail regarding the classification of accumulated other comprehensive income is included in notes 8 and 9.

(11) Business Restructuring Charges

In 2003, several Reserve Banks announced plans for restructuring to streamline operations and reduce costs, including consolidation of check operations and staff reductions in various functions of the Bank. In 2004 through 2006, additional consolidation and restructuring initiatives were announced in the check, cash, purchasing, and Treasury operations. These actions resulted in the following business restructuring charges (in millions):

These actions resulted in the following business restructuring charges (in millions):

 
Total estimated costs
Employee separation $49
Contract termination 1
Other 1

Total $51


 

 
Year-ended 12/31/2006
Accrued liability 12/31/05 Total charges Total paid Accrued liability 12/31/06
Employee separation $17 $9 $(12) $14
Contract termination . . . . . . . . . . . .
Other . . .

. . .

. . .

. . .

Total $17


$9


$(12)


$14


Adjustments to the accrued liability due to changes in the estimated restructuring costs were offset against total charges. Without these offsets, total charges would have been $10 million in 2006.

Employee separation costs are primarily severance costs related to identified staff reductions of approximately 1,949, including 286 and 292 staff reductions related to restructuring announced in 2006 and 2005, respectively. Costs related to staff reductions for the years ended December 31, 2006 and 2005 are reported as a component of "Salaries and other benefits" in the Statements of Income. Contract termination costs include the charges resulting from terminating existing lease and other contracts and are shown as a component of "Other expenses." Other costs include the continuation of a noncancelable lease agreement and associated facility maintenance and are shown as a component of "Occupancy expenses."

Restructuring costs associated with impairment of certain Reserve Bank assets, including software, buildings, leasehold improvements, furniture, and equipment, are discussed in Note 6. Costs associated with enhanced pension benefits for all Reserve Banks are recorded on the books of the FRBNY as discussed in Note 8. Costs associated with enhanced postretirement benefits are disclosed in Note 9.

Future costs associated with the announced restructuring plans are estimated at $4 million.

The Reserve Banks anticipate substantially completing their announced plans in 2008.

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