U.S. Coins: Implications of Changing Metal Compositions
Published: 2015-12-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The U.S. Mint, a bureau of the Treasury, produced about 13 billion coins in 2014. Since 2006, metal prices have risen to where the unit costs of a penny and nickel exceed their face value. The U.S. Mint was directed by statute to develop and evaluate the use of new metals that would reduce the costs of coin production while minimizing the impact on coin accepting equipment. Treasury is authorized to recommend coin changes to Congress based on the U.S. Mint's analysis and has not yet done so. GAO was asked to examine the U.S. Mint's efforts.
This report examines (1) what is known about potential government savings from changes to the metal composition of coins; (2) what is known about potential industry costs from changes to the metal composition of coins; and (3) how potential coin composition options could affect government savings and industry costs. GAO reviewed legislative provisions and U.S. Mint estimates of government savings; compared the U.S. Mint's estimating process to best practices; and reviewed cost estimates from associations that represent selected businesses that submitted estimates to the U.S. Mint, such as the vending and laundry industries. GAO interviewed U.S. Mint officials and industry representatives to understand how their estimates were developed.
GAO is not making recommendations in this report. In comments, the U.S. Mint questioned GAO's use of the Cost Guide to assess the U.S. Mint's estimates. GAO continues to believe it is appropriate to use the Cost Guide to assess the U.S. Mint's estimates.
section_title: What GAO Found
paragraphs: The U.S. Mint estimated that the government could potentially save between $8 million and $39 million per year by changing the metal composition of the nickel, dime, and quarter. The estimated savings of $8 million would come from slightly changing the current metal in coins, which would decrease metal costs and retain the characteristics of existing coins. The savings of $39 million would come from changing the nickel and dime to a plated steel coin, which would change the coin's weight and other characteristics. While the U.S. Mint previously estimated potential savings of $83 million per year by changing the nickel, dime, and quarter to a plated steel-based coin, the U.S. Mint determined that it was not viable to change the quarter because less-valuable foreign coins would have similar characteristics to a steel quarter and could be used as counterfeit quarters. GAO found that the U.S. Mint's cost-estimating process does not fully align with best practices outlined in the GAO Cost Estimating and Assessment Guide ( Cost Guide ) and as such may not result in precise estimates. For example, U.S. Mint officials discussed but did not conduct a sensitivity analysis—a best practice— that would have allowed them to know how savings estimates could be affected by changes in metal prices. However, the U.S. Mint's estimates can provide insight into the general magnitude of potential savings.
Associations representing selected industries that use coin acceptance machines estimated a cost impact ranging from $2.4 billion to $10 billion to modify an estimated 22-million coin machines, such as vending machines, to accommodate steel-based coins. According to these associations, these costs would be incurred because coin machines would require modifications to accept new coins while continuing to accept current coins. However, GAO found that these estimates may be overstated for several reasons. For example, the vending industry assumed 7-million vending machines would require modification, but a 2015 industry study estimated that there are 4.5-million vending machines in the United States. Second, the cost estimates assumed steel changes to all coins, but the U.S. Mint has determined it is not viable to change the quarter. Therefore, machines that only accept quarters (such as coin laundry machines) would not require modification. However, any change in coin composition that requires changes to coin acceptance machines will result in some industry costs.
Although government savings and industry cost estimates may not be precise indicators of savings and costs, they nonetheless show that metal compositions that would increase government savings also increase industry costs. U.S. Mint estimates show that one change could result in no industry costs but show a savings of only $8 million annually. In contrast, changing the nickel and dime to multi-ply plated steel coins could save $39 million annually but result in substantial industry costs. The Coin Modernization, Oversight, and Continuity Act of 2010 requires that any new coins work in existing machines that accept coins “to the greatest extent practicable.” U.S. Mint officials have not yet analyzed whether the options they are considering meet these criteria for making recommendations to Congress. U.S. Mint officials said when and if the Department of the Treasury (Treasury) makes recommendations to Congress, they will ensure that recommendations are within the framework of the Act.

section_title: Letter
paragraphs: According to one estimate, there were over 355 billion U.S. coins  circulating in the United States in 2012. The U.S. Mint, a bureau of the  Department of the Treasury, is responsible for making coins and  produced about 13-billion circulating coins in 2014. Coins play a major  role in commerce, as consumers use them daily to purchase food and  beverages from vending machines, wash clothes at coin-operated  laundries, and procure entertainment at amusement venues, among other  things. Since 2006, the prices of metals used in coins have risen so much  that the total production unit costs of the penny and nickel exceed their  face value resulting in financial losses to the U.S. Mint. The Coin  Modernization, Oversight, and Continuity Act of 2010 (the Act) directed  the Department of the Treasury to develop and evaluate the use of new  metallic materials in coins and make recommendations that would reduce  the costs of coin production. The Act also directed the Department of the  Treasury to consider the impact of any metal change on equipment that  accepts coins in developing these recommendations. As of November  2015, the Department of the Treasury has not made any  recommendations.
You asked us to review the U.S. Mint’s research and development efforts  to determine options to change the metal composition of circulating coins  as well as industry cost estimates for changing equipment to accept new  coins. This report examines (1) what is known about potential government  savings from changes to the metal composition of coins; (2) what is  known about potential industry costs from changes to the metal  composition of coins; and (3) how potential coin composition options  could affect government savings and industry costs.
To address these objectives, we reviewed the Act as well as the two  previous U.S. Mint biennial reports to Congress on this matter, which  were required by the Act. We reviewed estimates of government savings  developed by the U.S. Mint and assessed how the U.S. Mint’s estimating  process compared with best practices from the GAO Cost Estimating and  Assessment Guide (Cost Guide). We also reviewed a 2012 estimate of  government savings that was produced by a consulting firm—Navigant  Consulting (Navigant)—and commissioned by a supplier of coin material.  We reviewed estimates of potential industry costs from changes to the  metal composition of coins. These estimates were provided to the U.S.  Mint by industry associations that represent businesses with coin- accepting machines, such as the vending, amusement, and parking  industries. We interviewed; (1) U.S. Mint officials and Navigant  representatives to better understand how they developed their  government-savings estimates; (2) officials from the Royal Canadian Mint  and Royal Mint of the United Kingdom because those two entities have  changed the metal composition of their coins; and (3) the six selected  industry associations that developed cost estimates for the U.S. Mint. In  addition to these associations, we selected and contacted five other  industry organizations to understand technical aspects of coin acceptance  machinery used in the industry. We selected industries using a variety of  criteria, including industries that; (1) were specifically identified in the Act,  such as the vending and parking industries; (2) reported sizeable cost  impacts, such as the amusement park industry; and (3) rely on different  coin denominations, such as the armored car industry. The information  we received from interviews cannot be generalized to represent the views  of the entire universe of industries that use coins, but it provides insight  into how industries developed their estimates and how they could be  affected by a change in coin composition. Lastly, we determined the  current options for changing coin composition. For each option, we  described how each option could affect government savings and industry  costs. For more information on the methodology used in our report, see  appendix I.
We conducted this performance audit from March 2015 to December  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Coins serve as a medium of exchange in everyday commerce. In 2012,  Concurrent Technologies Corporation, a contractor to the U.S. Mint,  estimated that there were from 355 billion to 370 billion coins in  circulation—about two-thirds of them pennies. Many of these coins are  not in active circulation because people hold coins in storage containers  in their homes, automobiles, or office desk drawers, among other places.  However, coins in active use are accepted across the nation as payment  in hand-to-hand transactions and for products and services in millions of  machines ranging from vending and laundry to amusement and parking  machines. These automated, unattended machines validate U.S. coins  and their denominations by measuring one or more of the diameter,  thickness, weight, and electromagnetic signature (EMS) of each coin. In  addition to the four primary coins in circulation—the penny, nickel, dime,  and quarter—the 50-cent piece and 1-dollar coin are also considered  circulating coins.
The Constitution gives Congress the power to coin money, and under this  authority, Congress has specified that the current metal composition of  coins be as follows:  the penny (1-cent) is made of copper-plated zinc and consists of 97.5  percent zinc and 2.5 percent copper,  the nickel (5-cent) is made with an alloy of 75 percent copper and 25  percent nickel (a combination known as “cupronickel”), and  the dime (10-cent) and the quarter (25-cent) consist of three layers of  metal. The inner layer is copper and the two identical outer layers are  a silver-colored alloy of 75 percent copper and 25 percent nickel. (A  multi-layer coin is called a “clad coin.”)
The Federal Reserve determines the number of coins required to meet  the public’s needs. Specifically, depository institutions (e.g., commercial  banks and credit unions) order new coins from the Federal Reserve  through an online coin-ordering system called FedLine. Then, the Federal  Reserve’s Cash Product Office submits a new coin order to the U.S. Mint.  In turn, the U.S. Mint produces and distributes new coins each month to  the 12 Federal Reserve Banks that fulfill the orders made by the  depository institutions. In general, coin production varies from year to  year depending on several factors, such as public demand, the need to  replace mutilated or worn coins, and the price of copper, as well as orders  from the Federal Reserve to maintain its targeted inventory levels. The  U.S. Mint produced about 5-billion circulating coins in 2010 and about 13- billion circulating coins in 2014.
When the cost to produce and distribute a coin is less than its face value,  the federal government experiences a financial gain, creating a value  known as “seigniorage”. In fiscal year 2014, the U.S. Mint realized about  $315 million in seigniorage from circulating coins. The quarter and dime  resulted in seigniorage of $406 million, whereas the nickel and penny  resulted in a loss of seigniorage in the amount of $91 million. Seigniorage  is returned to the Treasury General Fund and reduces government’s  borrowing and interest cost, resulting in a financial benefit to the  government, whereas loss of seigniorage is absorbed as part of the U.S.  Mint’s operating costs. Table 1 shows the amount of seigniorage from  fiscal year 2010 through 2014.
The Act authorized the Secretary of the Treasury to conduct research and  development on new metals for all circulating coins with the goal of  reducing production costs. The Act also required, among other things,  that the Secretary:  consider “actors relevant to the ease of use of and ability to co- circulate of new coinage materials, including the effect on vending  machines and commercial coin processing equipment and making  certain, to the greatest extent practicable, that any new coins work  without interruption in existing coin acceptance equipment without  modification;”  “include detailed recommendations for any appropriate changes to the  metallic content of circulating coins in such a form that the  recommendations could be enacted into law as appropriate;”  “to the greatest extent possible, may not include any recommendation  for new specifications for producing a circulating coin that would  require any significant change to coin accepting and coin-handling  equipment to accommodate changes to all circulating coins  simultaneously;” and submit a biennial report to Congress “analyzing production costs for  each circulating coin, cost trends for such production, and possible  new metallic materials or technologies for the production of circulating  coins.”
The Secretary of the Treasury issued the first biennial report in December  2012 and another in December 2014. These reports summarized the U.S.  Mint’s research and development efforts to identify new metallic materials  or technologies for the production of circulating coins and also included  information on the U.S. Mint’s outreach efforts to industry and industry  cost estimates. In identifying potential new materials for circulating coins,  the U.S. Mint needed to ensure that the material could be used as a  viable, durable coin. After testing 29 different metal compositions for  circulating coins, the U.S. Mint has identified four viable metal  compositions—a new version of the current cupronickel (copper and  nickel), nickel-plated steel, multi-ply plated steel, and stainless steel.  The U.S. Mint plans to issue another report in December 2016. According  to U.S. Mint officials, the 2016 report will highlight areas of further study  as discussed in the 2014 Biennial Report to Congress. The areas of study  include further testing and evaluation of the new cupronickel alloy,  stainless steel research and development, improvements in production,  and outreach to the coin industry, among other things.
Other countries have also taken steps to reduce metal composition of  coins to reduce costs. For example, the Royal Canadian Mint and the  Royal Mint of the United Kingdom have both changed the metal  composition of their coins from cupronickel to steel-based coinage in an  effort to reduce production costs. The Royal Canadian Mint  manufacturers its coins using a patented multi-ply plated steel  technology. The Royal Mint produces its coins using its own plated steel  technology known as aRMour® plating.
A variety of businesses rely on coins. Some industries sell products or  services through the use of coin machines, such as vending and coin- operated laundry machines. According to the vending machine industry, it  generally sells products using modern, technologically advanced coin  machines that validate and accept many types of circulating coins as well  as dollar bills. Its members include well-known, large corporations. In  contrast, representatives from the coin-operated laundry industry stated  that the industry is comprised of small “mom-and-pop” business owners  and operators, provides services using mechanical technology, and  depends heavily on the quarter. Representatives from the amusement  industry also stated that their industry depends heavily on the quarter for  playing games, billiards, and juke-boxes. Businesses in the amusement  industry range from large national chains to small owners and operators.  Another type of industry that deals with coins is the armored car industry.  According to this industry, it sorts, counts, wraps, and transports all  denominations of circulating coins from Federal Reserve Banks to  commercial banks and other privately owned businesses. This industry is  dominated by four large armored car carriers. Finally, manufacturers that  make coin acceptance and handling equipment support the entire coin  industry.
section_title: The U.S. Mint’s Analysis Indicates Potential for Government Savings from Changing the Composition of Coins
subsections: section_title: The U.S. Mint’s Analysis of Viable Metal Alternatives Shows Potential for Savings
paragraphs: The U.S. Mint’s analysis estimates that the government could potentially  save from about $8 million to about $39 million per year through different  changes in coin composition to the nickel, dime, and quarter. The U.S.  Mint developed four alternatives for coin composition and estimated the  savings for each alternative (see fig. 1).
The U.S. Mint’s analysis shows that changing to a new version of a  copper and nickel combination (cupronickel) could potentially save the  government about $8 million per year, based on 2014 production costs,  and should not affect industry. This change is known as the “seamless”  alternative because it would not significantly change the characteristics of  the nickel, dime, or quarter. The savings would result from a change in  metal costs alone, specifically (1) increasing the amount of copper in the  nickel and the outer clad layer of the dime and the quarter from 75  percent to 77 percent and decreasing the amount of nickel, which is more  expensive, from 25 percent to 20 percent, and (2) adding manganese to  the coins. The seamless alternative is designed to have the same  diameter and EMS characteristics and nearly the same weight as the  current cupronickel composition. According to the U.S. Mint, this  alternative would not require any changes to coin acceptance machines  and would not affect industry. As of September 30, 2015, the U.S. Mint  was conducting further testing of another version of this alloy that  substitutes zinc or zinc and manganese for some of the nickel, to help  ensure that the alloy has the same characteristics as the current nickel  and would not require changes to coin acceptance machines.
The U.S. Mint’s analysis also shows that the largest savings the  government could potentially achieve is about $39 million per year by  changing the coin composition of the nickel and dime to multi-ply plated  steel. This type of change is referred to as a “co-circulating” alternative  because different types of coin compositions for the same coin  denomination would circulate together in the economy for 30 years or  more. Under this co-circulating alternative, savings would result from  both metal changes (as steel is less expensive than copper or nickel) and  production changes. According to U.S. Mint officials, their metal suppliers  would supply coin “blanks” for multi-ply plated steel coins, thereby  eliminating the need for the U.S. Mint to make its own blanks. Currently,  suppliers provide sheets of metal that the U.S. Mint uses to produce coin  blanks. A change to steel-based coins would require the coin industry to  make modifications to current coin acceptance machines to recognize  and accept both new and existing coins, because the new coins would  have a different weight and EMS than existing coins and would also be  magnetic.
The U.S. Mint had originally included the quarter in its savings estimates  for a co-circulating coin change. When including the quarter, the U.S. Mint  had estimated that the government could save $83 million per year by  changing the quarter, nickel, and dime to multi-ply plated steel.
In October 2015, U.S. Mint officials told us that they determined that  neither multi-ply plated steel nor the nickel-plated steel compositions were  viable for the quarter due to security concerns. Specifically, as the use  of steel coins has increased around the world, the U.S. Mint determined  that there is too great a risk that the size, weight, and EMS of any steel- based U.S. quarter may be close to that of a less valuable foreign coin.  According to Mint officials, this disparity may result in fraud because  machines would not be able to differentiate between the U.S. quarter and  lower-value foreign coins. According to U.S. Mint officials, it is viable to  change the nickel and dime to multi-ply plated steel because these coins  are lower in value and therefore do not provide a similar incentive to  counterfeiters.
The Act provides the parameters that the U.S. Mint used to direct its  research and development and evaluate the impact to industry as it  developed estimates. For example, the Act limits the U.S. Mint to  considering metallic materials during its research and development for co- circulating alternative coinage. Specifically, the Act specifies that metallic  materials be tested for coinage, and this testing prevents the U.S. Mint  from considering less expensive materials and nonmetallic alloys that  could be suitably fabricated as coins and limits the co-circulating  alternatives. Additionally, the U.S. Mint did not include metallic changes to  the penny because the U.S. Mint could not identify a less expensive metal  for the penny. In its 2012 biennial report, the U.S. Mint reported that while  the penny costs more to produce than its face value, there is no viable  metal alternative that is cheaper than zinc. Representatives from a raw  material supplier, and consulting firm told us that they agreed with the  U.S. Mint’s assessment. The Act also specified that any proposed  changes may not allow for greater risk of fraud from counterfeiting or  substituting cheaper foreign coins. Finally, according to U.S. Mint officials,  the Act’s language on minimizing the effect on vending machines and  commercial coin processing equipment led the U.S. Mint to pursue  research on a seamless alternative as well as a co-circulating alternative.
In addition, the U.S. Mint’s analysis did not include information on how the  organization would transition from the current coin composition to a new  coin composition. For example, the U.S. Mint did not determine the  disposal costs of equipment that would no longer be used if coin  composition changed or consider potential changes to its workforce.  According to officials, the U.S. Mint has improved its internal processes  through a separate effort. Specifically, according to U.S. Mint officials, the  U.S. Mint reduced plant overhead by 7 percent and general and  administrative costs by 18 percent from between 2009 to 2014; reduced  employee shifts—from 3 to 2 shifts per day—at the two Mints that  produce circulating coins; and streamlined its die- manufacturing  process.
section_title: The U.S. Mint’s Cost- Estimating Process Does Not Fully Align with Best Practices
paragraphs: Although these estimates can provide an understanding of the general  magnitude of potential government savings, our analysis found that the  U.S. Mint’s cost-estimating process and resulting analyses are limited  because they did not fully align with best practices for estimating costs, as  outlined in the Cost Guide. Without following best practices, the U.S.  Mint’s estimates may not be reliable.
The Cost Guide includes a 12-step process to develop a reliable cost  estimate. These best practices are the basis for developing high-quality,  reliable cost estimates and help ensure that the cost estimates are  comprehensive, well documented, accurate, and credible. For example,  following these practices should result in cost estimates that can, among  other things, be replicated and updated. According to the Cost Guide,  these best practices can guide government managers as they assess the  credibility of a cost estimate for decision-making purposes for a range of  programs. Of the 12 steps in the Cost Guide, our analysis found that the  U.S. Mint’s cost-estimating processes fully met 1, partially met 7,  minimally met 3, and did not meet 1 of these 12 steps. More detailed  information describing how the U.S. Mint’s cost estimating process  aligned with the Cost Guide can be found in appendix II. In summary:
Fully met: The U.S. Mint fully met one step. This step was to brief its  management as part of its review process and obtain and document  management’s approval of the estimate.
Partially met: The U.S. Mint partially met 7 steps of the cost- estimating process. These steps generally occurred during the cost  assessment portion of the cost-estimating process. To its credit, the  U.S. Mint partially met the steps of (1) defining the estimate’s  purpose, (2) developing the estimating plan using technical staff, (3)  defining the program characteristics, (4) determining the estimating  structure from the cost of raw materials to overhead, (5) obtaining the  data from the U.S. Mint’s cost-accounting system, (6) developing the  point estimate and comparing it to an independent cost estimate, and  (7) updating the estimate. For example, the U.S. Mint partially met  defining the purpose of the savings estimate because the U.S. Mint  defined the scope of the estimate but did not fully consider all costs.  Specifically, the U.S. Mint did not include about $5.7 million in one- time expenses to conduct research, development, and testing of  viable metals and did not consider expenses to dispose of equipment  that may no longer be needed if a decision is made to produce steel- based coins.
Minimally met: The U.S. Mint minimally met 3 steps that generally  occurred during the analysis of the cost-estimating process. These  steps include (1) conducting a sensitivity analysis, (2) documenting  the estimate, and (3) identifying ground rules and assumptions. While  U.S. Mint officials discussed a sensitivity analysis, it was not  conducted. Without a fully documented sensitivity analysis, the U.S.  Mint cannot determine how a change in inputs—such as the price of  metal—would affect the potential for savings because the cost of  metal is an important factor in the U.S. Mint’s overall costs to produce  coins. Also, when documenting estimates, the U.S. Mint used 2014  metal prices to determine its estimates. However, metal prices change  over time. For example, from 2011 to 2015, the price of copper  ranged from $2.24 per pound to $4.58 per pound. Such a change in  metal prices impacts the U.S. Mint’s costs and therefore can  significantly impact its savings estimates. Finally, certain assumptions  were not made or documented since the U.S. Mint’s savings estimate  did not project savings into the future, but rather all analyses were  based on one year.
Not met: The U.S. Mint did not meet the step that required it to  conduct a cost-risk and uncertainty analysis. These analyses examine  a broad range of factors, such as unforeseen technical problems or  changes in staff availability and expertise, that could possibly occur  and would affect the estimate.
The U.S. Mint’s cost-estimating process did not fully align with the best  practices described in the Cost Guide and therefore the estimates may  not be reliable as a precise indication of government savings. However,  the efforts taken by the U.S. Mint nonetheless provide an understanding  of the general magnitude of government savings. We discuss later in this  report how the magnitude of estimated government savings compares to  the magnitude of estimated industry costs to illustrate the scale and  relationship between estimates of government savings and industry costs.
section_title: Other Estimates of Government Savings Are Narrow in Scope
paragraphs: Our review of other estimates of potential government savings found  these estimates to be narrow in scope. For example, a 2012 Navigant  study that was commissioned by a supplier of coin material estimated that  the U.S. government could achieve savings of up to $207.5 million per  year by changing the current coin compositions of the nickel, dime, and  quarter to multi-ply plated steel, which is the same composition used in  Canadian coins. However, by design, the estimate is not comprehensive  because it does not account for other costs associated with making this  change such as production, processing, transportation, and new  equipment costs as well as licensing fees to use multi-ply plated steel  technologies. In addition, this study was limited in scope because it was  not designed to be a comprehensive cost-benefit analysis of government  savings and industry costs. Generally, according to guidance from the  Office of Management and Budget (OMB), changes in federal programs  should be informed by an assessment of whether the benefits exceed the  costs. Navigant determined how the use of multi-ply plated steel that is  used by the Royal Canadian Mint could be applied to U.S. government  coins to potentially achieve raw material savings. Navigant did not make  comparisons to other seamless or other co-circulating metal-composition  options and did not consider how a statutory requirement, such as  minimizing industry conversion costs, might be applied.
Another 2012 Navigant study explored potential government savings by  eliminating the penny but did not consider how a change in metal  composition other than multi-ply plated steel for the other coins could be  made to reduce costs and achieve savings. This study concluded that  eliminating the penny would not result in government savings, as more  nickels may be required and the government also loses money on the  production of nickels.
section_title: Industry Costs Could Be Significant, but Estimates May Be Overstated
subsections: section_title: Industry Estimates Find Significant Costs Associated with Changes in Coin Composition
paragraphs: The six selected industry associations that provided cost estimates to the  U.S. Mint stated that there would be significant cost impacts ranging from  $2.4 billion to $10 billion. These costs result from modifying an estimated  21.9-million coin acceptance machines as a result of potential changes to  the metal composition of coins, as shown in table 2. Industry associations  developed these cost estimates and provided them to the U.S. Mint in  response to an April 2014 Federal Register notice. The U.S. Mint  reprinted the estimates in its December 2014 Biennial Report to  Congress.
The cost estimates in table 2 presuppose a metal change from  cupronickel to steel for the nickel, dime, and quarter as well as the need  to accept both current and new coins co-circulating together. These  estimates reflect a level of uncertainty about the dimensions (diameter  and thickness) and other technical specifications of any new coins. For  example, the vending industry estimated a cost impact of at least $700  million—a cost of at least $100 per machine—to update the software in 7- million modern, electronic coin machines to accept new metallic coins  with different EMSs. The vending industry representative we interviewed  said the low estimate assumes little or no changes to the dimensions of  new coins, and therefore costs for mechanical hardware changes are not  estimated, but presumed are changes in the EMS or weight due to a  metal change. Two of the six industry associations we contacted, as well  as a coin machine manufacturer and the contractor for the U.S. Mint, told  us that software modification costs are primarily driven by labor costs to  update software, not the software cost itself. That is, businesses would  have to hire a certified technician to update the software on every  electronic coin machine in order for that machine to accept any new coins  that do not have the same properties as the current coins that would  remain in circulation. These representatives stated that updates would  typically take less than an hour and each service call would cost up to  $100. The vending industry’s high cost estimate of $3.5 billion reflects  changes to coin dimensions as well as EMS specifications. According to a  vending industry representative, changes in coin dimensions would  require the vending industry to update the software as well as remove the  hardware associated with coins within the vending machine and replace it  with redesigned and expanded hardware in order to accept both current  and new coins with different dimensions.
The situation for the amusement industry is similar to that of the vending  industry. The amusement industry estimated costs ranging from $100  million to $500 million depending on the need to either update the  software on the estimated 1-million amusement machines, or remove and  replace their coin machines with new machines designed to accept both  current and new coins with different dimensions, which would be more  costly. For the owners and operators of pool tables and coin laundries  that use older mechanical (not electronic) coin machines, their cost  estimates reflect a need to remove and replace their machines with new  machines that could accept both current coins as well as steel-based  coins, yet reject steel-based slugs.
section_title: Industry Cost Estimates May Be Overstated
paragraphs: We reviewed industry estimates and identified factors that indicate that  these estimates may be overstated:
The published cost estimates do not account for the U.S. Mint’s  position not to alter the dimensions of coins. According to U.S. Mint  officials, new coins would retain the same dimensions as current  coins. Consequently, the high cost estimate of $10 billion may be  overstated because it is based on the need for mechanic hardware  changes in machines to accommodate new coins with different  dimensions. The low cost estimate of $2.4 billion assumes no  changes to coin dimensions.
The cost estimates do not account for the U.S. Mint’s position to not  alter the quarter to a steel-based coin. Specifically, these published  estimates assumed that the characteristics of the quarter would  change, but U.S. Mint officials have determined that it is not viable to  produce a steel-based quarter. According to U.S. Mint officials, they  are currently only exploring changing the cupronickel composition of  the quarter, which would not require any modification to a machine  that accepts only quarters.
The number of coin machines needing modifications may be  overstated. Industry costs to modify machines are proportional to the  number of coin machines needing modifications. As the number of  coin machines decreases, these costs would also decrease. Two  examples illustrate that the number of coin machines may be  overstated. First, the vending association reported in its 2014 written  response to the U.S. Mint that there were about 7-million food,  beverage, and product vending machines in the United States.  However, a 2015 study developed by the vending association, in  partnership with a food research and consulting firm, reported that  there are now 4.5-million vending machines—a decrease of about 36  percent. A lower actual number of vending machines would translate  to a decrease in estimated cost from $700 million to about $450  million—assuming the cost of $100 per machine. Second, in a 2014  written response to the U.S. Mint, the amusement park industry  association—whose members include family entertainment centers  and arcades, among others—stated that there are about 10-million  coin-operated machines in the United States and that changes in the  metallic content of coins would result in a cost impact ranging from $1  billion to $5 billion. However, our review found the its cost estimate  may have double-counted coin machines from the larger amusement  sector, which also represents family entertainment centers and  arcades. The industry did not provide enough detail to determine the  scope and breadth of its coin machine estimate.
The parking industry is shifting from coin-operated to coinless parking  meters. According to a parking industry representative, the number of  parking meters is decreasing due to a trend from single-space, coin- operated, parking meters to multi-space, smart meters that allow  payment by credit card or phone. Because of the many benefits  associated with smart meters, the representative believes that within  15 years, nearly all parking meters will no longer accept coins.  However, the parking industry estimated its costs by estimating that 2-  million parking meters would need to be updated to accept new coins.  According to a parking industry representative, this information was  based on data collected from an informal phone survey in 2007 and  does not reflect industry changes since then.
According to U.S. Mint officials, they did not independently verify industry  cost estimates to help ensure that they are reliable. Rather, officials said  that they obtained and reported industries’ written responses to the U.S.  Mint’s Federal Register notice, dated April 10, 2014, which requested  estimates from industry within 60-days after the notice was published.  Although we interviewed industry representatives to understand their cost  estimates, we did not independently verify the estimates as this was  outside the scope of our work.
One foreign mint, which has changed the metal composition of coins  found that actual industry costs were less than industry estimated.  Specifically, a Royal Mint memorandum stated that initial vending industry  estimates to accept new coins in the United Kingdom were about £40  million (about $60 million). However, after the United Kingdom had  completed its transition to steel coins, studies showed that actual  conversion costs were about £17 million (about $26 million), or about 58  percent less than estimated. According to a Royal Canadian Mint official,  the Royal Canadian Mint did not compare industry cost estimates to the  actual costs incurred.
section_title: Industry Has Little Incentive to Support Coin Composition Changes and Alternatives to Reduce Costs
paragraphs: In written responses to the U.S. Mint’s Federal Register notice, two of the  six industry associations we contacted explicitly said that they do not  support changes to the metallic composition of any coins. Specifically,  representatives for industries that handle or accept coins of all  denominations—such as the banking, armored carrier, and vending  industry—called for no changes to be made to the metallic content of  coins because such a change would require these industries to spend  money to update their coin machines. Representatives for industries that  accept certain coin denominations—such as the parking, amusement,  and coin laundry industries that rely primarily on the quarter—were not  opposed to metallic changes as long as changes were not made to the  quarter. These representatives told us that changing to a steel-based  quarter would complicate their business operations because these  industries tend to have mechanical, rather than electronic, coin machines  that currently use magnets to reject steel-based materials, commonly  called slugs. A coin machine manufacturer that updates or sells machines  to other businesses was generally supportive of potential changes to  circulating coins. Five industry associations we contacted said that if new  metallic coins are introduced, the changes should be seamless to avoid  any cost impact to industry.
Three industry associations we spoke with stated there is little benefit to  phasing in the introduction of new coins. Representatives from these  associations explained that even if the U.S. Mint introduced new coins at  a rate of 3 percent per year (thereby taking a number of years for a  substantial percentage of new coins to be in circulation), their industries  would take immediate action to modify their equipment because they  would not want to lose any potential revenue from customers who could  not use new coins in unmodified machines. They believed that those  customers would be unlikely to return to machines that rejected their  coins due to a perception that the machines were faulty.
Representatives from the six associations that provided cost estimates to  the U.S. Mint generally stood by their estimates and said that the  assumptions on which their cost estimates are based are reasonable.  Nonetheless, due to the Act’s mandate that the conversion costs to  industry be minimized, we discussed various potential changes in  business practices with some industry representatives to determine if  implementation of these practices could reduce costs. In general, they did  not believe these practices would reduce costs or identify other practices  that could reduce costs.
subsections: section_title: Gaining Efficiencies by Updating Multiple Machines at the Same Location
paragraphs: Like other industries that provided cost estimates, the vending industry  estimated its potential cost by multiplying the total number of coin  machines by the cost to update each machine. Because two or more  vending machines (one food and one drink machine) are often at the  same location, the total cost to update the software on the machines may  be less if a technician would be able to modify multiple vending machines  for the cost of one service call. When we asked its representative  whether it would be reasonable for businesses to update the software on  multiple machines at the same location, the representative said that costs  may be reduced by efficiencies in servicing machines at the same time,  but cautioned that the overall cost reduction was not large. The  representative was not able to provide other business practices that  would result in a lower cost estimate.
section_title: Updating Machines during Routine Maintenance
paragraphs: Representatives from three of the six industry associations we contacted  said that it was not a viable business practice to update their machines  during routine maintenance cycles, rather than scheduling special one- time service calls to accommodate new coins. Amusement industry  representatives said that they rarely replace coin acceptance machines  because their coin machines are built and designed to work for decades  without routine maintenance. Similarly, the coin laundry representatives  said there would be few opportunities for updating and replacing of coin  machines since washers and dryers tend to be in-service without failure  for a minimum of 12 to 15 years. The vending industry representative said  that drivers who stock vending machines are not trained, nor is it in their  skillset, to update software on vending machines. Representatives from  these industries said that if and when a decision is made to change the  metal composition of coins, they would take immediate actions to modify  their machines because doing nothing would result in lost revenue.
section_title: Moving to a Coinless Business Model
paragraphs: Given a potential cost to modify coin machines, we interviewed four  selected industry associations to determine whether their costs would be  lower if they moved to a coinless business model that accepts various  forms of electronic payments, not coins. Representatives from the coin  laundry and amusement machine industry association told us that moving  to a coinless business may increase, not decrease, costs because of the  substantial capital investment needed to install the necessary  infrastructure (i.e., payment mechanisms, Internet, modem, Wi-Fi, and  associated wiring) to move to a coinless system. For example,  amusement industry representatives said that a small number of  entertainment businesses have switched to coinless card readers at large  venues having 25 or more game machines, but it is not financially viable  for some business owners with a small number of amusement machines  in multiple locations to make this investment. Additionally, two  representatives from the coin laundry industry stated that their industry  serves individuals who are often “unbanked.” These unbanked individuals  who do not have or use bank accounts, debit cards, and other banking  services may prefer using only coin-operated laundry machines rather  than coinless-operated laundry systems.
section_title: Using Change Machines to Reduce the Need to Alter Other Machines
paragraphs: In lieu of modifying all of the coin machines to accept new coinage, we  interviewed representatives from two selected industry associations to  determine whether a viable business practice would be to install change  machines that dispense current coins. Representatives from both industry  associations told us that buying and installing change machines would not  be a cost-effective alternative to modifying their existing coin machines  due to procurement and installation costs as well as any maintenance  and servicing costs associated with these change machines.
section_title: Coin Compositions That Increase Government Savings Also May Increase Industry Costs
paragraphs: Although the estimates of potential government savings and industry cost  may not be precise, the estimates provide enough information to show  that metal compositions that increase the potential government savings  may also increase the potential industry costs. As discussed previously,  the U.S. Mint has determined that it is not viable to change the quarter to  a steel-based coin. As a result, the potential cost impact to industry is  greatly reduced. Specifically, industries that only accept the quarter— such as the coin laundry and amusement industries— would not incur any  costs if the quarter did not change. Table 3 shows options for changing  coin composition and the potential government savings and industry cost  impact of each option. These options do not include the possibility of  making no changes to the current coin composition, which would result in  no government savings and no costs to industry.
The first option calls for changing the nickel and dime to a steel-based  coin (either multi-ply or nickel-plated steel). The U.S. Mint estimates that  this option could save the government from $32 million to $39 million per  year. Using U.S. Mint data, we estimate that if these savings were  consistently realized over 10 years, the savings would be from $320  million to $390 million. However, coin machines for some industries,  such as the vending industry, would require a one-time update to accept  these new nickels and dimes because the properties of these coins would  change. Industry costs are unknown for this option because industry  estimates reflect the cost to change all coin acceptance machines for all  denominations. Under this option, there may be significant costs for those  industries that accept the nickel and the dime (about $1.1 billion to about  $4.1 billion for the vending, parking, and armored car as shown in table  2). However, the costs would likely be less than currently reported.
The second option is to change only the nickel to a plated or stainless  steel coin. The U.S. Mint estimates that this option could save the  government from $25 million to $32 million per year. As with option 1,  there may be significant costs for a few industries that accept the nickel,  but overall industry costs would likely be less than currently reported  (about $1.1 billion to about $4.1 billion for the vending, parking, and  armored car industries, as shown in table 2). It is also unclear if some  industries would choose not to modify their coin acceptance machines if  only the nickel would change. Some owners of coin acceptance machines  may decide to no longer accept the nickel instead of updating their coin  acceptance machines to accept the new nickel.
The third option—the seamless option—would increase the amount of  copper in the nickel, dime, and quarter. The U.S. Mint estimates that the  government could save about $8 million per year. The U.S. Mint is  conducting research to ensure it could reduce the amount of nickel in  each coin and increase the amount of copper while ensuring that the  coins work in current coin acceptance machines. The U.S. Mint is  expected to report on the results of this research in 2016. If the new coins  worked seamlessly in current machines, it is expected that there would be  no costs to industry.
As previously discussed, the Act requires that any new coins work without  interrupting existing coin acceptance equipment “to the greatest extent  practicable.” In addition, it requires that any recommendations to change  coin composition may not have “significant” changes to coin acceptance  machines. The U.S. Mint has not yet determined how to quantify  “significant” change and “to the greatest extent practicable” to determine  what, if any, recommendations could be made to change the composition  of coins that would be authorized under the Act. The Act does not set a  time frame for providing recommendations to Congress and the U.S. Mint  has not established a time frame for making any recommendations.  However, U.S. Mint officials told us that if and when the Department of  the Treasury makes any recommendations to Congress, the U.S. Mint  and Treasury officials will ensure that the recommendations are within the  framework of the Act.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to Secretary of the Treasury for review  and comment. In its comments, the U.S. Mint expressed concerns  regarding two issues–our use of the Cost Guide to assess the U.S. Mint’s  cost-estimating process and our lack of discussion regarding a 2012  report by Concurrent Technologies Corporation (CTC).  The U.S. Mint  also provided additional context regarding the Act’s requirements that the  U.S. Mint consider the effect on industry of any coin change.
Regarding our use of the Cost Guide, the U.S. Mint took exception to our  statement that the U.S. Mint’s cost estimates may not be reliable because  they did not consistently follow the best practices outlined in the Cost  Guide. The U.S. Mint stated that there is no requirement for agencies to  use the Cost Guide and that it is not intended for use on non-capital,  operational changes such as manufacturing coinage.  The U.S. Mint also  stated that manufacturing coinage is covered under the Statement of  Federal Financial Accounting Standard 4 (SFFAS 4), which the U.S. Mint  used in developing its cost estimates.  While we agree that there is no  requirement for agencies to use the Cost Guide, the guide consists of  best practices that can guide government managers as they assess the  credibility of a cost estimate. In addition, SFFAS 4 primarily refers to  fundamental elements of managerial cost accounting rather than cost  analysis and estimating.  In our view, the Cost Guide is the most  appropriate criteria to assess the reliability of cost estimates. The Cost  Guide includes best practices, from the private and public sectors, in cost  estimating for capital assets. A coin is produced using capital equipment  and is a physical asset. Based on all of these factors, we continue to  assert that the Cost Guide is both sufficient and reasonable criteria for  assessing the U.S. Mint’s cost-estimating procedures.
In its letter, the U.S. Mint also stated that our report should have  discussed a 2012 report by CTC.  We used this report to inform our  assessment of the U.S. Mint’s cost-estimating process and interviewed  CTC representatives.  However, the U.S. Mint’s 2014 Biennial Report to  Congress contained both updated cost estimates on viable metal  alternatives and updated information from industry stakeholders.  As a  result, we obtained information on the U.S. Mint’s cost estimates from that  report and reflected them in our report.
Regarding the Act’s requirement to consider the effect on industry of any  coin change, the U.S. Mint emphasized that it has analyzed the Act in its  entirety, including the statutory provisions that require special  considerations for the vending industry regarding any recommendations  for new metal coin compositions. The U.S. Mint also stated that it will be  important to provide a current analysis of the effect on industry when the  U.S. Mint is ready to recommend new coinage materials to Congress  because technology used by the industry is constantly changing.  The  U.S. Mint also provided technical comments, which we incorporated as  appropriate.  The U.S. Mint’s comments are reproduced in appendix III.
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If you or members of your staff have questions about this report, please  contact me at (202) 512-2834 or rectanusl@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We addressed the following questions: (1) What is known about potential  government savings from changes to the metal composition of coins? (2)  What is known about potential industry costs from changes to the metal  composition of coins? (3) How potential coin composition options could  affect government savings and industry costs?
To determine what is known about the potential government savings from  changes to the metal composition of circulating coins, we reviewed  savings estimates reported by the U.S. Mint in its December 2012 and  2014 biennial reports to Congress, which were required by the Coin  Modernization, Oversight, and Continuity Act of 2010 Act (the Act). These  estimates identified savings by coin denomination (nickel, dime, and  quarter) and by alternative metals (cupronickel and steel-based  alternatives) when compared to fiscal year 2014 actual costs. We also  reviewed the Concurrent Technologies Corporation study on alternative  metals conducted under contract with the U.S. Mint. We interviewed U.S.  Mint officials to understand (a) the rationale for not considering metal  alternatives to the penny; (b) the purpose, data sources, methodology,  and assumptions used in developing savings estimates; and (c) the  process followed in developing these costs estimates. We compared the  U.S. Mint’s cost-estimating process with best practices. Specifically, the  GAO Cost Estimating and Assessment Guide (Cost Guide) identifies best  practices that represent work across the federal government and are the  basis for a high-quality, reliable cost estimate. We analyzed the extent to  which the cost-estimating process used by the U.S. Mint to develop these  cost and savings estimates followed the 12-step process described in  cost estimating best practices—and assigned each step with a rating of  not met, minimally met, partially met, substantially met, or fully met. We  also held detailed discussions with U.S. Mint officials and reviewed their  documentation to identify key factors that could affect the potential costs  and savings such as changes in coin production or workforce and  operational changes that may not have been included directly in the  estimates. We shared our Cost Guide, the criteria against which we  evaluated the Mint’s savings estimates, and our preliminary findings with  U.S. Mint officials. When warranted, we updated our analyses based on  the agency response and additional documentation provided to us.  Finally, we corroborated our analyses in interviews with U.S. Mint officials  responsible for developing the savings estimates. In addition, we  reviewed two other reports prepared by Navigant Consulting—a global,  independent consulting firm—under contract from Jarden Zinc—a  material supplier to the Royal Canadian Mint. These reports contained  cost-savings estimates based on (a) producing the nickel, dime, and  quarter using multi-ply plated steel —the material currently used by the  Royal Canadian Mint for its coin denominations—and (b) costs estimates  should the U.S. Mint eliminate the penny. We interviewed the authors of  these reports to better understand the purpose, scope, and methodology  used in developing these estimates. We did not assess the reliability of  the Navigant cost estimates using GAO best practices because this  assessment was not within the scope of the review.
To determine what is known about potential industry costs from changes  to the metal composition of coins, we reviewed all 20 industry  stakeholder’s written responses that were reprinted in the December  2014 biennial report. The U.S. Mint obtained these responses through an  April 10, 2014 Federal Register notice in which it solicited written  responses from industry on the impacts of changing the metal  composition of circulating coins. To focus our review, we selected a non- generalizable sample group of 11 industry stakeholders. See table 4. We  made our selection using a variety of criteria—such as a mix of industries  (manufacturing, logistics, and commerce); being specifically identified in  the Act; industries that reported sizeable cost impact; the size of industry;  and mix of coin denominations, among others. This resulted in three  stakeholders coming from the coin-machine manufacturing industry and a  raw material supplier, two from the logistics industry, and six from the  commerce industry.
While information from our industry stakeholders is not generalizable, the  diverse perspectives of the stakeholders gave us a better understanding  of the impacts to industry costs should a change in coin composition  occur. We then contacted these selected stakeholders to understand the  data sources, methodology, and assumptions used to develop their cost  estimates. We asked these stakeholders to identify the coin  denominations that are of importance to them, the type of coin  acceptance machines that are used in their industries, and the  circumstances that would require software and/ or hardware changes that  that would need to occur to accept new coins. Finally, we asked these  stakeholders to comment on potential changes to business practices that  we developed. These changes were designed to reduce the conversion  costs to industry. We did not, nor did the U.S. Mint, validate any industry  cost estimates. Finally, we interviewed officials from the Royal Canadian  Mint and the Royal Mint of the United Kingdom about their experiences in  transitioning to steel-based coins.
To identify how potential coin composition options could affect  government savings and industry costs, we reviewed the legal framework  in Coin Modernization, Oversight, and Continuity Act of 2010 and the cost  estimates prepared by the U.S. Mint, Navigant, and industry associations.  We also interviewed industry representatives, who generally called for no  changes to the quarter (and in one case, no changes to coins at all).  From this work, we independently identified some options for changing  coin composition. This list of options is not exhaustive. For each option  we identified, we described how each option could affect government  savings and industry costs.
We conducted this performance audit from March 2015 to December  2015, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Summary Assessment of the U.S. Mint’s Cost-Estimating Process Compared to Best Practices
paragraphs: We developed the GAO Cost Estimating and Assessment Guide in order  to establish a consistent methodology that is based on best practices and  that can be used across the federal government for developing,  managing, and evaluating program cost estimates. We have identified 12  steps that, followed correctly, should result in reliable and valid cost  estimates that management can use for making informed decisions. We  assessed the U.S. Mint’s cost estimation process using the 12 steps  associated with high-quality, reliable cost estimates. Table 5 provides a  summary assessment on our comparison of the estimate to best  practices.
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact name above, John W. Shumann (Assistant  Director), Aisha Cabrer, Tim Guinane, Dave Hooper, Jennifer Leotta,  Steve Martinez, Josh Ormond, Amy Rosewarne, and Elizabeth Wood  made key contributions to this report.